Income Tax Exemption on Interest Paid on Housing Loan – Updated information for 2018-19

Income or Loss on House Property Calculation – From the Financial Year 2017-18 Section 24 of Income Tax Act allows only Rs. 2 lakh as Exempted income / Loss allowed to deducted from Income in respect of Interest paid on Housing Loan even in the case of House Property is rented out.

While having discussion with many of the Personal Income Tax Payers known to us it came to light that they did not aware of the restriction of exemption allowed / Loss allowed to deducted from Income in respect of Interest paid on Housing Loan to Rs. 2 lakh even in the case of Housing Property is rented out.

Checkout following Income Tax 2018-19 related links:

GConnect Income Tax Calculator 2018-19 for Central Government Employees

Income Tax 2018-19 – How various income earned by Salaried Employees treated under Income Tax ?

Income Tax 2018-19 – Changes for Salaried Employees and Pensioners

The Relevant Portions on determination of Income or Loss on House Property are as follows:

Income from house property.

Section 22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house property”.

Annual value how determined.

23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be—

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable :

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Explanation.—For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules22 as may be made in this behalf, the amount of rent which the owner cannot realise.

(2) Where the property consists of a house or part of a house which—

(a) is in the occupation of the owner for the purposes of his own residence; or

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,

the annual value of such house or part of the house shall be taken to be nil.

(3) The provisions of sub-section (2) shall not apply if—

(a) the house or part of the house is actually let during the whole or any part of the previous year; or

(b) any other benefit therefrom is derived by the owner.

(4) Where the property referred to in sub-section (2) consists of more than one house—

(a) the provisions of that sub-section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf;

(b) the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.

Following sub-section (5) shall be inserted after sub-section (4) of section 23 by the Finance Act, 2017, w.e.f. 1-4-2018 :

(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.

Deductions from income from house property.

24. Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—

(a) a sum equal to thirty per cent of the annual value;

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees :

Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within 24[five] years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed two lakh rupees.

Explanation.—Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the said previous year and for each of the four immediately succeeding previous years:

Provided also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.

Explanation.—For the purposes of this proviso, the expression “new loan” means the whole or any part of a loan taken by the assessee subsequent to the capital borrowed, for the purpose of repayment of such capital.

Deduction in respect of interest on loan taken for residential house property.

80EE. (1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential property.

(2) The deduction under sub-section (1) shall not exceed fifty thousand rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2017 and subsequent assessment years.

(3) The deduction under sub-section (1) shall be subject to the following conditions, namely:—

(i) the loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017;

(ii) the amount of loan sanctioned for acquisition of the residential house property does not exceed thirty-five lakh rupees;

(iii) the value of residential house property does not exceed fifty lakh rupees;

(iv) the assessee does not own any residential house property on the date of sanction of loan.

(4) Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.

(5) For the purposes of this section,—

(a) “financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies, or any bank or banking institution referred to in section 51 of that Act or a housing finance company;

(b) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.]

To Summarize,

Home Loan Interest deduction is now limited to Rs. 2 lakh only in all of the following cases –

(1) property is rented out

(2) self-occupied property

This restriction will also be applicable for second self occupied property.

An Illustrative Income or Loss from House Property Calculation is as follows

Loss allowed to deducted / exemption on interest on Housing loan 2016-17 2017-18
Rental Income

(Rs. 20,000 for 12 months)

240000 240000
Less : Municipal Taxes Paid 5000 5000
less: Standard Deduction(30% * 240000) 72000 72000
Less: Interest  on House loan 520000 520000
Loss from house property allowed to be deducted

AP = 70% of Rental Income – Municipal Tax

Where AP is Annual Rental Value minus allowed deductions

Loss from House Property = Interest on Housing Loan – Annual Rental Value minus allowed deductions

 

 

3,57,000

(no limit)

2,00,000

(maximum limit allowed )

Illustrative Calculation to set off Loss on House Property

2016-17 2017-18
Income from remaining heads 10,00,000 10,00,000
Loss from house Property (3,57,000) (2,00,000)
Total Taxable Income* 6,43,000 8,00,000
Income Tax to Paid 41,100 72,000

Checkout this Calculator for Income or Loss from House Property (Calculation of IT exemption for Interest on Housing Loan)

Detailed information on the income tax provisions on Income or Loss on house property is given below:

Income under the House Properties

Basis of Charge (Section 22)

Income from house property shall be taxable under this head if following conditions are satisfied:

a) The house property should consist of any building or land appurtenant thereto;

b) The taxpayer should be the owner of the property;

c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.

 Computation of Income from house property

Income from a house property shall be determined in the following manner:

Particulars Amount
Gross Annual Value
Less: Municipal Taxes
Net Annual Value ****
Less: Standard deduction at 30% [Section 24(a)]
Less: Interest on borrowed capital [Section 24(b)]
Income from house property ****

Gross Annual value [Sec. 23(1)]

The Gross Annual Value of the house property shall be higher of following:

a) Expected rent, i.e., the sum for which the property might reasonably be expected to be let out from year to year. Expected rent shall be higher of municipal valuation or fair rent of the property, subject to maximum of standard rent;

b) Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy

Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to the gross annual value.

Deductions

Description Nature of Deductions
Municipal Taxes Municipal taxes including service-taxes levied by any local authority in respect of house property is allowed as deduction, if:

a) Taxes are borne by the owner; and

b) Taxes are actually paid by him during the year.

Standard Deduction[Section 24(a)] 30% of net annual value of the house property is allowed as deduction if property is let-out during the previous year.
Interest on Borrowed Capital *

[Section 24(b)]

a) In respect of let-out property, actual interest incurred on capital borrowed for the purpose of acquisition, construction, repairing, re-construction shall be allowed as deduction
b) In respect of self-occupied residential house property, interest incurred on capital borrowed for the purpose of acquisition or construction of house property shall be allowed as deduction up to Rs. 2 lakhs. The deduction shall be allowed if capital is borrowed on or after 01-04-1999 and acquisition or construction of house property is completed within 5 years.
c) In respect of self-occupied residential house property, interest incurred on capital borrowed for the purpose of reconstruction, repairs or renewals of a house property shall be allowed as deduction up to Rs. 30,000.

* Any interest pertaining to the period prior to the year of acquisition/ construction of the house property shall be allowed as deduction in five equal installments, beginning with the year in which the property was acquired/ constructed.

* Deduction for interest on borrowed capital shall be limited to Rs. 30,000 in following circumstances:

a) If capital is borrowed before 01-04-1999 for the purpose of purchase or construction of a house property;

b) If capital is borrowed on or after 01-04-1999 for the purpose of re-construction, repairs or renewals of a house property;

c) If capital is borrowed on or after 01-04-1999 but construction of house property is not completed within five years from end of the previous year in which capital was borrowed.

Deduction for interest on housing loan [Section 80EE]

Deduction of up to Rs 50,000 shall be allowed to an Individual for interest payable on loan taken for the purpose of acquisition of a house property subject to following conditions:

a)  Loan has been sanctioned by Financial institution during the financial year 2016-17;

b)  The amount of loan sanctioned does not exceed Rs 35,00,000;

c)  The value of residential property does not exceed Rs 50,00,000;

d)  The assessee does not own any residential house property on the date of sanction of loan;

e)  Where deduction has been allowed under this section, no deduction shall be allowed in respect of such interest under any other provision.

 Computation of Income from House Property

S. No. Property Type Gross Annual Value of the property Deduction for municipal taxes Net Annual Value of the property Standard Deduction Interest on borrowed capital
1. One self-occupied house property Nil Nil Nil Nil Deduction for interest on borrowed capital is allowed up to Rs. 30,000 or Rs. 2,00,000, as the case may be.
2. House property could not be occupied by the owner due to employment or business carried on at any other place Nil Nil Nil Nil Deduction for interest on borrowed capital is allowed up to Rs. 30,000 or Rs. 2,00,000, as the case may be.
3. Let out property To be computed as per provisions of Section 23(1) Allowed on actual payment basis Gross annual value lessMunicipal taxes 30% of Net Annual Value Entire amount of interest paid or payable on borrowed capital shall be allowed as deduction. Pre-construction interest shall be allowed as deduction in 5 annual equal installments (Subject to certain conditions).
4. More than one-self occupied property Only one property selected by the taxpayer will be considered as self-occupied house property and all other properties shall be deemed to be let-out for the purpose of computation of income under the head house property.
5. A self-occupied property let-out for the part of the year The house will be taken as let-out property and no concession shall be available for the duration during which the property was self-occupied.
6. One part of the property is let-out and other part is used for self-occupied purposes Each part of the property shall be considered as separate property and income will be computed accordingly

Composite Rent:

If letting out of building along with movable assets i.e., machinery, plan, furniture or fixtures, etc. forms part of a single transaction and are inseparable, the composite rent shall be taxable under the head “Profits and gains from business or profession” or “Income from other sources”, as the case may be. On the other hand, if the letting out of building is separable from letting of other assets, then income from letting out of building shall be taxable under the head “Income from house property” and income from letting out of other assets shall be taxable under the head “Profits and gains from business or profession” or “Income from other sources”, as the case may be.

Deduction for unrealized rent:

Unrealized rent is that portion of rental income which the owner could not realize from the tenant. Unrealized rent is allowed to be deducted from actual rent received or receivable only if the following conditions are satisfied:

a) The tenancy is bona fide;

b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

c) The defaulting tenant is not in occupation of any other property of the assessee;

d) The taxpayer has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

Arrears of rent or recovery of unrealized rent [Section 25A]

Amount received in respect of arrears of rent or any subsequent recovery of unrealized rent shall be deemed to be the income of taxpayer under the head “Income from house property” in the year in which such rent is realized or received (whether or not the assessee is the owner of that property in that year).

Further, 30% of such rent shall be allowed as deduction.

Property owned by co-owners [Section 26]:

If house property is owned by co-owners and their share in house property is definite and ascertainable than the income of such house property will be assessed in the hands of each co-owner separately. For the purpose of computing income from house property, the annual value of the property will be taken in proportion to their share in the property. In such a case, each co-owner shall be entitled to claim benefit of self-occupied house property in respect of their share in the property (subject to prescribed conditions). However, where the shares of co-owners are not definite, the income of the property shall be assessed as that of an Association of persons.

Deemed owner [Section 27]:

Income from house property is taxable in the hands of its owner. However, in the following cases, legal owner is not considered as the real owner of the property and someone else is considered as the deemed owner of the property to pay tax on income earned from such house property:

1. An individual, who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;

2. The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate;

3. A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme shall be deemed to be the owner of that building or part thereof;

4. A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 shall be deemed to be the owner of that building or part thereof;

5. A person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in section 269UA(f), shall be deemed to be the owner of that building or part thereof.

Restriction on set off of loss from House Property

If the net result of computation of income under the head “House Property” is loss then such loss can be set-off against any other income upto Rs. 2 Lakh in any assessment year.

However, the loss which couldn’t be set off can be carried forward for set-off in subsequent years. It can be carried forward for 8 Assessment years for set-off.

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