How a Self-Occupied House is Taxed

building-your-own-house-points-to-ponderAny financial benefits derived from one’s own house property are considered as an income and is thus taxable under the Income Tax Act. “Income from house property” is one the five separate heads under the Income Tax Act. For computing reasons a “house property” is classified into two categories:
1) Self-Occupied Property (SOP);
2) Let Out Property (LOP).

The tax amount for a house property is calculated on the basis of the “annual value” of a property owned by the taxpayer. “Annual value” is defined as the “sum for which the property might reasonably be expected to let from year to year”. The calculation is not based on any exact figures but is a notional concept.

Under Section 23(2)(a), a special concession is allowed if the owner is occupying the house property for his residential purpose. In such a case the annual value of the house will be considered as “NIL” subject to the following conditions:

  • The property is occupied by the owner for his residential purpose.
  • He must not own more than one house property.
  • If he is not occupying the house property then it should only be because his personal employment or business forces him to stay away.
  • He should reside at the place of employment in a property that does not belonging to him.
  • His house property should not have been let anytime within the year.
  • He does not derive any other benefits from the house property that he has not occupied.

Annual Value Calculations

A notional estimation of how much income the house property can generate if its let out for a year, is considered as its annual value.

If the taxpayer is occupying his house property and is using it for his personal business or profession then its annual value does not come under the Income tax bracket. However, if the property is let out for any period of time within a year then a proportionate annual value will be calculated.

The only deduction the taxpayer is entitled to under this provision is on the interest taken for the purchase or construction of the house property. Provided the amount borrowed is not more than rs 30,000 under Section 24(b) applicable from after 1st April 1999. Upto rs 1,50,000 can be deducted for interest.

Taxing More Than One House

Taxpayers who own more than one house are given a choice to register any one of those houses as his choice, to avail the “NIL” offer for self-occupied house property. All his other houses will be then considered as let out.

The Net Annual Value is Gross Annual Value minus the Municipal Taxes paid by the owner. The income from the house property is got after making necessary deductions under Sec 24, Standard deduction @ 30% of the NAV and the interest on loan, from the Net Annual Value in cases where the Gross Annual Value (GAV), is higher than the rent received, Fair market value assessment, and municipal valuation.

If the house property is under loss, it cannot be balanced out under Section 70. The loss can be carried forward and setup anytime in 8 years, if it cannot be linked to any income provisions.

Transferring within 5 Years

As per sec. 80C (5) (iii) (a), if a person claiming House loan repayment benefit under section 80C transfers the house property within 5 years from the end of Financial year in which house property has been purchased, then all the benefits availed under this section (80C) of earlier years will be reversed and included in the taxable income of the year in which house has been sold.