Income/Loss from House Property

One of my senior friends, who constructed a house ten years ago after borrowing House Building Advance asked me last week, whether interest accrued in respect of Housing loan during the year 2008-09, but payable on a later date (as per the House Building Advance recovery procedure) could be deducted from the Income for Income tax purposes during the year 2008-09.

Update: 25th September 2017: Income Tax Exemption on Interest Paid on Housing Loan – Capped at Rs. 2 lakh for rented property also

Update : After Budget 2014, Income Tax Exemption / Deduction allowed from Income in respect of Interest payable on Housing Loan has been increased to Rs. 2 lakh. Click here to get Revised GConnect Calculator for Exemption for Interest paid on Housing Loan 

Update: 01.12.2016: Addtional deduction up to Rs. 50,000 under Section 80EE in resepct of First Time Home Buyers:

80EE. (1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential property.

(2) The deduction under sub-section (1) shall not exceed fifty thousand rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2017 and subsequent assessment years.

(3) The deduction under sub-section (1) shall be subject to the following conditions, namely:—

  (i) the loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017;

 (ii) the amount of loan sanctioned for acquisition of the residential house property does not exceed thirty-five lakh rupees;

 (iii) the value of residential house property does not exceed fifty lakh rupees;

(iv) the assessee does not own any residential house property on the date of sanction of loan.

(4) Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.

(5) For the purposes of this section,—

 (a) “financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies, or any bank or banking institution referred to in section 51 of that Act or a housing finance company;

 (b) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.

I was surprised, when he told me that he did not deduct such interest for Income tax purposes in the previous years and was under impression it could be deducted only at the time of actual payment of interest. This made me to present this small guide for calculating Income / Loss on House Property.

Use this Calculator after going through the details given below

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Interest on loans taken to buy a house is deductible under the Income Tax Act while computing income under the head ‘Income from House Property’. The relevant provisions for this are contained under Section 24 of the Income Tax Act. The interest is allowed as a deduction on accrual basis – on due basis, even if it has not actually been paid during the year.

The money can be borrowed for construction, acquisition, repair or reconstruction of property.

Maximum Limit of Interest that could be deducted : Under the Income Tax Act, for the purpose of computing income or loss under the head ‘Income from House Property’ in respect of a self-occupied house, a deduction of Rs 30,000 is allowed against interest on borrowed capital. However, a deduction on account of interest up to a maximum limit of Rs 1.5 lakhs is available if the loan has been taken on or after April 1, 1999 for constructing or acquiring the house, and the construction or acquisition has been completed within three years from the end of the financial year in which capital was borrowed. In case the property is let out, the entire amount of interest accrued during the year is deductible.

Update: 01.07.2013:

Method of calculating income or loss on house property has been changed subsequent on introduction of additional interest rebate of Rs. 1 lakh for new housing loans recieved in the year 2013-2014. Over and above the standard interest rebate Rs. 1.5 lakh this additonal interest rebate will be applicable only if the housing loan amount did not exceed Rs. 25 lakhs and that the housing loan is disbursed in the year 2013-14 (assessment year 2014-15).  The extract of Finance Bill 2013-14 which has made change in the Rebate on Interest paid on Housing Loan for certain categories is given below
Keeping in view the need for affordable housing, an additional benefit for first-home buyers is proposed to be provided by inserting a new section 80EE in the Income-tax Act relating to deduction in respect of interest on loan taken for residential house property.

The proposed new section 80EE seeks to provide that in computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property.

It is further provided that the deduction under the proposed section shall not exceed one lakh rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on 1st April, 2014 and in a case where the interest payable for the previous year relevant to the said assessment year is less than one lakh rupees, the balance amount shall be allowed in the assessment year beginning on 1st April, 2015.

It is also provided that the deduction shall be subject to the following conditions:-

(i) the loan is sanctioned by the financial institution during the period beginning on 1st April, 2013 and ending on 31st March, 2014;

(ii) the amount of loan sanctioned for acquisition of the residential house property does not exceed twenty-five lakh rupees;

(iii) the value of the residential house property does not exceed forty lakh rupees; (iv) the assessee does not own any residential house property on the date of sanction of the loan.

Annual Rental Value : The basis of calculating Income from House property is the “annual value”. It is not necessary, as we have seen earlier, that the property should actually be let. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent , the latter will be the annual value. The municipal value of the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same locality are all pointers to the determination of annual value. From the said annual value tax paid, From the annual value as determined above, municipal taxes are to be deducted.  Also, deduction equal to 30% of the annual value (Rental value-Tax paid), irrespective of any expenditure incurred by the taxpayer (S.24(a)).

Determination of Annual Value of Self Occupied Property : Having understood the concept of Annual Value, we can now go into the details of its actual determination. Self-occupied house property does not generate any rent. Presently, a preferential treatment is given to one self-occupied house property which has not been actually let out at any time in which case, the annual value is taken as ‘Nil’. If, one is fortunate enough to own more than one house property using all of them for self-occupation, he is entitled to exercise an option in terms of which, the annual value of one house property as specified by him will be taken at Nil.

The annual value of the other self occupied house property/ies will be determined on notional basis as if it had been let out. To analyse this let us consider two situations. A person may own a house property, in Bangalore, which he normally uses for his residence. He is transferred to Chennai, where he does not own any house property and stays in a rental accommodation.

In such a case, the house property in Bangalore cannot be used for self-occupation and notional income, therefore, would normally have been chargeable although he derives no benefit from the property. To save the tax payer from hardship in such situations, it has been specifically provided that the annual value of such a property would be taken to be nil subject to the following conditions:

• The assessee must be the owner of only one house property.
• He is not able to occupy the house property because of his employment, business etc., away from the place where the property is situated.
• The property should not have been actually let or any benefit is derived therefrom.
• He has to reside at the place of employment in a building not belonging to him.

Other Deductions : From the annual value as determined above, further deductions Tax paid on House Property and Repairs & Collection Charges subject to maximum of 30% of the Annual Value are deductible. Can there be loss under the head Income from House Property ?

This brings us to the question whether there can be any loss under this head. In so far as income from a self-occupied property is concerned and in respect of a property away from workplace, the annual value is taken at nil, no other deductions are allowed except for interest on borrowed capital upto a maximum of Rs.30,000. In such cases, there may be loss upto a maximum of Rs.30,000 (or Rs.1,50,000 as the case may be).

In respect of other type of house property, namely a house property that is let out, there are no restrictions on deductions and therefore, there can be loss under this head. Source of this article is one of the publications of Income Tax Department. Users who want check this publication can click the following link for more details

Detailed Article on Income / Loss on house property sourced from Income tax Department website