Under the head, income from house property, all such rental incomes arising from a house property (whether residential or commercial) are covered. The taxable value of a house property is dependant on the annual value of the property. For any rental income to be charged under the house property, the following three conditions are to be fulfilled:
1. The property should comprise of buildings with or without any land appurtenant thereto,
2. The assessee must be the owner of the house property &
3. The property must not be used by the assessee for the purpose of his business or profession.
House property is classified as self-occupied property (SOP) and let-out property (LOP). SOP is that property or part of a house property, which is owned and used by the assessee for the purpose of his and his familys residence. However, if the assessee owns & uses more than one house property for his own residence, then he has to choose one as SOP and the others shall be deemed as if they were LOPs.
LOPs are properties that are actually let out for either residential or commercial purposes. The computation of income of LOPs is relatively complex as compared to SOPs. The annual value of an SOP shall be taken as nil. In spite of the same, the assessee is allowed to claim any interest accrued or paid during the year on loan borrowed for the purposes of construction, acquisition, repairs or renovation of the property. The maximum amount of deduction allowed shall either be the interest accrued or Rs 30,000 whichever is less.
However, this limit of Rs 30,000 shall be replaced by Rs 1,50,000 if all the following conditions are fulfilled;
1. The loan is borrowed on or after 1.4.1999 for the purposes of construction or acquisition of the property. (Not available for repairs & renovation).
2. The acquisition or construction is completed within 3 years from the end of the financial year in which the loan was borrowed.
3. The person extending the loan should certify that such interest was payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.
Also the limit as specified above is qua assessee and not qua property. Meaning that the limit of Rs 30,000 or Rs 1,50,000 shall be with reference to each co-owner and not for the property as a whole.
The above provisions can be illustrated with the help of the following case; Mr PQR owns a house property acquired by him on August 15, 2002 by taking a loan of Rs 20 lakh on August 25, 2002. The interest accrued during the FY 2003-04 works out to Rs 1,80,000. The house is used by him for the entire year for his residential purposes.
The loss from the house property would be restricted to Rs 1,50,000. However, if Mr & Mrs PQR had jointly owned the property, then each of them could be eligible to claim a loss of Rs 90,000 (assuming share of ownership is equal and Mrs PQR is not a nominal owner).
Further had the loan been borrowed for repairs, then the maximum eligible limit would be Rs 30,000 and not Rs 1,50,000.
Pre-construction And Post-construction Interest
Any interest accruing on capital borrowed for the purpose of acquisition / construction pertaining to the period prior to the previous year in which the property has been acquired or constructed shall be regarded as pre-construction period interest. Post-construction interest would be the interest accruing after the property is acquired or constructed.
The bifurcation is necessary since the pre-construction interest is allowable as deduction equally over a period of 5 years commencing from the year in which the property was acquired or constructed and not in the year of accrual. The post-construction though is allowable, subject to limits in the year of accrual.
Mr XYZ commences construction of a house property on 1.4.97 and the construction is completed on 31.10.2002. However, the loan for the same is borrowed on 15.4.99. The interest accrued for the years since 99-00 is Rs 1,00,000 per year.
The total pre-construction interest is Rs 3,00,000 (up to 31.03.2002, since construction is completed in FY 2002-03). The amount of pre-construction available in FY 2003-04 would be Rs 60,000 (i.e 1/5th available for 5 years commencing from FY 2002-03). In addition, post-construction allowable for FY 2003-04 would be Rs 1,00,000.
Thus the total interest eligible would be Rs 1,60,000. However, the maximum allowable would be restricted to Rs 1,50,000. (Construction has been completed within three financial years of the FY in which the loan was borrowed.)
If the construction had been completed on any date after 31.03.2003, then the maximum limit would be restricted to Rs 30,000. The above benefits of SOPs are also available to a house owned by an assessee,
1. which has not been occupied due to the reason of employment, business or profession,
2. he has to reside in a house not owned by him,
3. the same has not been let out for any part during the year and
4. no other benefit there from has been derived by the assessee.
The position now would be clear as to how to work out the deduction on account of Interest on SOPs. If any individual owns more than one property, which is used by him for the purposes of his own residence, then he has to select that property which would minimise his tax liability by considering the municipal value of the properties and the eligible interest allowable for deduction.
Considering the tax breaks allowed on borrowed funds, it makes sense to invest in a house property. In fact, if the loan is availed @ 8 per cent and the individual is in the highest tax bracket i.e. 30 per cent, then the real rate works out to a mere 5.6 per cent which is more than what the banks offer on term deposits.
The author is a Chartered Accountant