Income earned from a property that is owned by a tax payer, is taxed under the head ‘income from house property’, whether it is a residential or commercial property. Basis for taxation If you own any house property, the rent received by you or which is reasonably expected to be received by you, is taxed. This actual rent received/or the notional rent, is known as ‘annual value’ in income tax parlance.
However, a property that is used by you for your business or profession, is not taxed as income from home. For residential houses owned by the tax payer, the law treats one house as self-occupied, in case it is not let-out and is used by you for your own residence, or remains vacant owing to your residence in another house that is not owned by you. The annual value for such a single property is taken as nil. If the property is let-out, the rent received on such property is taxable.
Two deductions are available, while computing the taxable income from house property. The first is a standard deduction, with respect to repairs, etc., at the flat rate of 30% of the annual value computed as above. This deduction is available, irrespective of whether any expenditure on repairs, etc., has been incurred or not.
For one self-occupied property, no deduction for repairs, etc., is available because the annual value of such property is nil. The second deduction pertains to interest on any money borrowed, to purchase or construct a house, or for repairs or reconstruction of your existing property. This benefit is available even for commercial properties. Even the processing fee or prepayment fee paid on a home loan, can be claimed as deduction.
The money can be borrowed from anybody, including your relatives or friends and not necessarily from banks. For one self-occupied property, the amount of deduction available is capped at Rs 2 lakh per year. However, for a property that is let-out or any additional self-occupied property that is treated as let-out, the entire interest on such a loan can be claimed.
If you have more than one property as self-occupied, it is better to treat the property with lower or nil interest as self-occupied, in case the interest payable for any such properties exceeds Rs 2 lakh. For an under-construction property, the interest can be claimed only from the year when the construction is completed and possession is taken. In the year of construction, you can claim interest for the full year, even if the possession is taken on last day of the year.
For interest paid prior to taking possession, the same can be claimed in five equal instalments from the year in which the construction is completed and possession is taken. The overall interest claim shall still be restricted to Rs 2 lakhs, if the property is self-occupied.
Deduction available under Section 80C for repayment of home loan principal
An individual and a Hindu undivided family (HUF), can claim tax benefits on the repayment of the principal component of a home loan that is availed from specific institutions.
This benefit is restricted to Rs 1.5 lakhs per annum, and includes stamp duty and registration charges, life insurance premiums and investments in NSCs, EPF, ELSS, etc. This deduction is available only on the purchase or construction of a residential house property. If the residential house that is bought or constructed with a home loan, is sold within five years from the end of the year in which its possession was taken, all the deductions that were allowed for principal repayment in the earlier years, shall be reversed and taxed as income of the year in which such property is sold.
Moreover, no deduction under Section 80C will be available for principal repayment made during the year.
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