Income from House Property and Taxes

Income from house property encompasses rental earnings from residential or commercial buildings, as well as adjoining land, owned by a taxpayer. Governed by Sections 22 to 27 of the Income Tax Act, it allows deductions such as the standard deduction, interest on housing loans, and property taxes.   

Key Highlights

• Rental income from properties is taxable under "Income from House Property.
• Home loan interest deduction up to Rs. 2 lakh under the old regime for Self-Occupied & Let-Out type property.
• Home loan interest deduction of up to Rs. 2 lakh under the new regime applies only to Let-out type properties.

What is Income from House Property?

Income from House Property refers to rental income earned from letting out a building or land appurtenant thereto (such as parking space, garden, or courtyard). This includes residential houses, offices, shops, factories, or commercial complexes.

In short, any rental income from a property owned by a taxpayer whether residential or commercial will be taxed under "Income from House Property," unless it is used for their own business or treated as business activity.

As per Section 22 of the Income Tax Act, 1961, such income is taxable under the head "Income from House Property" if the following conditions are satisfied:

1. The property must consist of a building or part of a building, along with land attached to it.
2. The taxpayer must be the legal owner (or deemed owner under Section 27) of the property.
3. The owner should not use the property for their own business or profession. If it is used for business purposes, the income is taxable under Profits and Gains from Business or Profession instead.

Key Points to Note

• Rental income only – Income must be like rent or lease, whether received in periodic intervals or as a lump sum.
• Building and attached land – Rent received for land appurtenant to the building (e.g., parking lot, garden) is also considered house property income. However, if the payment is primarily for land, it is taxed under 'Income from Other Sources'.
• Not a business activity – If the taxpayer is in the full-fledged business of renting properties, the income is taxed as Business Income and not as House Property Income.
  • Example: Renting out one apartment = House Property Income.
  • Running a hostel with multiple rooms = Business Income.
• Residential or commercial property – Both residential and commercial rentals are treated as income from house property.
• Ownership is essential – The taxpayer must own the property. If a person sublets a rented property, the income is not taxed as house property income but under 'Other Sources'.
• Deemed owners are also covered – Even if the legal title is not in the taxpayer's name, income is taxable in the hands of the person who is considered the deemed owner under Section 27.

Concept of Deemed Ownership (Section 27)

• The concept of deemed ownership was introduced to avoid tax evasion practices.
• The owners of the property transferred it to other persons, (for example family members) and still enjoyed the control of the property, while shifting the tax implications to the transferee.
• Therefore, the person who exercises control over the house property will be deemed as the owner, whether the title is in his name or not. House property income is taxed in the hands of the deemed owner. 
• The following cases are provided in the act related to deemed ownership under section 27:
  • If a person transfers property to his spouse or minor child, the transferor is the deemed owner.
  • If a property cannot be divided among the heirs, the holder of the property is the deemed owner.
  • If a person is allotted a house under a co-operative housing scheme, the allottee is the deemed owner.
  • If a person is allowed possession under section 53A of transfer of property act, the possessor is the deemed owner.
  • If a person who is under a lease for a term more than 12 years, the lessee is the deemed owner.

Classification of House Property

Income tax classifies the properties in three ways:

a. Self-Occupied House Property

• A self-occupied house property is used for one’s own residential purposes. 
• Up to two vacant house properties can be considered self-occupied for Income Tax purposes. 
• The annual value of such properties shall be nil if the owner occupies them for personal residence or cannot occupy them for any reason.
• The remaining house as let out for Income tax purposes. 

b.  Let Out House Property

• A house property that is rented for the whole or part of the year is considered a let-out house property for income tax purposes. 

c. Deemed to be Let Out Property

• Any house property in excess of 2 self-occupied properties is deemed a let-out property.
• It is treated as a let-out property even if it is left vacant.

  Points to Remember while Claiming Home Loan Deductions

  • The amount of deduction you can claim depends on the ownership share you have on the property.
  • The home loan must also be in your name. A co-borrower can claim these deductions too.
  • The home loan principal deduction can only be claimed from the financial year in which the construction is completed.
  • Submit your home loan interest certificate to your employer for him to adjust tax deductions at source accordingly. This document contains information on your ownership share, borrower details and EMI payments split into interest and principal.
  • Otherwise, you may have to calculate the taxes on your own and claim the refund, if any, at the time of tax filing. It’s also possible that you may have to deposit the dues on your own if there is a tax payable.
  • If you are self-employed or a freelancer, you don’t have to submit these documents anywhere, not even to the IT Department. You will need them to calculate your liability for every quarter. 
  • You must keep them safely to answer queries that may arise from the IT Department and for your own records.

Tax Benefits on Home Loans for Joint Owners

• If a property is jointly owned and both co-owners take a home loan, each can claim interest deduction up to ₹2 lakhs. 
• Co-owners can each claim up to ₹1.5 lakhs under Section 80C for principal repayment, stamp duty, and registration charges.
• These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
• For claiming deduction like this, both the persons should be co-owners and both should have repaid principal and interest on home loans, stamp duty and registration charges. 

Therefore, to claim the tax benefits on the property:

1. You must be a co-owner in the property (and)
2. You must be a co-borrower for the loan

Therefore, you can avail a larger tax benefit against the interest paid on home loan when the property is jointly owned and your interest outgo exceeds Rs 2 lakh per year.

Set-off and Carry Forward of House Property Loss

• Under Old Regime, a maximum of Rs.2 lakhs losses can be set - off against income under other heads. 
• Carry forward of losses is also allowed. In subsequent years, the losses can be set-off against income from house property income only.
• Under New Regime, loss under house property cannot be set off under any other head. Carry forward of losses is also not allowed.