[sbinews] House Property and Housing Loans- Tax and other aspects

  • From: rspai@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Thu, 30 Oct 2003 07:44:56 +0500

A very lucid and well-written article on Housing Loans and House Property - 
from the Tax Angle- Published in the Businessworld. Very useful information. 
Home truths - I 
In response to readers' queries on housing loans, this column explains the 
nitty-gritty of taxation of housing properties and, in the next month's column, 
some specific issues will be explained. Let us begin with the term 'annual 
value'. It is the annual value of your residential house (along with any land 
attached to it), which is taxed as 'income from housing property'. So if you 
exclusively use your house as a place of work or business, then its annual 
value is not chargeable to income tax.

Under the Income Tax Act, the annual value of property consisting of any 
building or land attached is chargeable to income tax under 'income from 
housing property'. 

Annual value for a house or its part is treated as nil in the following cases 
(meaning there is no taxable income on that house or a part thereof):

If you use your house as a residence;

You are not living in your house because your business or profession is at 
another place. For example, you have a house in Mumbai but you are working in 
Delhi and living there in a house not owned by you.

Annual value in the above situations is taken as nil if you do not let out your 
house (or a part of the house) and do not derive monetary benefit from it. In 
case you own more than one house, then you can choose the house for which you 
want the annual value to be nil. The second house will be treated as if the 
house or the houses (if there are more than one houses) have been let out and 
the annual value is calculated accordingly.

Fair Market Rent
The annual value of the house deemed to be let out (self-occupied, but whose 
value has not been taken as nil) is equal to the 'fair market rent'. It is 
taken as the higher of the following:
(i) Fair market rent of a similar house.
(ii) The municipal value (this is the rateable value given in the challan of 
municipal taxes).

'Fair market rent', however, cannot exceed the standard rent according to the 
Rent Control Act. If a house is actually let out, the annual value shall be the 
higher of:
(i) 'Fair market rent' (if the property is deemed to be let out), or 
(ii) Actual rent received or receivable. 

If your house was let out only for a part of the year during the previous year 
and, owing to this vacancy, the actual rent received or receivable by the owner 
is less than the 'fair market rent'; the actual rent received or receivable 
shall be taken as the annual value.

Income from subletting is not taxable as 'income from house property'. For 
instance, Mr X owns a house. He rents it to Mr Y at Rs 15,000 per month. Mr Y 
sublets it to Mr Z for a monthly rent of Rs 20,000. The rental income of Mr X 
is taxable under 'income from house property'. Since Mr Y is not the owner of 
the house, his income from subletting is not taxable under 'income from house 
property' but is taxable as either business income or as income from other 
sources. Rent paid by Mr Y to Mr X shall be allowed as deduction to Mr Y. The 
tax liability is on the owner and Section 27 of the Income Tax Act deems the 
following to be the owners even if the house is not in their names:
(i) Flat owners in a co-operative society, etc., even though the flats are not 
registered in their names. 
(ii) Person possessing the house in accordance with a sales agreement. 

If Mr A enters into an agreement to sell his house to Mr B, then Mr B shall be 
deemed as the owner of the house from the date he gets the possession of the 
house. Here, the date of registration is not important but the date of 
possession in pursuance of the agreement to sell is important. There are 
certain deductions available against the annual value, which reduce the final 
amount chargeable to tax. Let's look at each of them:

Municipal Taxes
If a house is deemed to be let out or is actually let out, you can deduct the 
municipal taxes actually paid during the previous year from the annual value. 
It may be possible that the municipal taxes of the last 10 years are paid in 
the current year. So the current year deduction shall be allowed for the 
municipal taxes paid for the last 10 years.
Income earned from subletting a house cannot be taxed as 'income from house 
The municipal taxes paid may be greater than the annual value. Then the 
difference shall be counted as loss under 'income from house property'. It can 
be set off against any other income in the current year. If this loss can't be 
set off in the current year, then it shall be carried forward for eight 
assessment years and in the following years it can be setoff against 'income 
from house property'. No deduction of municipal taxes shall be made in case of 
self-occupied property whose annual value has been taken as nil.

Ad Hoc Deduction Of 30%
After reducing the municipal taxes from the annual value, you are allowed a 
deduction of 30% of the reduced amount (annual value - municipal taxes) while 
computing 'income from house property'. It is only for houses actually let out 
or deemed to be let out and not available if municipal taxes actually paid are 
greater than the annual value and, consequently, there is a loss under 'income 
from house property'.

Interest On Housing Loan
This is the most important deduction. Interest payable on a loan taken for 
purchase, construction, repair or reconstruction of the house is allowed as 
deduction while computing 'income from house property'. The deduction is 
allowed in case of:

Self-occupied property whose annual value has been taken as nil;

Deemed to be let out property;

Actually let out property. 
The deduction of interest is allowed on accrual basis (even if the interest has 
not been actually paid but has become payable). It shall be allowed even if 
there is a loss because of municipal taxes paid being greater than the annual 

For a self-occupied house, whose annual value is taken as nil, the amount of 
deduction on interest shall not exceed Rs 1.5 lakh if the house is purchased or 
constructed with loan taken on or after 1 April 1999 and this purchase or 
construction is completed within three years from the end of the financial year 
in which the loan is taken. The Central Board of Direct Taxes says that the 
date of issue of the loan to get this benefit should be on 1 April 1999 or 

For loans issued before1 April 1999, the deduction was limited to Rs 30,000. 
Thus, if you had taken a house loan in 1998 and you took a new loan on or after 
1 April 1999 to repay the earlier loan, then you will be entitled to a 
deduction up to Rs 1.5 lakh on interest on the new loan. According to the 
amendments in the Finance Act, 2002, deduction on interest will be allowed only 
if you furnish a certificate from the lender specifying the amount of interest 
payable to purchase, or construct the house or convert the whole or any part of 
the loan taken which remains to be repaid as a new loan. 'New loan' is the 
whole or any part of a loan taken by the assessee after borrowing capital, for 
the purpose of repaying such capital. 

For a house which is or is deemed to be let out, then there is no limit of 
deduction on interest and the amount may exceed Rs 1.5 lakh.

Joint ownership of a house and a joint loan for it will allow both the owners 
to avail themselves of a tax benefit up to Rs 1.5 lakh each for interest 
If you are constructing a house or you are buying a house in a residential 
complex being built by a builder, the house might take a few years to be ready. 
The interest payable on the housing loan for the period before the previous 
year in which the house has been purchased or constructed shall be deducted in 
five equal instalments starting from the previous year when the property is 
purchased or constructed. This deduction of interest is in addition to the 
interest payable in the current year.

In case of self-occupied property with zero annual value, the total deduction 
of interest cannot exceed Rs 30,000, or Rs 1.5 lakh, as the case may be. For 
repayment of the principal amount of the loan, the benefit is available as a 
rebate under Section 88 of the I-T Act for repayments up to Rs 20,000 per 
Implications Of Joint Ownership 
Working couples prefer a joint housing loan. If a house is jointly owned and 
the housing loan is also taken jointly, then the deduction for interest on 
housing loan can be availed of by all the joint holders up to the maximum limit 
of Rs 1.5 lakh, each against their share of income from the property. 

Suppose Mr X and Mrs X buy a house jointly and this is the only house they own. 
For buying the house they have taken a joint housing loan of Rs 25 lakh. 
Interest on the housing loan amounts to Rs 3 lakh. 

The income from this house for both the husband and the wife shall be nil as 
they have only one house and that is self-occupied. Now Mr X and Mrs X can both 
avail a deduction of Rs 1.5 lakh on interest on other taxable incomes, but it 
should be ensured that both the husband and the wife repay the instalments to 
the bank in equal proportions. 

Loss Under 'House Property' 
With all the deductions available, you can incur loss under 'income from house 
property' in case of:
(i) For a self-occupied house whose annual value is taken as nil, interest can 
be up to Rs 1.5 lakh. 
(ii) In case of let out or deemed to be let out property, there is excess of 
municipal taxes that is paid over the annual value. 

The case holds if you are paying municipal taxes due for many years in the 
current year and the amount exceeds the rent from the let out house. This loss 
will further increase up to the interest payable on the housing loan. For 
example, if the rent from the let out property is Rs 1 lakh and you have to pay 
Rs 1.6 lakh as municipal taxes, and further the interest payable on the housing 
loan comes to around Rs 3 lakh, then the loss under the head 'income from house 
property' will then be Rs 3.6 lakh. Then the loss under the head 'house 
property' in the current year can be set-off against any other income including 

The loss that is not set-off in the current years should be carried forward to 
the next assessment year and the carry-forward is possible for another eight 
assessment years and in the next assessment years, this loss can be set off 
only against the head 'income from house property'.

Vinod Gupta is a practising chartered accountant and a tax expert. Send your 
queries to tax@xxxxxxxxxxxxxxx General issues from the queries are taken up in 
the column

Mailing list (sbinews@xxxxxxxxxxxxx) related information:

News/articles about SBI and Banking related matters published  in the print 
media, Internet etc will be circulated through this Mailing List. 

The messages in this list will help in improving awareness of SBI and its 
activities vis-a-vis the happenings in the Banking industry. This should be of 
help to all staff members of SBI, particularly those who are preparing for 
promotional written tests/interviews/group discussions. Subscription to this 
Mailing List is simple and FREE. Please check the procedure below. Please share 
this information with other colleagues/branches that could be interested in 
subscribing to this Mailing List. 

The messages circulated here should not be deemed to have the official 
endorsement of the SBI or any of its employees. The correct factual position 
may be ascertained from official sources. 

To join this mailing list, just send an email to sbinews-request@xxxxxxxxxxxxx 
with 'subscribe' without the quotes in the subject field. 

To leave this mailing list, just send an email to sbinews-request@xxxxxxxxxxxxx 
with 'unsubscribe' without the quotes in the subject field. 

This is an announcements/newsletter type mailing list i.e. only the Moderator 
can post messages to the list. 

This mailing list is maintained by Sri. R.S.Pai, currently working as Chief 
Manager(IT-Internet Banking), SBI, Corporate Centre, Mumbai. 
Visit http://rspai.tripod.com for some useful Banking, Reference and Utilities 

Other related posts:

  • » [sbinews] House Property and Housing Loans- Tax and other aspects