How to compute Income from House property?

If you own a house property like flat, bungalow, shop, commercial gala etc. you may need to compute income from house property in your Income tax return (ITR). That does not depend upon whether you earn rental income or not. Irrespective of you earning income from the said property, you need to compute the income from house property in your ITR.

The income that you may earn through rent or lease on your property is not exactly the income from house property. Such income may be starting point for computation of income from house property. But the final amount of income from house property is different from rent or lease that you receive. This article attempts to explain the broad concepts about computation of income from house property which shall be applicable in case of more than 90% of house property owners. The nuances involved in certain classes of owners are dealt with in separate article. The stepwise guide for the same follows.

Steps for computation

  1. Compute Gross Annual Value (GAV)

This is the starting point of computation. The GAV is different for different kinds of occupation of house property as follows:

Nature of house property Gross Annual Value
Self-Occupied Property NIL  (0)
Let Out Property The amount which is higher of the fair market rent and the rent amount received*
Deemed Let Out Property (Vacant Property) The amount of fair market rent which the owner would have received had the property been let out*

(*) since the municipal valuation is generally very less than fair market rent, hence former is not considered.

Example:
Shri Vikas has three properties, one each at Mumbai, Pune and Goa. The property at Pune is self-occupied whereas the property at Mumbai is rented out and the property at Goa is vacant. The different values of parameters and GAV determined from them are as below:

(Amounts in ₹)

Value Pune Goa Mumbai
Municipal value 50,000 60,000 1,00,000
Fair Market Rent 3,00,000 2,50,000 5,00,000
Rent actually received 0 0 6,00,000
Gross Annual Value (GAV) 0 2,50,000 6,00,000
  1. Computation of Net Annual Value (NAV)

Once the GAV is computed, the amount of municipal taxes paid by the owner of the house property needs to be deducted from the GAV to arrive at Net Annual Value (NAV). The amount of municipal taxes and service charges actually paid is only considered and not the municipal taxes due. The amount of municipal taxes which the owner has to pay are included and not those which are borne by someone else including the tenant.

Let’s take the above example to illustrate this further:

Value Pune Goa Mumbai
Municipal value 50,000 60,000 1,00,000
Fair Market Rent 3,00,000 2,50,000 5,00,000
Rent actually received 0 0 6,00,000
Gross Annual Value (GAV) 0 2,50,000 6,00,000
Municipal taxes due 30,000 30,000 50,000
Municipal taxes paid by Shri Vikas 20,000 30,000 20,000
Municipal taxes paid by tenant 0 0 30,000
Eligible deduction of municipal taxes 0 30,000 20,000
Net Annual Value 0 220,000 5,80,000

 

  1. Compute Income from House Property

 

From the Net Annual Value as determined above, certain amounts are deducted on account of standard deduction and interest on the capital borrowed for home.

Standard deduction: An amount at 30% of the net annual value is to be deducted uniformly as it is allowed by law. This is the deduction allowed for maintenance and repairs expenses of the property since separate deduction on such expenses is not allowed.

Interest on capital: Many a times, the home is constructed or acquired through the borrowed funds. These borrowed funds are interest bearing and such an interest accrued or paid needs to be deducted from the net annual value. However, the amount allowed as deduction differs for different types of properties.

 

  • For self-occupied property (SOP), the maximum deduction on account of housing loan interest of ₹200,000/- is allowed
  • For let out properties (LOP) the entire amount of housing loan interest is allowed as deduction
  • For deemed let out properties (DLOP), the entire amount is allowed as deduction.
  • The interest paid by the owner before the period of possession is allowed as deduction in five equal annual installments

Let us understand with the help of the above example:

Value Pune Goa Mumbai
Municipal value 50,000 60,000 1,00,000
Fair Market Rent 3,00,000 2,50,000 5,00,000
Rent actually received 0 0 6,00,000
Gross Annual Value (GAV) 0 2,50,000 6,00,000
Municipal taxes due 30,000 30,000 50,000
Municipal taxes paid by Shri Vikas 20,000 30,000 20,000
Municipal taxes paid by tenant 0 0 30,000
Eligible deduction of municipal taxes 0 30,000 20,000
Net Annual Value 0 220,000 5,80,000
Standard deduction 0 66,000 174,000
Interest 2,40,000 3,60,000 4,80,000
Allowable Interest deduction 2,00,000 3,60,000 4,80,000
Income from House Property (-)2,00,000 (-)2,06,000 (-)74,000

Thus, as mentioned in the beginning, the amount of income from house property for income tax purposes is quite different from rental income received by the owner of the house property.

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