In Income Tax Act, 1961, various deductions as well as exemptions are available for those who own a house property or thinking of owning one in future. By availing these tax benefits, major tax saving is possible. Hence, becoming aware about these benefits is all important to reduce the tax burden. Let’s consider each comprehensively.
Benefits Available Under Income Head: House Property
Various deductions are available while computing income earned from house property comprising Standard Deduction, Deduction of Municipal Tax paid as well as deduction of interest on loan taken for the purpose of said house property. Let consider each one by one –
Deduction of Municipal Tax – Municipal tax or any other tax levied by state government, recovered by municipality, Local Authority or gram panchayat is allowed as deduction upto the extent of actual amount paid by owner during the year.
Statutory/ Standard Deduction [Section 24(a)]- Standard deduction of 30% on net annual value is allowed as deduction wherein Net annual value shall be calculated as follows –
[NAV= Gross annual value – Municipal taxes paid during the year]
Deduction of interest on loan taken [Section 24(b)]-
Interest on loan taken for the purpose of acquisition, construction, repair, renovation etc. of house property shall be allowed as deduction from Net Annual Value. Loan may be taken from banks, financial institutions, trust, friends and family etc.
Following two points may be noted –
- Interest shall be allowed on due basis and not on payment basis like municipal taxes.
- Interest on interest shall not be allowed as deduction
Quantum of Deduction – In case of Let out property and deemed to be let out property, there is no limit on amount of deduction allowed on account of interest on loan i.e., whole of the amount of interest payable can be claimed as deduction whereas in case of self-occupied house property, aggregate amount of deduction shall not exceed thirty thousand rupees.
However, subject to fulfilment of below conditions collectively, the aforesaid threshold limit of thirty thousand rupees increased to two lakh rupees–
1. Loan is taken on or after the 1st day of April, 1999
2. Loan is taken for the purpose of acquisition, construction of house property.
3. Such acquisition or construction is completed within five years from the end of the financial year in which capital was borrowed.
4. A certificate from the person, to whom such interest is payable is furnished, specifying the amount of interest payable for the purpose of such acquisition, construction of the property, or conversion of the whole or any part of capital borrowed which remains to be repaid as new loan.
In case of Joint owners of house property, the aforesaid deduction is allowed separately to each owner.
If any fresh loan has been taken for repayment of earlier loan whereas earlier is taken for the purpose of purchase or construction of house property then interest on such fresh loan shall also be allowed as deduction.
Categorisation of Interest on Loan– Interest on loan, allowed as deduction has been classified into two categories as follows –
Pre-Acquisition Interest
Interest pertaining to the period prior to the year in which acquisition or construction of house property was completed shall be treated as Pre-Acquisition/ Prior Period Interest and shall be allowed as deduction in five equal instalments starting from the year in which acquisition or construction was completed.
Post- Acquisition Interest
Interest pertaining to the year in which income under head property is being computed. It shall be allowed as deduction subject to limit stated above as applicable for let out and self-occupied house property.
Interest paid by builder for delay in delivery of flat is not deductible as it could not be treated as interest paid on capital borrowed for the construction of the flats. [Refer: Akash and Ambar Trust v. CIT [2004]].
Interest paid on partners’ capital which has been utilized for construction of property from which rental income is earned is allowable as deduction [Refer: CIT v. Sane & Doshi Enterprises [2015], SLP granted in CIT v. Sane & Doshi Enterprises [2017]].
In case, where house building advance has been taken by the Central Government servants under the House Building Advance Rules of the Ministry of Works & Housing, then in that case also deduction of interest on loan would be on the basis of accrual of interest, which would start running from the date of withdrawal of the advance.
Further, deduction of interest is allowable on the basis of ownership of the property so purchased or acquired irrespective of its possession i.e., title of property must be in the name of assessee, he should be the owner of said property. [Refer: Mr. Abeezar Faizullabhoy Vs CIT (ITAT Mumbai)].
Well, under common law, ‘owner’ means a person who has got valid title, legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of relevant section of the Income-tax Act, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, ‘to tax the income’, we are of the view, ‘owner’ is a person who is entitled to receive income from the property in his own right i.e., not on the behalf of someone else.
Benefits Available Under Income Head: Profit and Gains from Business and Profession [Section 43CA]
Full Value of Consideration, in case immovable property is held as Stock-in-Trade – In case where immovable property being land or building or both held as stock in trade and sales consideration on its transfer is less than the stamp duty value (i.e., SDV) then such SDV shall deemed to be full value of consideration for the purposes of computing profits and gains. However, if SDV exceeds sales consideration not more than 110% of sales consideration then sales consideration shall deemed to be full value of the consideration.
Here, government has given relief to taxpayer by increasing the tolerance band to 120% instead of 110% subject to fulfilment of all the conditions specified below:
1. The transfer of such residential unit must take place during the period beginning from the 12th day of November, 2020 and ending on the 30th day of June, 2021;
2. Such transfer must be by way of first time allotment of the residential unit to any person; and
3. The consideration received or accruing as a result of such transfer must not exceed two crore rupees.
“Residential Unit” includes independent housing unit with separate facilities for living, cooking and sanitary requirement, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household.
Benefits Available Under Income Head: Other Sources [Section 56(2)(X)]
Where Immovable property being land or building or both has been received for inadequate consideration as a gift then the difference between stamp duty value and sales consideration of the property shall be taxable under the head income from other sources if –
(a) Difference between SDV and sales consideration exceeds fifty thousand rupees and
(b) Stamp Duty Value is more than 110% of sales consideration
However, here also relief has been provided by government by increasing the tolerance band to 120% instead of 110% subject to fulfilment of all of the below conditions –
1. The transfer of such residential unit takes place during the period beginning from the 12th day of November, 2020 and ending on the 30th day of June, 2021;
2. Such transfer is by way of first time allotment of the residential unit to any person; and
3. The consideration received or accruing as a result of such transfer does not exceed two crore rupees.
Benefits in the form of Deduction under Chapter VI-A
Repayment of Loan [Deduction u/s 80C]
Deduction may be claimed by an Individual/ HUF of the amount repaid towards principal (not towards interest) of the loan taken for the purpose of purchase or construction of house property.
However, the quantum of deduction allowable is such that the aggregate of deduction under section 80C, section 80CCC and 80CCD(1) shall not exceed one hundred and fifty thousand rupees.
Interest on Loan [Deduction u/s 80EE]
An Individual may claim deduction in respect of interest on housing loan, taken for the purpose of acquisition of house property up to fifty thousand rupees in addition to deduction claimed under the head house property in respect of interest.
Deduction shall be allowed in subject to fulfilment of all the following conditions:
(i) Loan should be taken from bank or financial institution that is sanctioned between 1st day of April, 2016 to 31st day of March, 2017;
(ii) Loan amount should not exceed thirty-five lakh rupees;
(iii) the value of residential house property should be up to fifty lakh rupees;
(iv) no residential house property must be owned by the assessee on the date of sanction of loan.
Deduction under this section can be claimed only in respect of any amount remaining after claiming deduction of interest under the head house property
Interest on Loan [Deduction u/s 80EEA]
Individuals (other than covered under section 80EE) may claim deduction in respect of interest on housing loan taken for the purpose of acquisition of house property up to one lakh fifty thousand rupees in addition to deduction claimed under the head house property in respect of interest.
Deduction shall be allowed subject to fulfilment of all the following conditions:
(i) Loan should be taken from bank or financial institution that is sanctioned between 1st day of April, 2019 to 31st day of March, 2022;
(ii) the stamp duty value of residential house property should be upto forty-five lakh rupees;
(iii) no residential house property must be owned by the assessee on the date of sanction of loan.
Deduction under this section can be claimed only in respect of any amount remaining after claiming deduction of interest under the head house property
Payment of Rent [Deduction u/s 80GG]
An Individual (other than those who received House Rent Allowance) may claim deduction in respect of rent paid for the house property used by him for the purpose of his own residence.
The deduction amount shall be lower of following three limits-
1. Five thousand rupees per month
2. Rent paid over 10% of his total income (before claiming deduction under this section)
3. 25% of his total income (before claiming deduction under this section)
Deduction under this section shall not allowed if any residential accommodation at a place where assessee resides or perform his duties owned by assessee himself, by his spouse, minor child or Hindu Undivided Family (i.e., HUF) in case he is member of HUF
Benefits Available Under Income Head: Capital Gain
Sale and purchase of house property involve substantial quantum due to which seller’s tax liability from capital gain arising from the sale of house property is also a substantial quantum.
In order to reduce this tax burden to some extent, various exemptions under the head capital gain are available as follows –
Exemption on Sale of residential Property [Section 54]
I. Assessee- Individual/Hindu Undivided Family
II. Period of Holding Asset- Long term
III. Nature of asset transferred- Residential house property being building or Land appurtenant there to
IV. New asset purchase/constructed- One residential house property. However, if long term capital gain is upto two crore rupees then assessee can acquire two residential house properties only once in life time.
V. Time Limit- Purchase asset within 1 year before or 2 years after the date of transfer or Construction must be completed within 3 years after the date of transfer.
VI. Capital gain account scheme- Applicable
VII. Amount of exemption – Lower of Capital Gain or Cost of new asset /deposit amount
VIII. Transfer of Asset- If new asset is transferred within 3 years from the date of purchase/construction, then cost of new asset shall be reduced by exempted capital gain.
Exemption on sale of urban agriculture land [Section 54B]
I. Assessee- Individual/Hindu Undivided Family
II. Period of Holding Asset- Long term /Short term
III. Nature of asset transferred- Agriculture land used by Individual or his parents for the purpose of agriculture for atleast 2 years immediately before the transfer.
IV. New asset purchase/constructed- Agriculture land (Rural/ urban)
V. Time Limit- Purchase within 2 years after the date of transfer.
VI. Capital gain account scheme- Applicable
VIII. Amount of exemption – Lower of Capital Gain or Cost of new asset /deposit amount
IX. Transfer of Asset- If new asset is transferred within 3 years from the date of purchase, then cost of new asset shall be reduced by exempted capital gain.
Exemption on sale of any capital asset other than residential house property [Section 54F]
I. Assessee- Individual/Hindu Undivided Family
II. Period of Holding Asset- Long term
III. Nature of asset transferred- Any Capital asset other than residential house property
IV. New asset purchased/constructed- One residential house property. Further, the
V. assessee should not have more than one house in his name at the time of transfer of the asset besides the house which is being purchased or constructed.
VI. Time Limit- Purchase asset within 1 year before or 2 years after the date of transfer and Construction must be completed within 3 years after the date of transfer.
VII. Capital gain account scheme- Applicable
VIII. Amount of exemption – [Cost of new asset * Capital gain/Net consideration]
IX. Transfer of Asset- If new asset is transferred within 3 years from the date of purchase/construction, then exempt capital gain should be taxable in previous year of transfer of new asset and treated as long term capital gain.
Exemption on Transfer of residential property /Plot of land [Section 54GB]
I. Assessee- Individual/Hindu Undivided Family
II. Period of Holding Asset- Long term
III. Nature of asset transferred- Residential property (a house or a plot of land)
IV. New asset purchase/constructed- Subscription of shares of eligible company and company within 1 year from the date of subscription, acquire new asset being plant and machinery
Eligible company: which fulfil conditions of section 80IAC i.e.
> Incorporated between 01.04.2016 to 01.04.2022.
> Total turnover of business doesn’t exceed 100 crores in any of the previous year in which deduction u/s 80IAC claimed.
> It holds certificate of eligible business from Inter ministerial board of certification (IMBC) as notified by CG.
V. Time Limit- Shares subscribed upto due date of return filing
VI. Capital gain account scheme- Applicable (for company)
VII. Amount of exemption – [Cost of new asset * capital gains/Net consideration (FVOC)]
VIII. Transfer of Asset- If equity share or new plant and machinery is transferred within 5 years from the date of subscription/ acquisition then exempt capital gains shall be taxable in previous year of transfer of equity shares or new plant and machinery. In case of computer & computer software acquired by eligible start up restriction apply upto 3 years.
Exemption on investment in certain bonds after transferring land/ building or both [Section 54EC]
I. Assessee- Any person
II. Period of Holding Asset- Long term
III. Nature of asset transferred- Land and building or both
IV. New asset purchased/constructed- Bonds redeemable after 5 years issued by –
National Highway Authority of India or
Rural Electrification Corporation Limited or
Power finance corporation Limited or
Indian Railway Finance Corporation Limited
V. Time Limit- Within 6 months from the date of transfer of original asset
VI. Capital gain account scheme- Not Applicable
VII. Amount of exemption – Lower of capital gain or cost of new asset subject to maximum of 50 lakhs rupees
VIII. Transfer of Asset- If new asset is transferred or converted into money within 5 years from the date of acquisition then exempt long term capital gain will be taxable in the year of transfer/conversion.
Conclusion – At this, one may conclude that various tax benefits are provided by government in the form of exemptions/ deductions. All what is needed awareness and professional’s advice. If proper tax planning has been carried out, then one may not feel the burden of tax/less tax burden with regard to income from house property. After all, government has considered the fact that house is a basic necessity of an individual and hence, accordingly provided these benefits.
About the Author
Author is Sachin Jain Senior Associate in Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing their business in India. Neeraj Bhagat & Co. Chartered Accountants, is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.
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