Determining the Taxable Income from House Property in India

Posted on: Oct 9, 2024 | 3 mins | Written by: HDFC ERGO Team

Determining the Taxable Income from House Property in India

A sizeable number of the total assessable income in India comes from the rent of the buildings owned by them. All kinds of income generated from an individual’s property whether it is owned by the individual or rented out is considered as taxable income according to the Income Tax Act of 1961. However, there are other factors, which influence the taxation of this income, including; the type of property, usage of the property and relevant deductions. Giving a brief mention of home insurance and property insurance, this article gives more detail about how income from house property is taxed in India.

Categories of Properties

Under the Income Tax Act, income from residential property is divided into two primary categories:

1. Self-occupied property(SOP)

Housing refers mainly to ‘self-occupied property’ or ‘SOP’ which means the property owned and occupied by the owner. If a person constructing multiple self-occupied properties, then they choose any one of them to be reported under self-occupied, the rest of the properties will be treated as let out.

2. Let-Out Property

An asset that is given out for lease to tenants is in this category. It is pertinent therefore that rent of such property is liable to be taxed under the heading ‘Income from House Property.

Calculation of Taxable Income from House Property

The following procedures are used to calculate the taxable income from residential property:

1. Calculate Gross Annual Value (GAV)

• The GAV is zero for a property when such a property is occupied by the owner.

• The Gross Annual Value (GAV) of a rented property is determined by the rent received or the higher amount among the standard rent, fair rent, or municipal value.

2. Subtract Local Taxes

The NAV is gotten from the effecting the owner’s payment of municipal taxes like the property tax on the GAV for the financial year. This deduction is only allowed where these taxes are paid in full for the year in question.

3. Utilise the Standard Deduction method

The Income Tax Act allows a standard deduction of 30% of the NAV in section 24(a).

4. Reduce Home Loan Interest

Interest on a house loan taken for acquiring, constructing or repairing of house can be claimed as a deduction under section 24(b) from the income.

5. Determine Your Taxable Income

Your taxable income from residential property is the amount arrived after these expenses have been subtracted.

The Functions of Property and Home Insurance

Someone ought to take an insurance policy, especially the home insurance and property insurance which are very important even though they do not in any way influence the taxable income. Building insurance enables you to have cover for your assets against risks like theft, fire outbreaks or natural calamities.

Conclusion

Indian law taxes the income from real estate, with separate regulations governing properties that are rented out and those that are occupied. By being aware of these regulations and taking advantage of deductions, you may minimise your tax obligations. Home and property insurance are essential for protecting your assets, guaranteeing your financial security, and preserving your eligibility for certain tax advantages, even if they have no direct impact on the tax computations. As a result, knowing the tax ramifications of your rental revenue is just as important as having sufficient property insurance.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

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