Income tax returns: All you need to know about how to account for income from house property

It's important to note that income tax liability is calculated based on the annual value of the property, which is determined by factors such as the fair rental value, municipal taxes paid, and standard deductions.

According to the income tax rules, if the letting out of the building and the letting out of other assets are inseparable, the entire rent (i.e., composite rent) will be taxable under the head “Profits and gains of business and profession” or “Income from other sources”, depending on the circumstances. No tax will be charged under the head “Income from house property”.

Notional rent from deemed-to-be-let-out properties.

Even if you have not let out any of your property, but are the owner of multiple houses, you may have to pay tax on the rental income. It is important to note that the benefit of treating a property as "self-occupied" is applicable only to two properties of your choice. The remaining property or properties are considered “deemed to be let out” for taxation purposes.

A self-occupied property refers to a property that is occupied by the taxpayer for their own residence throughout the year. This means that if you reside in a property as your primary residence, you can claim it as a self-occupied property, and no rental income needs to be declared for taxation.

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However, for properties that are either let out to tenants or deemed to have been let out, you are required to report rental income for taxation. The rental income received from such properties is subject to tax as per the applicable tax rates.

It is important to correctly determine the status of each property as either self-occupied or deemed to be let out.

The calculation of rental income for income tax purposes takes into account various factors such as the fair rent, standard rent, and municipal value of the property. Among these factors, the rental income is determined based on the higher of the three values. To understand this in detail read:

Co-owned or ancestral properties

Joint ownership of properties is very common, especially if you’re a married couple. Here, you need to account for who contributed how much to own this property.

For instance, “In the case of co-owned property by a husband and wife, the rental income shall be divided between them according to the ratio in which they have contributed to the cost of purchasing the house property and accordingly the same needs to be disclosed in the ITR as well,” said Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm.

In some cases, people inherit or get possession of ancestral properties and start receiving or collecting rent from tenants if it’s a let out property. Sometimes, heirs do not transfer the properties in their names immediately or take it long. But treatment of rental income varies depending on the ownership status. If a person receiving the rent is not the owner of the property, then rental income is not charged to tax under the head “Income from house property.”

“It is very important for legal heirs to secure the asset (house) after the death of the person in whose name it is registered. The amount received on inheritance is exempt from tax. However, it is to be noted that any income from the ancestral property shall be taxed in the hands of the legal heir and he/she has to pay the requisite taxes on it accordingly,” said Sehgal.

How to treat composite rental income

Apart from the rental income received for the premises, there are cases where the property owner also earns income from renting out other assets, such as furniture, electronic equipment, or charges for various services provided within the building, such as lifts, housekeeping, security, air conditioning, and more. This combined amount is referred to as “composite rent”.

According to the income tax rules, if the letting out of the building and the letting out of other assets are inseparable, the entire rent (i.e., composite rent) will be taxable under the head “Profits and gains of business and profession” or “Income from other sources”, depending on the circumstances. No tax will be charged under the head “Income from house property”.

However, if the letting out of the building and the letting out of other assets are separable, the rent of the building will be taxable under the head "Income from house property," while the rent of other assets will be taxable under the head "Profits and gains of business and profession" or "Income from other sources," as applicable.

In certain cases, particularly in apartments, the composite rent includes both the rent for the building and charges for various services such as lifts, security, electricity, water supply, and more. In such situations, the composite rent needs to be divided, and the portion attributable to the use of the property will be taxable under the head “Income from house property”, while the charges for the various services will be taxable under the head “Profits and gains of business and profession” or “Income from other sources”, depending on the nature of the services provided.

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Remember, “In order to compute income from house property, the deduction of municipal taxes, interest on capital borrowed, and a 30 percent blanket deduction in the form of standard deduction is permissible. Thus, it is to be noted that the above-mentioned expenditure cannot be availed of as a deduction from the rental income of the house property,” said Sehgal. This is why it is always better to ask the tenant to pay the utility expenses, maintenance cost and other costs directly on their own. If it is routed through owners, it brings unnecessary tax liability along for the owner.

Deduction that can be claimed against rental income.

As a property owner, you have the opportunity to avail of various deductions. Here are two important deductions that you can claim:

A) Municipal Taxes: If you, as the owner, bear the municipal taxes for your house property, you can claim them as a deduction. This means that the amount you paid towards municipal taxes can be subtracted from your taxable income.

B) Standard Deduction [Section 24(a)]: If you have let out your property during the previous year, you are eligible to claim a standard deduction. This deduction allows you to subtract 30 percent of the net annual value of the house property from your taxable income.

Deductions on a home loan

If you have bought a house with a home loan, you can claim deduction for repayment of principal and interest on the home loan.

Deduction on Principal Repayment: You can claim a deduction of up to Rs 1.5 lakh on the repayment of the principal amount of your home loan under Section 80C of the Income Tax Act. Additionally, you can also claim a deduction under Section 80C for the registration and stamp duty charges paid for the property.

Deduction on Home Loan Interest: If you have a self-occupied property, you can claim a deduction of up to Rs 2 lakh on the interest paid on your home loan under Section 24(b) of the Income Tax Act. The same applies if the property is rented out.

Also read: How to maximise income-tax benefits on your home loan

However, it's important to note that the total loss you can claim under the head of house property is limited to Rs 2 lakh. Any additional losses beyond this limit can be carried forward and set off against future income for subsequent years.

Choosing the correct ITR form

The applicable ITR form varies based on income sources and the level of income the assessee had during the financial year. In the case of income from house property, the applicable ITR form also varies based on the number of houses owned by the taxpayer. “Individual taxpayers have the option to report their income from house property in different ITR forms subject to specific conditions prescribed for the respective form. ITR-1 and ITR-4 are suitable for taxpayers having income from a single house property. However, a taxpayer with income from multiple house properties and having brought forward or carry forward losses must report the same in ITR 2 or ITR 3,” said Sehgal.