What is House Property Tax?

Property ownership is a cherished goal for many, but it comes with its set of responsibilities, one of which is paying house property tax. This tax is an essential aspect of owning real estate and contributes significantly to the revenues of local governments. Understanding house property tax is not only crucial for legal compliance but also for effective financial planning. Whether you're a first-time homeowner, a real estate investor, or simply exploring the basics of property taxes, this guide will illuminate the what, why, and how of house property tax and help you understand its impact on property owners.

What is House Property Tax?

House property tax, often simply referred to as property tax, is imposed by local municipal authorities on the owners of properties. This tax is calculated on the basis of the property's value and is applicable to all types of real estate, including residential homes, office buildings, and shops. Here’s what you need to know:

House property tax is an important financial consideration for property owners and forms a vital part of local governance and infrastructure development.

How to Calculate Income From House Property?

Calculating income from house property is a crucial aspect of your income tax filing if you own property. Here’s a step-by-step guide to understanding this calculation:

• Determine Gross Annual Value (GAV): For a rented property, GAV is the rent collected. For a self-occupied property, GAV is considered as nil.

• Less: Municipal Taxes: Deduct the municipal taxes paid during the year from the GAV. This is applicable only if the taxes are borne by the property owner.

• Net Annual Value (NAV): NAV is calculated as GAV minus municipal taxes.

• Less: Standard Deduction: A standard deduction of 30% of the NAV is allowed for repairs, maintenance, etc., irrespective of the actual expenditure.

• Less: Interest on Home Loan: Deduct the interest paid on any home loan taken for the purchase, construction, repair, or renovation of the property.

• Income from House Property: The resulting figure after all deductions is your 'Income from House Property', which is taxed as per your income tax slab.

Tax Deduction on Home Loans

Home loans can provide significant tax benefits under the Income Tax Act. Here’s how you can avail of these deductions:

Deduction on Principal Repayment (Section 80C):

• You can claim a deduction on the principal repayment portion of your home loan up to ₹1.5 lakh under Section 80C
• This is within the overall limit of Section 80C which includes other investments like PPF, ELSS, etc

Deduction on Interest Payment:

• For Self-Occupied Property (Section 24): You can claim a deduction of up to ₹2 lakh on the interest component of the home loan.
• For Let-Out/Rented Property: There is no upper limit on the amount of interest you can claim as a deduction. However, the overall loss that can be claimed under the head "Income from House Property" is capped at ₹2 lakh.

Additional Deduction (Section 80EE and 80EEA):

First-time homeowners can claim additional deductions on interest paid under Sections 80EE and 80EEA, subject to certain conditions and limits.

Pre-Construction Interest:

Interest paid during the construction period can be claimed in five equal installments starting from the year in which the construction is completed.

Utilisingthese tax deductions effectively can significantly reduce your tax liability, making home loans a tax-efficient way of financing property investments.

Claiming Deduction on Home Loan

Claiming deductions on a home loan can significantly reduce your tax burden. Here’s a guide on how to do it:

Deduction on Interest Payment (Section 24):

• For self-occupied property, claim up to ₹2 lakh on interest paid.
• For let-out property, claim the actual interest paid with no upper limit. However, the net loss that can be set off against other heads of income is capped at ₹2 lakh.

Additional Deduction (Section 80EE and 80EEA):

First-time homebuyers can avail of additional interest deduction under Sections 80EE and 80EEA, subject to fulfilling specific conditions.

• Documents Required: Keep handy documents like loan sanction letter, loan account statement, and interest certificate from the lender to claim these deductions.

• Joint Home Loan: If you have a joint home loan, each co-borrower can claim these deductions individually, subject to the limits, enhancing the overall tax benefit.

Tax Benefits on Home Loans for Joint Owners

Joint owners of a property who are also co-borrowers of a home loan can avail significant tax benefits:

• Deduction for Each Co-Owner: Each joint owner can claim a deduction for home loan interest up to ₹2 lakh (for self-occupied property) and principal repayment under Section 80C up to ₹1.5 lakh individually.

• Sharing of Benefits: The benefit can be shared among the co-owners in the proportion of their share in the loan. It's important that the shares are clearly defined and are adhered to in the actual transaction.

Conditions for Claiming Deduction:

• Both the co-owners should be co-borrowers of the loan.
• The co-owners should be joint owners of the property.
• The construction or purchase of the property should be completed.

Additional Deduction for First-Time Buyers: Similar to individual homebuyers, joint owners who are first-time homebuyers can also avail additional deductions under Section 80EE and 80EEA.

Documentation: Each co-owner should maintain separate proof of the home loan repayment to claim deductions.

These tax benefits make joint home loans an attractive proposition for co-owners, allowing them to maximise their tax savings.

HRA and Deduction on Home Loan

Combining House Rent Allowance (HRA) and home loan deductions can optimise your tax savings, especially if you're living in a rented house while owning a property. Here's how this works:

• Claiming HRA: If you receive HRA as part of your salary and live in a rented house, you can claim this allowance as a deduction. The deduction is the least of the following:

• Actual HRA received.
• 50% of salary (for metro cities) or 40% (for non-metro cities).
• Excess of rent paid over 10% of salary.
• Claiming Home Loan Deduction: Simultaneously, you can claim deductions on your home loan both on the principal amount under Section 80C and the interest payment under Section 24.

• Conditions:

• The property on which you've availed the home loan should not be in the same city where you're residing on rent, or,
• If it's in the same city, you should have a valid reason for not living in it (like the property being too far from your workplace).

Significant Budget Amendment in 2017 – Impact Explained with an Example

The 2017 Budget introduced a significant amendment regarding the set-off of loss under the head 'Income from house property' against other heads of income.

• Pre-Amendment Scenario: Before the amendment, there was no cap on the amount of loss from house property (primarily due to interest on home loans) that could be set off against other heads of income.

• Post-Amendment Rule: The set-off of loss under the head 'Income from house property' against other heads of income is capped at ₹2 lakh per annum.

Example: Assume Mr. A has a loss of ₹3 lakh under the head 'Income from house property' (due to interest on home loan) and a salary income of ₹10 lakh. Pre-amendment, he could set off the entire ₹3 lakh against his salary income, reducing his taxable income to ₹7 lakh. Post-amendment, he can only set off ₹2 lakh, with his taxable income being ₹8 lakh. The unabsorbed loss of ₹1 lakh can be carried forward for eight assessment years.

Conclusion

Understanding house property tax, including deductions on home loans and the interplay with HRA, is crucial for effective tax planning. The significant amendment in the 2017 Budget regarding the set-off of loss from house property further underscores the need to stay updated with tax laws. Remember, each element of property taxation, from calculating income from house property to optimising deductions, plays a vital role in your overall tax strategy.

FAQs

• What is house property tax?

House property tax is a local tax levied by municipal authorities on property owners, based on the value of their property. It applies to all real estate, including residential and commercial properties.

• How is income from house property calculated for tax purposes?

Income from house property is calculated by deducting municipal taxes paid, standard deduction of 30% for maintenance, and interest on home loan from the Gross Annual Value (GAV) of the property.

• Can I claim tax deductions on a home loan?

Yes, you can claim tax deductions on both the principal repayment (up to ₹1.5 lakh under Section 80C) and interest payment (up to ₹2 lakh for self-occupied property under Section 24) of a home loan.

• Is it possible to claim HRA and home loan deductions simultaneously?

Yes, you can claim both HRA and home loan deductions if you live in a rented house while owning another property, subject to certain conditions.

• What was the significant budget amendment in 2017 regarding house property?

The 2017 Budget capped the set-off of loss under 'Income from house property' against other heads of income at ₹2 lakh per annum.

• What are the tax benefits for joint owners of a property with a home loan?

Joint owners who are also co-borrowers of a home loan can each claim deductions on the principal and interest paid, thereby increasing the overall tax benefit.

• How does owning a let-out property affect my taxes?

For a let-out property, the entire amount of home loan interest is deductible, but the net loss that can be claimed against other heads of income is capped at ₹2 lakh.

• Can I claim tax benefits on a second home loan?

Yes, you can claim tax benefits on a second home loan. However, if the second home is not rented out, it will be deemed to be self-occupied, and the interest deduction will be limited to ₹2 lakh.

• Are there any tax exemptions on selling a house property?

Yes, under Section 54, capital gains from selling a house property are exempt if the amount is reinvested in buying or constructing another house property, subject to certain conditions.

• What is Form 26AS in the context of house property?

Form 26AS is a tax credit statement that includes details of TDS deducted on rent payments (if applicable), which is useful for landlords to reconcile their tax deductions and file accurate tax returns.