Section 26 of the Income Tax Act (ITA) pertains to the treatment of income from the house property. The section lays down the rules for the computation of the income from the house property and the deductions that are allowed from such income. This blog provides an overview of the key provisions of section 26 of the ITA.
What is considered as house property?
As per section 22 of the ITA, a property that is owned and used for residential or commercial purposes is considered as a house property. This includes buildings, flats, shops, offices, warehouses, factory sheds, and other such immovable properties.
Computation of Income from House Property:
The income from house property is calculated as the annual value of the property. The annual value is the amount for which the property might reasonably be expected to be let out from year to year. The computation of annual value is determined in the following manner:
Gross Annual Value: The Gross Annual Value (GAV) is the amount for which the property is actually let out or could be let out. If the property is self-occupied, the GAV is considered as zero.
Municipal Taxes: The Municipal Taxes paid on the property during the year can be deducted from the GAV.
Net Annual Value: The Net Annual Value (NAV) is arrived at by deducting the municipal taxes paid from the GAV.
Deductions Allowed:
As per section 24 of the ITA, certain deductions are allowed from the income from the house property. These deductions are as follows:
- Standard Deduction: A standard deduction of 30% of the NAV is allowed towards repairs and maintenance of the property.
- Interest on Loan: Interest paid on any loan taken for the purpose of construction, repair, or renovation of the property is allowed as a deduction. The maximum deduction allowed is Rs. 2,00,000 per year for a self-occupied property. For let-out properties, there is no limit on the amount of interest that can be claimed as a deduction.
- Loss from House Property: If the expenses incurred on the house property exceed the income from the property, the excess amount is treated as a loss from house property. Such losses can be set off against income from other heads up to a maximum of Rs. 2,00,000. Any unadjusted loss can be carried forward for up to 8 years.
- Co-ownership: If a property is co-owned by two or more individuals, each co-owner is assessed separately for their share of the income from the property. The share of income is calculated based on the ratio of ownership.
- Unrealized Rent: If the property remains vacant during the year or is not let out for the whole year, the income from the property is calculated on the basis of the unrealized rent. This is the rent that could have been received if the property had been let out for the whole year.
- Annual Value of Let-Out Property: If a property is let out for a part of the year, the annual value is calculated on a proportionate basis. For example, if a property is let out for 10 months in a year, the annual value would be calculated for 10/12th of the year.
- Taxation of Deemed Rent: If a property is not let out but is capable of being let out, it is deemed to be let out for the purposes of income tax. In such cases, the annual value is calculated based on the notional rent that could have been received if the property had been let out.
- Deduction for Pre-Construction Period: If a property is under construction or has been acquired for the purpose of letting out, the interest paid during the pre-construction period can be claimed as a deduction in five equal installments starting from the year in which the construction is completed or the property is acquired.
In conclusion
Section 26 of the Income Tax Act lays down the rules for the computation of income from house property and the deductions that can be claimed from such income. Taxpayers should be aware of the provisions of this section to ensure that they comply with the tax laws and avail of the tax benefits available to them. It is recommended to seek the guidance of a tax professional for accurate computation of income from house property and to ensure compliance with the tax laws.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Q. What is considered as a house property for the purposes of income tax?
A property that is owned and used for residential or commercial purposes is considered as a house property. This includes buildings, flats, shops, offices, warehouses, factory sheds, and other such immovable properties.
Q. How is the annual value of a house property calculated?
The annual value of a house property is calculated as the amount for which the property might reasonably be expected to be let out from year to year. It is calculated by subtracting the municipal taxes paid on the property from the gross annual value of the property.
Q. What deductions are allowed from the income from the house property?
Deductions allowed from the income from the house property are as follows:
Standard Deduction of 30% of the net annual value towards repairs and maintenance of the property.
Interest paid on any loan taken for the purpose of construction, repair, or renovation of the property.
Loss from House Property if the expenses incurred on the house property exceed the income from the property.
Q. Can a property that is not let out be considered as an income-generating asset?
Yes, if a property is not let out but is capable of being let out, it is deemed to be let out for the purposes of income tax. In such cases, the annual value is calculated based on the notional rent that could have been received if the property had been let out.
Q. How is the income from a jointly owned house property taxed?
If a property is co-owned by two or more individuals, each co-owner is assessed separately for their share of the income from the property. The share of income is calculated based on the ratio of ownership.
Q. Can losses from a house property be set off against other sources of income?
If the expenses incurred on the house property exceed the income from the property, the excess amount is treated as a loss from house property. Such losses can be set off against income from other heads up to a maximum of Rs. 2,00,000. Any unadjusted loss can be carried forward for up to 8 years.
