How is income from house property calculated ?

The Income Tax Act of India has five heads of income, of which “Income from House Property” is one of them.

In order to calculate the income from house property, one needs to know the annual value of house property. We saw in our last article how to calculate the annual value of a house.

This article will teach you how to find the income from the home you own.

How is income from house property calculated

After you have calculated the annual value for your house, you can claim two deductions on it. The value so got  after the deductions is the income from your home. The two deductions are as follows :

(1) Statutory deduction: A sum equal to 30% of the net annual value of the house can be deducted from the annual value of the house. This is like a standard deduction offered.

(2) Interest on borrowed capital: If you have taken a home loan to buy, build, construct or repair your house, then the interest on the loan can also be used as a deduction. Each year, the amount of interest is to be calculated separately and claimed as a deduction.

If you have been paying interest on a loan during the pre construction period of a house, then the interest will be summed up and deduction will be allowed in 5 successive years starting from the year in which the acquisition/construction was completed. Note that interest will be taken from the date of borrowing till the end of the previous year prior to the year in which house is completed. That is, if construction of house was completed in June 2009, the interest will be taken only till March 2009 (end of the previous year prior to the year in which house is completed).

Shown below is the calculation along with the two deductions :

Rental income net of municipal taxes (Annual Value) A
Less
Standard deduction @30% D
Interest payable on home loan I
Income from house A – D – I

Income from house property

Example on calculation

If the annual value of a house is calculated as Rs 3,00,000/- and the interest on home loan during construction of the house is say, Rs 1,60,000/-, what will income be ?

The standard deduction of 30% on the annual value of the house comes to : 3,00,000/- * (30/100) = 90,000/-

Put the values in the table below to find out the income which comes to 3,00,000 – 90,000 – 160,000 = Rs 50,000/-.

Note – The house is not self occupied.

Rental income net of municipal taxes (Annual Value) A 300,000
Less
Standard deduction @30% D 90,000
Interest payable on home loan I 160,000
Income from house A – D – I 50,000

Caveat : Income from home which is self occupied

We have seen earlier that when a house is self occupied, its annual value is NIL. In such a case, the statutory deduction of 30% is not allowed. This is because the statutory deduction in on the annual value and if the annual value itself is nil, so is the deduction.

However, the interest on home loan in case of a self occupied house will be as below :

If property is acquired or constructed on or after 1st April 1999 and such acquisition or construction is completed within 3 years Actual interest payable subject to a maximum of Rs 1,50,000/- provided a certificate from lending institution is furnished
In any other case (loan is for repairs) or condition above is not satisfied Actual interest payable subject to a maximum of Rs 30,000/-

The first rule is the one you keep hearing all the time about an interest deduction of Rs 1,50,000/- on your home loan if you stay in your own house.

However, note the condition on when you can avail it – many investors are not aware of this.

Can income from house be negative ?

The answer is yes, it can be negative.

In case of a self occupied house, since the annual value is NIL and only the interest is allowed as deduction (subject to a maximum of either Rs 1,50,000/- or Rs 30,000/-), the income is negative to the extent of the actual interest. With relation to the formula above (A – D – I), both A and D are zero if the house is self occupied, so only negative I remains.

What happens when a person owns two houses ? Read the income tax benefits on a second home loan.

Comments

  1. vishwanath sankanoor says:

    hello friends

    how should i take the interest on housing loan while doing the form no-16

  2. “In a future article, we will see what happens when a person owns two houses.”
    Awaiting the publishing of the next article !!!

  3. Sir, I have constructed house by taking loan from the bank, and in the same house I am self occupied and let-it out for rent. Apart, from this I am an employee coming under taxable income from my salaries. Now, I want show my rent income alongwith my salary income. So, I request to give details about interest on house building loan to claim actuals i.e., above 1.5 lakh.(1.70 lakh)

    • Radhey Sharma says:

      @shashidhar, What do you mean by “in the same house I am self occupied and let-it out for rent.”

      I did not understand your question.

      • @Radhey Sharma,
        Lets take a case here. The house has 2 floors and is owned by Mr. X.
        Mr. X lives on the ground floor and has let out the first floor. Now how will this be treated for tax calulations?

        • Radhey Sharma says:

          @Mohit, No clue, get to a tax consultant please. And let us know please :-)

        • If a house property consists of two or more independent residential units, one of which is self – occupied and the other unit(s) are let out,the income from the different units is to be calculated separately. The income from the unit which is
          self – occupied for residential purposes is to be calculated as per the provisions of Section 23(2)(a) i.e. the annual value will
          be taken as nil and only interest on borrowed capital
          will be deductible upto the maximum limit of Rs. 1,50,000 or
          Rs. 30,000, as the case may be. The income from the let out unit(s) will be calculated in the same manner as the income from any let
          out house property.

  4. can you please tell me
    if the property is constructed after 1.4.99 and completed then which 3years we have to take??

    do we have to take that year when we took the loan?

    • Radhey Sharma says:

      @gargi, It is written in the article above –

      If you have been paying interest on a loan during the pre construction period of a house, then the interest will be summed up and deduction will be allowed in 5 successive years starting from the year in which the acquisition/construction was completed. Note that interest will be taken from the date of borrowing till the end of the previous year prior to the year in which house is completed. That is, if construction of house was completed in June 2009, the interest will be taken only till March 2009 (end of the previous year prior to the year in which house is completed).

      Is this what you are after, if not, can you be more explicit ?

  5. On the example interest deduction is shown as 160,000 whereas the maximum allowed is 150,000.Please clarify..

    • Radhey Sharma says:

      @Kekin, Nice catch Kekin, I will correct the same.

    • 1.if i buy a property on hire purchase and use it for my business which is earning rent ,then
      what is the tax procedure?
      2.If i take a loan in 2010-11 and house construction is completed in 2013-14.Then how much interest will be deductible on this loan in 2012-13?

      • TheWealthWisher says:

        1. What is “hire purchase” ?
        2. Whatever interest component was there before completion can be availed over a period of 5 future years.

  6. subhasish nag says:

    is the full interest deduction allowed on second house even if i have fully repaid the home loan on my first house?

  7. Hi,
    I have purchased my second an undercunstruction house 4.5 years back.
    I am planning to shift to this house?
    Can i avail benefit of 5 years pre emi and 1.5l interest deduction after the possesion.

  8. Seema Jhuria says:

    If i am not the owner of land and take the loan for construction of this land . can i claim the deduction of payment of interest under income from house proerty and payment of instalment under 80c ? Plz reply

  9. yogesh adalatwale says:

    I am co-owner with my father for a House in the city where my father lives. I live in different city in a rented accommodation. Now I am planning to co-own house in my city. the situation is now both me and my father own two houses in two different cities where the cost difference and the EMI (interest paid) is substantial. while in my 1 st home the EMI is around 7k the new would be around 40K. how can we get maximum benefit where the higher tax benefit goes to my father lesser to me. Can we pay rent to each other?

  10. sunil salunke says:

    if any one have 3 house property . and out of that on 1 property loan is there. and i have not let out any property. so can i show 2 property as let out ? it is compulsory that one man can occupied (s/o) only 1 house ? can i go for (s/o) all 3 house or I have to show 2 let out and one self occupied .
    and if i have to go for 2 property as let out how should i show rent ? b’coz in actual it is not let out ?
    pls reply
    thanks
    kindly give answer

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