Everybody dreams of owning a house someday. Although it is a big and celebratory step, you must also bear the responsibilities that come with it. One of the primary responsibilities includes paying house property taxes every year. This guide offers detailed insights on income from house property, how to compute your actual income after tax and other deductions, saving tax on home loan interest and so on. Keep reading to know more.
What does income from house property mean?
As per the Income Tax Act, the income of an individual obtained from multiple sources is divided to simplify the tax calculation process. Income from house property is included among these sectors.
As the name suggests, income from house property refers to the money earned by property ownership. For example, if a taxpayer has their own house and rents it to someone else, the rent amount, after tax and other deductions, is the income earned.
Properties whose income is taxable include both residential and commercial buildings. It could be your house, office, shop or building. The only difference is that if it is a residential property, the tax is a part of income from the house property.
On the contrary, if it is a commercial plot used for business purposes, then the tax falls under income from business or profession.
Taxability conditions for Income from house property
The income from house property adds up to your Gross Total income under the following three criteria.
- You own the property
- Property constitutes buildings as well as lands.
- Buildings can include residential houses, offices, shops, factory buildings and so on.
- The owner can use the property for any purpose except professional or business work.
Follow these steps to calculate Income from house property
We have prepared a sequenced list to compute the income from house property. Keep reading to know more.
- Calculate the Gross Annual Value or GAV of your house property: If a house is self-occupied, the net GAV is zero. However, if you rent out your residential space, the gross annual value amounts to the rent collected from the tenant.
- Deduct Property Tax from GAV: You need to pay the property tax, which is a certain percentage of the GAV as per the Income Tax Act.
- Calculate Net Annual Value: Net Annual Value or NAV is the amount left after deducting the Property Tax from the Gross Annual Value (GAV).
- A standard deduction on NAV: As per Section 24 of the Income Tax Act, a 30% deduction is carried out from the NAV. This section also states that carrying out repairs, painting or something else cannot be charged beyond thirty percent.
- Low home loan interest: Section 24 of the Income Tax Act also allows for a deduction on the interest amount paid each year when one has opted for a home loan.
After all these deductions, the remaining value is your actual income from the house property. Apart from this, you have to pay taxes on your complete income as per the specific slab rate.
Please note that if you rent out your property, make sure its rental value is either equal to or higher than a reasonable amount as decided by the municipality.
- Municipal value: The respective municipal authorities determine a reasonable property value that is subject to municipal taxes. This is called Municipal value.
- Standard rent: There is a fixed rent amount as per the Rent Control Act. The property owner cannot impose a higher rent than the standard one in this Act.
- Fair rent: If there is a property in the same locality with similar features or amenities, a fair rent amount is charged.
- Net Annual Value: Net Annual Value or NAV is the amount left after the Municipal taxes are deducted from the Gross Annual value.
Ways to lower taxes on Income from house property
We understand that taxable deductions on property income can be very inconvenient to the owner. However, you do not need to worry as you can actually save on taxes imposed with the help of effective strategies, some of which are listed below:
- Own a property with someone else: If you opt for a home loan with another person such as your spouse, the tax amount will be significantly reduced due to tax exemption that can be availed of by both parties.
- Renting out vacant properties: Please note that if you have houses or property that are vacant, it is still subject to taxation as per the fair rental value. Thus, we recommend that you rent out such empty spaces or properties that will help eliminate losses and bring more income.
- Different ownership: If a property is already registered in your name, it is a better alternative to register a different owner such as your spouse or relative for another property. This will help avoid heavy taxation.
You need to have complete knowledge of property income and tax deductions to make informed investment decisions. If you implement the strategies mentioned above, you can reap maximum benefits while limiting the taxation amount.