If a taxpayer owns many house properties, the Income Tax Act allows the benefit of declaring only two properties as ‘Self-occupied property’ as per his choice. The other properties have to be treated as ‘Deemed to be let out’.
A property is considered self-occupied property if it is occupied for residence throughout the year by the taxpayer. The property owner must pay tax on the rental income or even deemed rental Income for all other properties that are let out during the year or become classified as ‘Deemed to be let out’.
The income tax department allowed exemption on the notional rent (deemed rent) on two properties instead of one in the Interim Budget 19-20.
For instance, suppose Mr Udit has three residential units in an apartment, out of which one is self-occupied by him, and the other two were purchased for investment and are vacant. According to the amendment, Mr Udit can declare two properties as self-occupied, and the third will be classified as ‘Deemed to be let out’. Before this amendment, only one property was allowed to be classified as self-occupied.
The government brought the amendment to boost the demand for retail housing by giving tax benefits.
Let us understand the tax aspect on rent or notional (deemed) rent
As mentioned above, if a taxpayer owns more than two house properties, whether the properties are self-occupied or vacant, they will be classified as ‘Deemed to be let out’.
The annual value of the deemed to be let out property will be taxable under the head Income from house property. The annual value of such property is derived according to Section 23 (1a) of the Income Tax Act.
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The annual value is nothing but the expected rental value of the house property calculated based on standard rent, fair rent and municipal value. Standard rent means the rent prescribed and fixed by the Rent Control Act. Fair rent means the rent similar to the rent earned by other properties in a similar location. In contrast, municipal rent is the rental value estimated by the local municipal corporation of that locality.
Steps to calculate notional rent for a deemed to be let out property:
- Ascertain the standard rent, fair rent, and municipal rent.
- Derive at the ‘Expected rent’ of the deemed to be let out property. Expected rent is the higher the value between (i) Municipal value and (ii) Fair rent.
- The Annual value will be lower than (i) Expected rent derived in Step 2 and (ii) Standard rent. This value shall be taken as ‘the gross annual value’ of the property.
Income from house property would be as follows:
|Gross annual value||***|
|Less: Municipal rent||**|
|Net Annual Value||**|
|Less: Standard Deduction||**|
|Less: Interest on the loan||**|
|Income from house property||**|
Deductions under ‘Income from house property
The house property owner is allowed to claim a few expenses from the income as below:
- House property tax: Municipal taxes paid for the house property by the owner is allowed as a deduction.
- Standard Deduction: Section 24(a) allows the standard deduction at the rate of 30% of the house property’s net annual value (gross annual value less municipal taxes). Please note that this deduction is allowed only for the let out or deemed to be let-out properties.
Clubbing of rental Income of all house property under one head
You cannot club all the rental receipts, meaning; you cannot claim one property’s expenses from another property’s rental income.
Deductions on a home loan
Principal repayment of a home loan can be claimed as a deduction under Section 80C of the Income Tax Act up to Rs.1.5 lakh. Also, expenditure in terms of stamp duty and the house property registration charges are allowed as a deduction under Section 80C.
Home loan interest deduction is allowed up to Rs.2 lakh for self-occupied homes under Section 24. In contrast, there is no threshold limit for claiming home loan interest deduction for the let-out property.
However, a maximum of Rs.2 lakh can be claimed under the house property head. Any excess loss over Rs.2 lakh can be carried forward to subsequent years (eight years) for set-off.
Apart from this, Section 80EEA allows interest deduction for the home loan to purchase affordable homes. A deduction of Rs.1.5 lakh over and above the interest deduction of Rs.2 lakh under Section 24 is available under this provision. This deduction is specifically for the housing loan availed for the purchase of affordable homes till the 31st of March 2022 (extended by one more year in Budget 2021)
Conditions for claiming deduction under Section 80EEA:
- Housing loan availed from a financial institution or a housing finance company for buying a residential house property.
- The taxpayer should be a first-time homebuyer. The taxpayer should not own any residential house property as of the date of sanction of the loan.
- The stamp duty value of the house property should be Rs 45 lakh or less.
- The individual taxpayer should not be eligible to claim deduction under the existing Section 80EE.
ITR applicable to report house property income
The number of properties owned would decide the ITR applicability of the taxpayer. For instance, a taxpayer who owns more than one house property cannot file ITR-1. In this case, the taxpayer has to file his return of Income through ITR-2, ITR-3 or ITR-4, as the case may be.
Further, the ITR requires reporting details like address, ownership percentage and PAN of all the property owners for each property owned by the taxpayer.