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2021

Deductions from the ‘Income from House Property’ under Income Tax

income from house property

The income earned by the assesse from a property is taxable under the head 'Income from House Property'. If an individual owns a house property, the rent received becomes taxable. This actual rent received or the notional rent is referred to as ‘annual value’ and taxable under Income Tax. However, there are several deductions allowed by the Income Tax Act, 1961 from such income from house property. Let us discuss them briefly.

Municipal Taxes:

Municipal tax is the annual amount paid to the municipal corporation of that area. Municipal taxes are to be deducted from the Gross Annual value to derive the Net annual value of the house property.
Deduction of municipal tax is allowed only if it has been borne by the owner and paid during that financial year.

Home Loan Principal Repayment [Section 80C]:

The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under Section 80C is Rs. 1,50,000.

The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under Section 80C is Rs. 1,50,000. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.

Restriction on Transfer of Property [Section 80C(5)]:

Section 80C(5) also states that in case the assessee transfers the house property on which he has claimed tax deduction under Section 80C before the expiry of 5 years from the end of the Financial Year in which the possession has been obtained by him, then no deduction and tax benefit on Home Loan shall be allowed under Section 80C. The aggregate amount of tax deduction already claimed in respect of previous years shall be deemed to be the Income of the Assessee of such year in which the property has been sold and the Assessee shall be liable to pay tax on such income.

Standard Deduction [Section 24(a)]:

A standard deduction is allowed at the rate of 30% of the Net Annual Value of the property.
This deduction is provided keep in view the normal maintenance cost of the property such as insurance, repairs, electricity, water supply, etc. However, it is allowed irrespective of the actual amount of expenditure on the property.
Please note that no standard deduction is allowed in case of a self-occupied house property because the Annual Value of the self-occupied house property is nil so the standard deduction is also nil.

Home Loan Interest Repayment [Section 24(b)]:

Self-occupied House Property:

  • If the interest repayment is related to a house property which is self-occupied, the amount of deduction is restricted to maximum up to Rs. 2 lakh.
  • The allowable deduction in such a case is the actual interest paid or Rs. 2 Lakh whichever is lower.

Let-Out Property:

  • If the property is let-out i.e. given on rent, there is not restriction to the maximum amount of deduction u/s 24.
  • This means you can claim actual amount of interest paid during the FY as deduction.

Pre-Construction Interest:

  • If you have taken a loan for the purchase of an under construction house or for construction of a new house on your own, the interest paid by you on such loan till the time the construction is completed is known as pre-construction interest. Pre-Construction Interest means interest on home loan paid before the construction of the house is completed.
  • The pre-construction interest incurred on a housing loan is allowed as a deduction in five equal installments, beginning from the financial year (FY) in which the property has been completely constructed.
  • The allowability of interest is not linked to the existence of the housing loan in each of the five FYs when the deduction is being claimed.
  • You can claim deduction only if you continue to own the property in each of the said FYs.
  • However, no pre-construction interest is allowed in case of loan taken for repairs or reconstruction on an existing house.

Pre-Construction Interest in case of Self-Occupied House Property:

  • There is a cap of Rs 2 lakh per annum on the interest that can be claimed in each FY in respect of a self-occupied property (SOP).
  • If the construction of a self-occupied is not completed within 5 years from the FY in which the loan was taken, the maximum deduction is capped at to Rs30,000 per annum.

Pre-Construction Interest in case of Let out House Property:

  • There is no cap on the interest that can be claimed in each FY in respect of a let out property.
  • Also, there is no restriction on the number of years for construction of house property.

Deduction for Interest on Home Loan [Section 80EE]:

Eligibility to claim Deduction u/s 80EE:

  • The deduction under this section is available only to individuals. This means, if you are a HUF, AOP, a company or any other kind of taxpayer, you cannot claim any benefit under this section.
  • This deduction (up to Rs. 50,000) is over and above the Rs 2 lakh limit under section 24 of the income tax act.
  • To claim this deduction, you should not own any other house property on the date of the sanction of a loan from a financial institution only.

Conditions for Claiming the Deduction:

  • Value of the house should not be more than Rs 50 lakhs;
  • Loan taken for the house should not be more than Rs 35 lakhs;
  • The loan must be sanctioned by a Financial Institution or a Housing Finance Company;
  • The loan must be sanctioned between 01.04.2016 to 31.03.2017;
  • As on the date of the sanction of loan, no other house property must be owned by you.

Order of Claiming Deduction:

  • This deduction is in addition to the Rs 2 lakh limit allowed under section 24.
  • So, if you satisfy the conditions of both Section 24 and Section 80EE of the Income Tax Act, first, exhaust your deductible limit under section 24, which is Rs. 2 lakh. Then claim the additional benefits under section 80EE.

Additional Deduction for Interest Payment in respect of Home Loan [Section 80EEA]:

  • Section 80EEA covers additional deduction of interest payment on home loan subject to certain conditions.
  • The maximum tax deduction available under this section is Rs. 1,50,000/- over and above deduction available under section 24.This deduction is available from financial year 2019-20.
  • Home buyers in India enjoy additional tax benefits, if they are first-time owners of property.
  • Specific provisions have been introduced in India’s tax laws, to offer greater savings on income, if an owner is a first-time property buyer.
  • Additional benefit under the section 80EEA, provided on payment of the interest component of home loans, will be extended till March 31, 2022.
  • The section does not specify anything about residential status of the borrower as well as the use of the house property i.e. self-occupied or let out. Therefore, it can be concluded that both Resident and Non-Resident Indians can claim this deduction irrespective of whether the house is self-occupied or let out.
  • If a person jointly owns the house with a spouse and they both are paying the installments of the loan, then both of them can claim this deduction.

Eligibility:

The deduction under this section is available only to individuals. This deduction is not available to any other taxpayer. Thus, if you are a HUF, AOP, Partnership firm, a company, or any other kind of taxpayer, you cannot claim any benefit under this section.

Amount of Deduction:

  • A deduction for interest payments up to Rs 1,50,000 is available under Section 80EEA.
  • This deduction is over and above the deduction of Rs 2 lakh for interest payments available under Section 24 of the Income Tax Act.
  • Therefore, taxpayers can claim a total deduction of Rs 3.5L for interest on home loan, if they meet the conditions of section 80EEA.

Other Conditions:

  • Similar to Section 80EE, in order to claim deduction under Section 80EEA, you should not own any other house property on the date of the sanction of a loan.

Conditions for claiming the deduction:

  • Housing loan must be taken from a financial institution or a housing finance company for buying a residential house property.
  • Stamp duty value of the house property should be Rs 45 lakhs or less.
  • The individual taxpayer should not be eligible to claim deduction under the existing Section 80EE.
  • The taxpayer should be a first-time home buyer. The taxpayer should not own any residential house property as on the date of sanction of the loan.

Conditions with respect to the Carpet Area of the House Property:

These conditions have been specified in the memorandum to the finance bill, but not mentioned in section 80EEA:

  • Carpet area of the house property should not exceed 60 square meter ( 645 sq ft) in metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region).
  • Carpet area should not exceed 90 square meter (968 sq ft) in any other cities or towns.
  • Further, this definition will be effective for affordable real estate projects approved on or after 1st September 2019.

 

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