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Importance of the due date

To avoid any interest or late fee from the income tax department, you should file your income tax returns within the due date set by the Income Tax Department.

The due date is the date by which you should file your income tax returns to avoid any interest, penalty or late fee. In case you fail to file your tax returns within the due date, you shall have to pay interest under section 234A and penalty under section 234F. However, the income tax department can extend the due dates of a particular FY by issuing an official notification and notifying in the official Gazette.

What are the due dates for filing your income tax return

The due date differs from taxpayer to taxpayer. In case you are an individual, you will have to file your tax returns usually by July 31st of every assessment year.

What happens if you fail to file your income tax return within the due date?

In case you miss filing your income tax returns within the due date, you will have to incur penal costs in the form of interest and penalty which have been mentioned below:

1. Interest under section 234A: An interest of 1% per month or part of the month will be charged in the outstanding tax liability as computed in your return. You will have to pay interest from the due date till the date you actually file your return. However, if you do not have any tax outstanding or you have a tax refund, then no interest under section 234A shall be charged.
2. Penalty under section 234F: A maximum penalty of INR 5,000 (INR 1,000 if your total income is upto INR 5 lakhs) is charged, if your income tax returns (ITR) is filed after the due date.
3. Adjustment of losses: You will not be allowed to adjust and carry forward the losses you incurred during the year except for losses incurred under house property.

An overview of Income Tax in India

Taxes have been around since times immemorial. In the new age, Indians started paying taxes in 1860. There were several amendments in the following years, but India needed a revamped taxation structure after independence.

The Income Tax Act was passed in 1961 and came into force on the 1st of April 1962. It contains 298 sections along with 14 schedules and thousands of subsections. Under this Act, every person whose income exceeds the basic exemption limit is liable to pay tax to the government.

Who needs to pay tax?

If we dig deeper in the Act, it states that all the earning individuals/businesses are liable to pay tax. The current union budget has some exemptions to the rule. But here is a list of assessees who come under the tax purview:–

• Self-employed
• Corporates
• Salaried Individuals
• Firms/ LLPs
• Partners of LLP/ Firm
• HUF (Hindustan Undivided Family)
• BOI (Body of Individuals)
• AOP (Association of Persons)
• Legal artificial persons &
• Local authorities

What are the different heads of income under Indian income tax?

As per the existing rules of the Income Tax Act, 1961, the tax department bifurcates the income of an assessee under five heads –

• Income from Salary
• Income from Capital Gain
• Income from House Property
• Profits and Gains earned through Business & Profession
• Income that do not fall under the above four categories form part of Other Sources

Chapter VI-A

After computing your Gross Total income, the income tax department allows certain deductions in respect of several investments made or other permitted expenses. Most of them are covered under Chapter VI-A which enable you to reduce your taxable income and consequently your tax liability.

How is the rate of tax decided on a given income?

The Indian taxation regime follows a slab-based taxation system for individuals, HUFs. It is based on the net taxable income of the assessee and is progressive, i.e., higher the earnings, higher the tax. Some items do not fall under these slabs, and they have a separate specific tax rate, such as 20% for long term capital gains, 30% for winning the lottery, etc.

Income Tax Return (ITR)

If your income is above the maximum exemption limits, or you intend to request a refund from the income tax authorities, you must file your income tax returns and pay taxes. There are occasions where you want to carry forward your losses. In such cases also, you will have to file returns, even if your income is below the basic tax slab. If you have no tax liability, you can voluntarily file your tax returns for the following reasons –

• It helps the tax department to set up a record.
• It allows faster processing of loans.
• It makes registration of immovable properties easier.
• Banks don’t issue credit cards unless you have a tax return filing history.
• To claim TDS refund
• To carry forward the losses

Tax is an involuntary charge levied upon individuals or businesses to raise revenue for government administration. There are different taxes that we pay to the local, state, and central governments. Every tax levied in India is backed by an accompanying law passed by the Parliament or the State Legislatures.

In India, there are two major types of taxes – Direct Tax and Indirect Tax. It is classified based on the manner in which the tax is paid to the taxation authorities.

Direct tax

Direct tax is a type of tax that the taxpayer pays directly to the government. The incidence and impact of direct tax are on the same entity, and it cannot be passed to someone else. The Central Board of Direct Tax (CBDT) is the statutory body that deals with matters related to levy and collection of direct taxes in India.

Examples of direct taxes include Income tax. This type of tax is levied on the annual income or profits gained by an individual or entity.

Indirect tax

Indirect tax is imposed on goods or services when they are bought or sold. The seller of the product or service will collect the indirect tax. Generally, the price you pay for a product or service will be inclusive of indirect tax.

The primary example of indirect tax is Goods and Service Tax (GST). This consumption-based tax is levied on “supply” in India, where you have the ultimate liability to pay while the seller deposits it to the State Government.

Other taxes

There are various subcategories of indirect tax which work as revenue generators for the government. Some common examples are professional tax, entertainment tax, entry tax, road tax, stamp duty, property tax, etc.

Why are taxes levied?

Tax is levied upon citizens of the country to raise funds for a wide range of government activities. The tax money collected is used for various purposes, and a few among it are listed below.

• To fund public expenditure programs.
• To support development projects and welfare programs.
• To raise the standard of living of citizens.
• To build and maintain required infrastructures.
• To create a more robust economy.
• To spend on public insurance.
• To support law enforcement activities.

The Government has always promoted investments in the real estate sector. Thus, it always aims to provide various tax benefits to individuals in India for buying a house property under the ‘Housing for All’ initiative. Individuals can get additional benefits if they register the property jointly. You can buy a house jointly with anyone like your spouse, parent, friend, or a business partner.

When you avail a joint home loan, the tax benefits can be claimed by all the joint owners. However, each one who claims the tax benefits should have ownership in the property.

Also, the owners should be the co-borrowers of the home loan and should contribute to the EMI. Tax benefits are applicable only after the completion of construction of a property.

We have listed various tax benefits that are available to a taxpayer if he co- owns a property.

Residential house property

The Income Tax Act allows individuals to claim a tax deduction on interest payments of home loans. The upper limit for claiming a deduction on a self-occupied property is INR 2 lakhs for an individual per financial year after satisfying some conditions.

If it is a joint property, each property owner can claim a deduction up to INR 2 lakhs per financial year, separately. Thus, each co-owner can claim the tax benefit, provided they are co-borrowers of the home loan. This benefit is all the more beneficial if the interest payments for such home loan is more than INR 2 lakhs.

If rental income is earned out of the said property, it can also be divided between the co-owners.

Tax benefits under Section 80C

Section 80C of the Income Tax Act allows tax benefits on the principal repayment of the home loan. In case of joint ownership of property, each co-owner can claim deduction towards principal amount repayment. However, the maximum deduction limit under Section 80C is INR 1.5 lakhs.

Furthermore, stamp duty and registration charges can also be claimed by all co-owners in a jointly-owned property.

Tax exemption under Section 54

As per Section 54 of the Income Tax Act, individuals can avail tax exemption on long-term capital gains if it is invested in the purchase or construction of another residential property.

In the case of joint ownership, the capital gains can be divided between each of the owners. Thus, each co-owner can avail tax benefits as specified in Section 54. Each co-owner can invest in a new residential property and reduce the taxable capital gain.

An individual can claim tax exemption up to two residential houses if the capital gains is upto INR 2 cr.

Tax exemption under Section 54EC

Section 54EC allows individuals to claim a deduction of up to INR 50 lakhs on long-term capital gains on sale of a residential property. However, such an exemption can be availed only if the capital gains are invested in specified bonds. Rural Electrification Corporation (REC), Power Finance Corporation Ltd (PFC), Indian Railway Finance Corporation (IRFC) offer these bonds. The investment should be completed within six months of the date of sale/transfer. You can download the investments from here:

• IRFC: https://kosmic.kfintech.com/IRFC/download_applns.aspx
• REC: https://kosmic.kfintech.com/REC/download_applns.aspx
• PFC: https://kosmic.kfintech.com/pfc/download_applns.aspx

For jointly-owned properties, each co-owner can claim a deduction up to INR 50 lakhs. In total, owners can save a maximum of INR 1 cr on capital gains in joint ownership.

Please note that Section 54 and Section 54EC are applicable only if it is a long-term capital asset.

A self-occupied house owned by the taxpayer doesn’t generate any income for him, but it requires disclosure in his tax returns. It falls under the head ‘Income from House Property’, and the tax department also allows some deductions concerning the same for reducing your overall tax liability.

In this article, we discuss the tax benefits that you can avail from your self-occupied house.

When is a property termed ‘self-occupied’?

A self-occupied property refers to a house where the owner or/and his family members reside and use it for residential purposes. Even if the taxpayer doesn’t occupy the house for the entire year due to him living in some other city, the Income Tax Act assumes the house to be self-occupied for the whole year.

What is the Gross Annual Value of a self-occupied property?

As per the income tax provisions, the Gross Annual Value (GAV) of a self-occupied property is considered NIL for Income from House Property calculations. The concepts of Fair Rent, Municipal Value, and Standard Rent are not applicable in such cases.

I paid municipal tax for my residential property. Is it allowed as a deduction?

The income tax department takes the GAV of such property as NIL. Therefore, they don’t allow a deduction for the municipal value paid by the assessee for the same. Even the concept of Standard Deduction under Section 24(a) does not apply here, which means general repair expenses aren’t covered too.

I paid interest on a home loan of INR 2.40 lakhs. Will I get the entire amount as a deduction for my self-occupied property?

The tax department allows interest on the loan as an eligible deduction under ‘Income from House Property’. For self-occupied houses, the maximum limit of deduction is INR 2 lakhs in a financial year even if you have paid a higher amount of interest. This deduction is treated as a “Loss under the head House Property” which can be set off against other allowable heads of income. However, it is important to bear in mind that such loss that can be set off is subject to a limit of INR 2 Lakhs. If the taxpayer doesn’t have any income against which such loss can be set off, it can be carried forward for eight consecutive years.

Illustration for better understanding:

Parker brought a house in FY24 by taking a home loan amounting to INR 35 lakhs. He has been living there with his spouse since then. The family made a principal repayment of INR 12 lakhs and interest to the tune of INR 2.50 lakhs in the FY24. He also paid INR 50,000 as municipal taxes for the same period. Calculate his ‘Income from House Property’ for the FY24

Such loss from House Property can be set off against income from different heads only to the extent of INR 2 Lakhs or can be carried forward for 8 years, accordingly.

The increasing rental costs have propelled people to look for viable alternatives such as purchasing their own houses. Since the property cost is also skyrocketing at a rapid pace, it has pushed the income tax department to provide some tax benefits to make owning a home a more feasible option.

Section 24

Section 24 covers two significant deductions:–

Section 24(a) – Standard Deduction

A taxpayer having income under the head ‘Income from House Property’ doesn’t get deductions for general repairs and maintenance charges. They instead get a standard deduction of 30 percent of the Net Annual Value. If you are self-occupying a property, the deduction does not apply to the same.

Section 24(b) – Interest on Loan

Section 24(b) of the Income Tax Act, 1961 allows a deduction of maximum INR 2 lakh as standard deduction against interest on the loan, in case the house is self-occupied. In case of let out properties, deduction for interest on home loans is not subjected to any limits. It includes interest income earned in pre-construction period which can be claimed in five equal instalments.

If one does not satisfy the following conditions, the limit is restricted to INR 30,000:

• One uses the home loan only for purchasing or constructing the house.
• The construction or the acquisition of a home is complete within five years from the end of the financial year in which the one got the loan.
• It was borrowed after 1st April 1999.
• The institution sanctioning the loan must certify that the purpose of loan is for construction or acquisition of the house or for refinancing an earlier loan for the same reason.

Example:

Abhishek works in Kolkata for an MNC. He recently bought a house in Delhi with the help of a home loan of INR 40 lakh in FY24. His spouse and parents occupy the property, and he is paying an interest of INR 15,000 per month currently in FY25. Compute his ‘Income from House Property’ for FY25, assuming that he owns only one house.

 Solution:

In the given case, Abhishek’s Gross Annual Value is NIL as the house is self-occupied. Further, he has paid INR 15,000 * 12, i.e. INR 1.80 lakhs for the FY25. So, he has made a net loss under the head ‘Income from House Property’ amounting to INR 1.80 lakhs.

If he has a positive balance under other heads of income, he can set off the entire loss in the current year. Otherwise, the tax department allows taxpayers to carry forward such loss for eight consecutive financial years. But to avail the deduction, he has to file his Income Tax Return for FY25.

Section 24 of the Income Tax Act, 1961

Buying a home is a need for some people, while many others consider it as an asset or investment. As you know, you can avail tax exemptions on specific investments and expenditures. Housing property is one among them. Section 24 talks about exemptions on the interests on home loans. In this blog, let us analyse Section 24 in detail.

How is income from house property determined?

Rental income generated from house property is chargeable under the head “Income from House Property” in the following cases:

• If you are letting out your house property.
• If you own multiple houses, the Net Annual Value of the properties, excluding two houses, is added to your income

The income under the head “House Property” is taxable after deductions made under Section 24. However, if you own two houses and you do not own any other property, the income from house property is NIL.

There are two permissible deductions under this section:

Standard deduction

As per standard deduction, a sum equal to 30% of the Net Annual Value of the property is exempted from tax. Any taxpayer can avail this exemption on income from house property.

Deductions on interest incurred against home loans

This deduction applies to the interest payable on the borrowed capital for the house property. You can avail exemption on interest on home loans taken for acquisition, construction, repair, renewal or reconstruction of the property.

The following conditions apply to avail deduction on interest of home loans under Section 24:

• If you or your family resides in the property for which the loan has been taken, you can claim a deduction up to Rs 2 lakh on the interest.
• If you have rented out the property or deemed to rent out the property, the whole interest amount is liable for a tax deduction.

To claim deductions under Section 24, you should have the interest certificate of the loan you have availed.

Points to remember

• The maximum deduction limit on interest is Rs 30,000 if the purchase or construction of the property is not completed within five years, starting from the financial year in which the loan was taken.
• You can claim a deduction for pre-construction loans for buying or constructing a property. You can avail deduction of such interest in five equal instalments from the year in which such construction is completed. The maximum limit for deduction on interest of pre-construction loan is Rs 2 lakh.

Note that the tax liability of income from house property is on the person who receives the financial benefit. It may or may not be the registered property owner.

The tax benefits, on a joint home loan, are extended only to the “owners” / “co-owners”. It means that the registered property document needs to bear the names of each of the “owners” explicitly. It is a normal practice in India that a property is co-owned by a parent or a spouse through a loan taken jointly by the parent and child or spouses or siblings. However, you should be aware that      tax benefits accrue only to the “owner(s)” mentioned in the title deeds.

Here are a few pointers that you must keep in mind while availing tax benefits on the property.

• Be a co-owner in the property: The borrower of the loan should be an “owner” of the property for which the joint loan has been taken to claim tax benefits.
• Be a co-borrower in the joint loan: The government provides tax benefits in the form of tax deduction on the principal as well as interest paid on home loans. Hence, the “owner” must be a loan “applicant” or “co-applicant” as well. Owners who are not borrowers and do not pay EMIs don’t get tax benefits.
• Status of construction: Tax benefits are not available for an under-construction property. One can claim tax deductions from the financial year in which construction of the property is complete. But the expenses made prior to completion of the construction can be claimed in five equal instalments beginning from the year in which construction is complete.

Tax benefits on home loan

• For a self-occupied property: Each co-owner, who has a home loan under his name, can claim a maximum deduction of INR 2,00,000 for interest on the home loan in their Income Tax Return. The total interest paid on the loan is assigned as deduction to the owners in the ratio of their ownership.
• For a property out on rent: Each co-owner / borrower can claim the actually paid interest amount. There is no limit. One can claim any amount actually spent as interest, whether it is completed or not.
• For property under construction: INR 2 lakhs deduction applies only for a property that has been constructed within 5 years of taking the home loan. Moreover. the loan in such case should have been sanctioned after April 01, 1999. In case, the construction is not completed within this period, one is entitled only up to Rs 30,000 as deduction for such property.
• For second self-occupied property: As per the Finance Act, 2019, the second self-occupied home can also be claimed as a self-occupied one. However, prior to the amendment, the self-occupied second property was considered deemed to be let out.

Tax Benefits on Home Loan (FY21 onwards)

The following table illustrates the tax benefits available to a property owner who has a home loan

If you own a house or flat which is rented or vacant, you need to understand the chargeability of tax on your rental income since you will be required to provide a detailed break-up of your rental income earned.

Let’s understand how you should report such income in your tax returns:

Basics of house property

Properties including your home, office, shop, any building or land attached to such a building will be considered as a house property for the purpose of income tax computation. There is no differentiation between commercial and residential property under the Income Tax Act. Rental income from all such properties is taxed under Income from House Property. However, it is important to note that rental income from vacant land is chargeable under the head “Income from Other Sources”,

An owner is a person who is the legal beneficiary of the property and who exercises the rights of the owner.

There are two types of house properties separated for the purpose of income tax:

Self-occupied house property

A house property occupied by you or your family for residential purposes is considered as a self-occupied house property. A vacant house property will also be considered as self-occupied, in case such house property cannot be occupied by the owner for reasons owing to his employment, business carried out at any other place. This beneficial provision is available to you only in respect of two residential houses owned by you.

Let-out/deemed to be let out house property

A house property which has been rented out for the whole year or part of the year is considered as a let-out house property. Even in cases where no property has been let out, a house property, in excess of two properties owned by you, shall be deemed to be let out as per the provisions of the Income Tax Act.

This development has come from an amendment, before FY20, if you owned two house properties, then only one was considered as self-occupied for the income tax purposes and the other one was assumed to be let-out. The option to choose the self-occupied was given to the taxpayer. However, from FY20 onwards, you can consider 2 houses as self-occupied and others (if any) will be assumed to be let-out for income tax purposes.

Definition of income from house property

Income from house property is charged when any rental income is received/ deemed to be received from the house property owned by you.

The income from house property will be added to your gross total income if the following conditions are fulfilled:

1. You are the beneficial owner of that property.
2. Your property must consist of a house, buildings or land.
3. You do not use the property for the purpose of business or profession.

How to compute the value of rental income

For the income tax purposes, there are two types of value of house property:

Gross annual value (“GAV”)

GAV is the value of the property at which you might let out from year to year. It is more likely the notional rent that you could have earned if the property was rented out.

Do note that even if your property is not let out, the notional rent or deemed rent receivable will be taxable wherein the property is considered to be deemed to be let out.

The annual value is calculated after taking the following 4 factors into consideration:

• Actual rent received or receivable
• Municipal value
• Fair rent
• Standard rent

Net annual value (“NAV”)

NAV of the property is calculated after deducting municipal taxes paid from the gross annual value. It is important to note that municipal taxes can be deducted from the GAV only if they have been paid. You cannot claim deduction of municipal taxes on an accrual basis.

For example, let us compute the NAV of a house property with the following information:

Municipal Value: Rs.6,00,000

Fair Rent: Rs. 5,00,000

Standard Rent: Rs. 8,00,000

Actua Rent: Rs. 9,00,000

Municipal Taxes Paid: Rs. 1,80,000

Computation of NAV should be carried out as per the table below:

As per the provisions of the Income Tax Act, 1961, the rent received by the owner is taxable under the head ‘Income from House Property’. In most cases, rent from let-out property is taken into consideration, but if the individual has multiple self-occupied properties, deemed income can also come under the tax scanner.

When is Income from House Property added to the individual’s income?

Income from House Property is added if the following conditions are satisfied –

• You must be the owner of the property.
• The property must comprise of land and/ or building.
• The property must not be used for business or professional purposes.

How do we calculate the Gross Annual Value of a property?

In case of a rented property, the GAV or Gross Annual Value is the higher of Expected Rent and the Actual Rent received by the owner. Expected Rent is the higher of Municipal Value and Fair Rent, but not exceeding Standard Rent in any case.

For example, Mr X has let-out a property on rent. He is earning Rs 2.40 lakh annually as rental income from it. The Municipal Value of the same is Rs 2.60 lakh, but the Fair Rent is Rs 2.20 lakh. The Property has a Standard Rent of Rs 2.50 lakh.

He paid Rs 30,000 as municipal taxes for it in the previous year and spent Rs 12,000 on general repairs. He has funded the purchase by a home loan, the interest of which was Rs 1.20 lakh for the year. Calculate the Income from House Property for Mr X in the previous year.

Note: The tax department allows a flat standard deduction of 30 percent of Net Annual Value to the owner. The main intention for the Government to provide this deduction was to subsume all miscellaneous expenses incurred on general repairs and otherwise.