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