One may either have a tax break or additional tax liability as there are different rules for determining income and claiming deductions from house property.
Income from house property
Taxable value of a self–occupied property is treated as nil under the provisions of the Income Tax Act, 1961. However, if a person owns more than one house property and neither of the properties is let out, one of the properties will be considered as self-occupied and the rest will be regarded as deemed to be let out. When a property is considered to be deemed to be let out, expected rent from such a property is regarded as taxable and needs to be offered to tax.
In the case of properties which are actually let out, the higher of fair rental value or actual rent received is chargeable to tax as taxable value. Deduction for actual municipal taxes paid and standard deduction at 30% of net annual value (i.e. after reducing municipal tax from the annual value) is available in case of deemed to be let-out or actually let-out properties.
Deduction for housing loan interest
A housing loan taken from any financial institution or from any other person can give a buyer a tax break. Interest payable on such housing loans can be claimed as deduction even if such interest is actually not paid during the year. In the case of self-occupied properties, allowable deduction will be restricted to Rs 2 lakh. However, this cap is not applicable to deemed to be let out or actually let out properties. Actual interest can be claimed for these properties.
In the case of a self-occupied property, if acquisition or construction is not completed within a period of five years (under the proposed amendment with effect from April 1, 2016) from the end of the financial year in which loan was obtained, the cap on interest deduction will be restricted to Rs 30,000 instead of Rs 2 lakh.
The aggregate interest payable from the date of obtaining the loan until acquisition or completion of construction of the house property can be claimed in five equal instalments from the year in which construction is completed or the property is acquired. However, this deduction would again be subject to a cap of Rs 2 lakh in case of a self-occupied property.
Deduction for housing loan repayment
The repayment of the principal amount of capital borrowed for the purchase or construction of a house property is allowed as deduction under Section 80C of the Act from the year in which the same is acquired or the construction is completed. Apart from the above, the payment of stamp duty, registration fees paid for the house property is also eligible for deduction under Section 80C.
It may be noted that the deduction claimed under Section 80C will be reversed and chargeable to tax as deemed income if the house property is transferred within a period of five years from the end of the financial year in which the property is obtained by the buyer. The maximum tax deduction allowed for repayment of a housing loan along with other eligible investment/expenditure under Section 80C is R1.5 lakh.
Taxation of property held jointly
Where the property is jointly held and the loan is serviced by co-owners, each co-owner will be liable to tax in respect of his share of income and can claim the permissible deductions.
Treatment of loss from house property
Loss from house property can be set off against the current year’s income. Any balance loss which is not set off against the current year’s income can be carried forward up to eight years and be set off against income from house property only.
Tax benefit to first home buyers
There is additional interest deduction up to Rs 50,000 for first home buyers, provided the loan is sanctioned during FY17, the buyer does not own any other residential house property on the date of the sanction of the loan, the loan value does not exceed R35 lakh and the property value does not exceed Rs 50 lakh. Further, it is also proposed that such a deduction would be available through the years of repayment of such loan starting from FY17.
The writer is director, Deloitte Haskins & Sells. With inputs from Pallavi Dhamecha, manager and Sudeep Kumar, assistant manager, Deloitte Haskins & Sells