By :Balwant Jain
The income tax laws provides for taxation of your income under various heads. Income from house property is one of them. This article will discuss taxation of house property and tax benefits on housing loans.
Taxation of house property
If you are an owner of a house property, you are required to offer for tax, the rent which you receive or which you are reasonably expected to receive. This is known as “Annual value” in income tax parlance. The head “Income from house property” covers residential as well as commercial property except the property you are using for your business or profession.
For residential house properties, the taxation laws treat one house property as self-occupied in case the same is not let-out and is used by you for your residence or remains vacant due to your stay in any house not owned by you at any other place. In case, the single property is actually let out, you have to offer the rent received on such property for taxation. In case you are using more than one house property for self-occupation, you have to choose one of such property as self-occupied and offer notional rentals in respect of other property/ies for taxation.
Deductions from Annual Value
For calculating the income taxable under the house property head, the taxation laws allow you two deductions. The first deduction is standard deduction in respect of repairs etc. at the flat rate of 30% of the annual value calculated as above. The amount of deduction in respect of repairs is available whether you have actually incurred any expenditure on repairs or not. Since the annual value of one self-occupied house property is taken at nil, no deduction is naturally available for repairs in respect of such property.
The other deduction available is in respect of interest on loan taken to purchase or construct a house property, or even for repair or reconstruction of your existing property. This benefit of interest deduction is available for all properties whether residential or commercial. It may be interesting to note that even processing fee or prepayment fee paid in respect of home loan is also treated as interest and thus can be claimed as deduction. The loan can be taken from any body including your friends and relatives and not necessarily from banks and financial institutions.
For one self-occupied property, the deduction is restricted to Rs. 2 Lakhs per year and for let-out property or any additional self-occupied property which is treated as deemed to have been let out, you can claim the full interest payable. So in cases where more than one property is self-occupied, it is always advisable to treat the property on which interest is lower as self-occupied, in case the interest payable on any or all of the property is more than Rs. 2 Lakhs.
For under construction property, you can claim the interest from the year in which construction is complete and possession is taken. In respect of interest paid for the years prior to taking possession, you can claim aggregate of such interest in five equal installments from the year in which construction is completed within the overall limit of Rs. 2 Lakhs in case the same is self-occupied.
Deduction available under Section 80 C for Principal repayment of home loan:
An Individual and an HUF can claim principal repayment component of a home loan taken from specified institutions along with other eligible items like Life Insurance Premium, NSCs, EPF, ELSS and stamp duty and registration charges etc. The overall deduction is restricted to Rs. 1.5 lakhs from current year. This deduction is available only for residential house property. Moreover it is only available for purchase or construction of a house and not for renovation, additions or repairs of any existing house property.
In case you decide to sell the residential house acquired with home loan, within five years from the end of the year in which possession of the house was taken, all the deduction allowed for Principal repayment in earlier years shall be treated as income of the year in which this property is sold. Moreover no deduction under Section 80 C shall be allowed for principal repayment made during the year.
Hope that above discussion helped you in understanding the taxation of house property and benefits in respect of money borrowed for your house.
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(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)By Balwant Jain (CA, CS and CFP)The author is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal., He can be reached at email@example.com and @jainbalwant