Income from house property

How to Calculate the Gross Annual Value (GAV) of the Let-out Property?

The Gross Annual Value (GAV) of a let-out property and deemed let-out property is a key component in determining the taxable income from house property. It represents the highest value of potential income the property can generate, either from actual rent received or the expected rent based on prevailing market conditions.

Here’s a step-by-step process to calculate the GAV:

Step 1: Determine Actual Rent Received or Receivable

• This is the total rent received (or receivable) from the tenant for the entire financial year.
• If the property was vacant for part of the year, calculate rent only for the occupied period.

Step 2: Identify the Expected Rent

• Expected Rent is the higher of:
  1. Municipal Value: The value assigned by the local municipal authority for tax purposes.
  2. Fair Rental Value: The market rental value based on similar properties in the area.
• However, the expected rent cannot exceed the Standard Rent under the Rent Control Act (if applicable).

Step 3: Compare Actual Rent and Expected Rent

• The GAV is the higher of the Actual Rent Received or the Expected Rent.
• If the property was vacant for part of the year, the GAV will be limited to the actual rent received or receivable.

Example of GAV Calculation

• Municipal Value: ₹2,00,000
• Fair Rental Value: ₹2,50,000
• Standard Rent: ₹2,40,000
• Actual Rent Received: ₹2,20,000

The expected rent is ₹2,40,000 (since it is capped at the Standard Rent). Comparing the expected rent with actual rent received, the GAV will be ₹2,40,000 (higher of the two).

Example of Calculation of Income for House Property

Let’s break down an example to calculate taxable income from a let-out property:

Scenario

• Municipal Value: ₹3,00,000
• Fair Rental Value: ₹3,50,000
• Standard Rent: ₹3,40,000
• Actual Rent Received: ₹3,30,000
• Municipal Taxes Paid: ₹20,000
• Home Loan Interest Paid: ₹1,00,000

Step-by-Step Calculation

1. Gross Annual Value (GAV):

   • Expected Rent: ₹3,40,000 (as it is capped at Standard Rent)
   • Actual Rent Received: ₹3,30,000
   • GAV = ₹3,40,000 (higher of Expected Rent and Actual Rent).

2. Deduct Municipal Taxes Paid:

   • Net Annual Value (NAV) = GAV – Municipal Taxes Paid
   • NAV = ₹3,40,000 – ₹20,000 = ₹3,20,000

3. Apply Standard Deduction (30%):

   • Standard Deduction = 30% of NAV = ₹96,000

4. Deduct Home Loan Interest:

   • Home Loan Interest Deduction = ₹1,00,000

5. Calculate Taxable Income:

   • Taxable Income = NAV – Standard Deduction – Home Loan Interest
   • Taxable Income = ₹3,20,000 – ₹96,000 – ₹1,00,000 = ₹1,24,000

Tax Deduction on Home Loans

Home loans come with significant tax benefits, making them a popular financial tool for purchasing property. These deductions are available under different sections of the Income Tax Act and cover both the interest and principal components of the home loan. Here’s a detailed breakdown:

a. Tax Deduction on Home Loan Interest: Section 24

Section 24(b) provides tax relief on the interest paid on a home loan. This deduction reduces your taxable income and applies to both self-occupied and let-out properties.

Key Points:

• For a self-occupied property: The maximum deduction is ₹2,00,000 per annum.
• For a let-out or deemed let-out property: There is no upper limit on the interest deduction 
• The deduction is available for loans taken to:
  1. Purchase or construct a house (construction must be completed within 5 years from the end of the financial year in which the loan was taken).
  2. Repair, renew, or reconstruct a house (in this case, the maximum deduction is ₹30,000).

b. Tax Deduction on Principal Repayment

The principal portion of the home loan repayment is eligible for deduction under Section 80C, up to a limit of ₹1,50,000 per annum.

Key Points:

• The deduction applies to loans taken for purchasing or constructing a residential property.
• The property must not be sold within five years of possession. If sold earlier, the deductions claimed in previous years are added back to your taxable income in the year of sale.
• This deduction is part of the overall ₹1,50,000 limit under Section 80C, which includes other investments like ELSS, PPF, and LIC premiums.

Example:
If your total Section 80C investments are ₹1,20,000 and your principal repayment is ₹50,000, you can claim a maximum of ₹1,50,000 as a deduction under this section.

Tax Deduction for First-Time Homeowners: Section 80EE

Section 80EE provides an additional deduction for interest paid on home loans for first-time homeowners.

Eligibility Criteria:

• The value of the property should not exceed ₹50 lakh.
• The home loan amount should not exceed ₹35 lakh.
• The loan must be sanctioned by a financial institution between April 1, 2016, and March 31, 2017.
• The taxpayer must not own any other residential property at the time of loan sanction.

Key Benefits:

• Maximum deduction: ₹50,000 per year, over and above the ₹2,00,000 deduction under Section 24(b).
• This benefit continues until the home loan is fully repaid.

Example:
If you pay ₹2,50,000 as interest, you can claim ₹2,00,000 under Section 24(b) and an additional ₹50,000 under Section 80EE.

Tax Deduction for First-Time Homeowners: Section 80EEA

Section 80EEA extends benefits for affordable housing and allows an additional deduction on interest paid, specifically targeting middle-class buyers.

Eligibility Criteria:

• The stamp duty value of the property should not exceed ₹45 lakh.
• The home loan must be sanctioned between April 1, 2019, and March 31, 2022.
• The taxpayer must not own any other residential property at the time of loan sanction.
• This deduction is available only to those who have not claimed benefits under Section 80EE.

Key Benefits:

• Maximum deduction: ₹1,50,000 per year, over and above the ₹2,00,000 deduction under Section 24(b).

Example:
If you pay ₹4,00,000 as interest, you can claim ₹2,00,000 under Section 24(b) and an additional ₹1,50,000 under Section 80EEA, totaling ₹3,50,000 in deductions.

Tax Benefits on Home Loans for Joint Owners

When a home loan is taken jointly by two or more individuals, all co-borrowers who are also co-owners of the property can avail tax benefits. This can significantly increase the overall deductions claimed.

Individual Deduction Limits:

Each co-owner can claim deductions independently, subject to their share of the loan repayment. For interest payments, up to ₹2,00,000 can be claimed under Section 24(b) by each co-owner for a self-occupied property. For principal repayment, each co-owner can claim up to ₹1,50,000 under Section 80C.

Conditions for Claiming Benefits:

All co-borrowers must also be co-owners of the property. The share of ownership and loan repayment must be clearly defined. Proper documentation, such as the loan agreement and ownership deed, is required.

HRA and Deduction on Home Loan

Many taxpayers wonder if they can claim both House Rent Allowance (HRA) and home loan deductions. The good news is that under certain circumstances, you can avail both benefits.

1. Eligibility to Claim Both:

   • You live in a rented house and pay rent while owning another house elsewhere.
   • The owned house is either vacant or rented out.

2. HRA Exemption:

   • HRA is exempt under Section 10(13A) of the Income Tax Act.
   • The exemption depends on your salary, rent paid, and city of residence.

3. Home Loan Deductions:

   • You can claim deductions on interest (Section 24(b)) and principal repayment (Section 80C) for the owned house, even if it is vacant or rented.

Example: If you work in Mumbai and live in a rented house, while owning a home in Pune:

• You can claim HRA for the rent paid in Mumbai.
• Simultaneously, you can claim deductions on the home loan for the Pune property.

Key Considerations:

• Proper documentation of rent payments (rent receipts) and loan details is necessary.
• If you claim HRA and own a house in the same city, you need to provide a valid reason for living in a rented house (e.g., work location far from owned property).

Exclusions to Income From House Property

Certain scenarios lead to exclusions from taxable income under the Income from House Property category. In such cases, the property income is not added to the taxpayer’s total income.

1. Self-Occupied Property (SOP):

   • For one self-occupied property, the Gross Annual Value (GAV) is considered zero.
   • If there is no home loan, no taxable income arises from the property.

2. Vacant Property:

   • If the property remains vacant for the entire year and is not let out, its GAV is considered zero, provided it qualifies as a self-occupied property.

3. Agricultural Land or Farmhouses:

   • Properties classified as agricultural land or farmhouses outside municipal limits are exempt from income tax under certain conditions.

4. Income from Property Used for Business or Profession:

   • If a property is used exclusively for the owner’s business or profession, no income is taxable under Income from House Property. Instead, deductions can be claimed under the Income from Business or Profession head.

5. Property Donated to Charity or Religious Institutions:

   • If the property is owned by a registered charitable trust and used for charitable purposes, it is exempt from tax under Section 11.

Example: If you own a self-occupied house and a farmhouse classified as agricultural property, the income from both properties is excluded from taxation under the Income from House Property head.