Tax planning and managing the House Property

CA Kinjesh Thakkar

House Property is one of the important source for tax planning under Income tax Act. Even we can observed that recently since last 2-3 years Government has also introduced various benefits related to house property investment so that tax payer tents to think for investing into house property and every Indian has his own dream house one day!

In today’s article we will discuss some Income tax provisions related to house property which can be used for saving tax in the hand of tax payer.

1. Computation of Income From House Properties:

Steps involved in the Computation of Income from House Property

(1) Computation of Gross Annual Value

(2) Computation of Net annual Value

(3) Computation of Deduction available U/s 24

Basis of computing of Income from House Property:

Income from House property is computed as under :

 Particulars Amount (Rs) Gross Annual value ********** Less : Municipal Taxes (It is deductible when it is born by the owner and actually paid by him during the year. ) (*********) Net Annual value ********** Less : Deduction U/s 24 (i)Standard Deduction @ 30% (Section 24(a)) (*********) (ii)Interest on borrowed Capital (Section 24(b)) (*********) Income from House Property **********

How to determine Gross Annual Value and Net Annual Value

Gross Annual Value is determined as under:

 Step I Find out reasonable expected rent of the property Step II Find out Actual rent received or receivable ( Note 1 ) Step III Higher of the I or II above Step IV Find out Loss due to vacancy Step V Step III minus step IV is the Gross Annual Value

Note 1: Unrealized rent if any has to be deducted from rent received or receivable if certain conditions are fulfilled.

Net Annual Value

Gross Annual Value minus Municipal taxes like property tax, paid by the owner.

Deductions against Income from House Property

Following two types of deductions from annual value are available u/s 24 of the Income Tax Act to arrive at the taxable income from HP.

1. Standard deduction @ 30% of Net Annual value (Note 2)
2. Deduction of Interest on borrowed capital

Note 2: No other deduction towards expenditure such as insurance, repairs, electricity, water supply etc. is allowed.

Some Key Points regarding Income From House Property

1. Until FY 2016-17, Loss under the head Income from House Property could be set off against other heads of income without any limit. However, from FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs only. This amendment would not effect on self-occupied house property, however this will have an impact on let-out properties. Though there is no bar on the amount of interest that can be claimed as a deduction under Section 24 for a rented house property, but the losses which arises on account of such interest repayment can be set off with other heads of income) only to the extent of Rs 200000.

2. Earlier only one property will be treated as a ‘self-occupied property’ and the other property will be taken as ‘deemed to be let out’ Now, from AY 2020-21 onwards two house properties can be taken as ‘Self-occupied properties’

Notes:

a) Here please note that, the assesse do not have an option, either to shown it as ‘deemed to be let out’ or as ‘self-occupied property’ – But it is mandatory that if assesse have two house property he has to consider both as self-occupied.

b)  The main key effect of this amendment is that, earlier if assesse is showing second property as deemed to be let out, and then in that case he is eligible to take deduction u/s 24(b) for interest on housing loan without any monetary limit.

But now henceforth, if he has to consider the second house as self-occupied property only and therefore now he is eligible for total deduction of maximum Rs. 2,00,000/- only towards interest on housing loan of both the properties.

Deduction under Chapter VI-A related to House Properties:

1. Deduction under Section 80C – Towards Principal Repayment

Section 80C also offers deduction in respect of repayment of housing loan take for purchase or construction of residential property. Maximum amount qualified for deduction under section is Rs. 1,50,000. The deduction in respect of repayment of housing loan also falls under this limit. In other words, if taxpayer had made repayment of  Rs.3,00,000 towards principal, he can claim deduction only up to Rs. 1,50,000 under this section .The taxpayer can also claim deduction stamp duty, registration charges and other expenses incurred for transfer of house property in his name subject to maximum limit of Rs.1,50,000. However, if the taxpayer transfers the house property before 5 years, then all the deduction already taken in previous years will be deemed as income in which the house property is transferred.

2. Additional Deduction in respect of Interest on Loan:

a) Section 80EE – Dedution amounting to Rs 50,000 is allowed in addition to deduction under section 24(b).

• The loan should be sanctioned between 1st April 2016 – 31st March 2017.
• The value for the property should not exceed Rs 50 lacs and the sanctioned loan amount should not exceed Rs 35 lacs.
• The purchaser should be a first time home buyer also this is applicable only in case of residential house property.
• The benefit will be applicable till the time of repayment of loan continues.

b) Section 80EEA – Additional deduction amounting to Rs 1,50,000 is allowed in addition to deduction under section 24(b).

• The loan should be sanctioned between 1st April 2019 – 31st March 2021.
• The stamp duty value of the house should not exceed Rs 45 lacs.
• The carpet area of the house should not exceed 60 sqmtr in metro cities and 90 sqmtr in other cities.

Only the individual is allowed to claim the deduction under this section provided he does not own any other house property.

To conclude this article I would like to say if you follow the above mentioned provisions smartly then you will able to save large amount of tax that to within compliance limit.

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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1. Kinjesh says:

CA Manoj Anand, I would like to bring to your notice that net cost of Interest will be 120,000/- (Interest on Loan 4,80,000 – Interest on FD 360,000).hence in terms of Cash flow as well, a person saves. Hope it clarifies.
Moreover, FD interest is More or less Risk Free interest, here, it is taken as 9%. one can also invest in better avenues or its own business if any, which can provide return better than that from FD.

2. CA Manoj Anand says:

Rs 4.80 L intt outgo has also to be considered wrt Tax Savings

3. sudarshana says:

Good article; particularly about owning more than one house property and getting unlimited exemption on interest repayment if the property is not self occupied.

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