Introduction
In India, the Income Tax Act categorizes income into five distinct heads:
- Income from Salary
- Income from House Property
- Profits and Gains from Business or Profession
- Capital Gains
- Income from Other Sources
Each taxpayer must appropriately classify their earnings under these heads when calculating total income. This article specifically addresses Income from House Property, outlining relevant provisions, computation methods, and applicable deductions.
Overview of Relevant Sections
The taxation of "Income from House Property" is governed by the following sections of the Income Tax Act:
- Section 22: Charging Section
- Section 23: Computation of Annual Value
- Section 24: Deductions
- Section 25: Disallowed Deductions
- Section 25A: Recovery of Unrealised Rent and Arrears
- Section 26: Income from Co-owned Property
- Section 27: Deemed Ownership
Section 22: Chargeability of Income from House Property
Income from house property is taxable under Section 22 provided the following conditions are satisfied:
- The assessee is the owner of the property.
- The property is either self-occupied or let out.
- The property is not used for personal business or profession.
Key Updates (Budget 2025):
- Self-Occupied Properties: Taxpayers can declare two self-occupied properties as having a nil annual value without any prior conditions regarding employment location.
- Vacant Properties: The annual value will only be computed for the occupied period assisting landlords during vacancies.
- Set-Off Limitation: Losses can be offset against other income heads up to ₹2 lakh per annum, with unabsorbed losses carried forward for eight years strictly against future income from house property.
- Unsold Inventory (Developers): Annual value for unsold properties will be considered nil for two years from the date of the completion certificate.
Section 23: Computation of Net Annual Value (NAV)
For Let-Out Properties:
Step 1:
Determine the Municipal Value and Fair Rent, selecting the higher amount.
Step 2:
Compare this amount with the Standard Rent (as per the Rent Control Act) and select the lower value. This results in the Reasonable Expected Rent.
Step 3:
Assess the Reasonable Expected Rent against the Actual Rent Received or Receivable, with the higher value defined as the Gross Annual Value (GAV).
Step 4:
Deduct any Municipal and Local Taxes paid by the owner from the GAV to find the Net Annual Value (NAV).
For Self-Occupied Properties:
For self-occupied property, or if unoccupied due to employment elsewhere, the NAV is considered nil.
Section 24: Deductions from NAV
Section 24 allows for two types of deductions:
(a) Standard Deduction:
- 30% of the Net Annual Value.
(b) Interest on Borrowed Capital:
Interest on borrowed capital for acquisition, construction, repair, renewal, or reconstruction is deductible under specific conditions:
- Deductions are allowed on a due basis, not when paid.
- Penalty or interest on interest is not deductible.
- Interest on a second loan is deductible only if the original loan was used for qualifying purposes.
- An interest certificate is required to claim this deduction.
Pre-Construction vs Post-Construction Interest
Interest on loans for construction cannot be deducted until construction is completed.
Pre-Construction Interest:
This can be deducted in five equal installments beginning from the completion year.
Calculation Period:
From the loan's start date until the earlier of:
(i) 31st March preceding the completion year, or
(ii) Loan repayment date.
Post-Construction Interest:
Fully deductible in the year of completion.
Interest Deduction Limits
For Let-Out Properties:
- Full interest on borrowed capital is deductible.
For Self-Occupied Properties:
| Condition | Maximum Deduction |
|---|
| Loan taken before 01/04/1999 | ₹30,000 |
| Loan taken after 01/04/1999 | ₹3,00,000 (Budget 2025) |
Note:
- Loans for repairs or renovations remain limited to ₹30,000.
- If the construction is not completed within 5 years of the loan, the deduction is restricted to ₹30,000.
Section 25: Disallowed Deductions
No deductions are permitted for interest payable outside India unless tax has been deducted at source or paid in India, notwithstanding Section 24.
Section 25A: Arrears and Unrealised Rent
- Arrears of rent or unrealised rent received are taxed in the year of receipt.
- A 30% standard deduction is allowed from such income.
Section 26: Income from Co-Owned Properties
For co-owned properties where ownership shares are definite and ascertainable, each co-owner will be taxed individually under Sections 22 to 25, rather than as an Association of Persons (AOP).
Section 27: Deemed Ownership
An assessee is considered a deemed owner in certain scenarios, including:
- Transfer of property without adequate consideration to a spouse (excluding under a separation agreement) or to a minor child (excluding a married daughter).
- Holding an impartible estate.
- Membership in a co-operative society, company, or AOP where property is either allotted or leased under a housing scheme.
- Possession of property under the part performance of a contract.
Conclusion
A thorough understanding of the provisions regarding Income from House Property is crucial for accurate taxation. From calculating annual values to claiming valid deductions and addressing complex situations like co-ownership or deemed ownership, each section plays a vital role in determining taxable income. Staying informed about updates, such as those introduced in the Budget 2025, can help taxpayers ensure compliance and optimize their tax liabilities.