Self Occupied Property & Let out Property - Meaning, Difference, Tax Benefits on Interest
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23 MAY, 2023

What is Self-Occupied Property?

A self occupied property is a residence owned by a taxpayer and occupied by the owner throughout the year for personal use without being rented out. To qualify, the self occupied cannot be used for any other purpose, and the owner must meet certain conditions. If the owner cannot occupy the property due to employment, business, or profession, and the property is not rented out, it may still be treated as self-occupied.

  • Home Loan Tax Benefits for Self-occupied Properties Under Section 80c

The tax benefit under section 80C for claiming a deduction on home loan principal repayment is restricted to Rs 1.5 lakh per annum, regardless of the number of home loans a taxpayer has availed.

  • Tax Benefits under Section 24

Homeowners can claim a deduction on their home loan interest on self occupied property under Section 24 of the Income Tax Act. The deduction amount is up to Rs. 2 lakhs (or Rs. 1,50,000 for the previous financial year) if the owner or their family occupies the house property.

  • Tax Benefits under Section 80EEA

To avail of the self occupied property tax benefits under Section 80EEA, a taxpayer can then claim a deduction of up to Rs. 2 lakh on the interest amount under Section 24(b) of the Income Tax Act.

  • Example Calculation of Tax Benefits for Self-Occupied Property

Suppose Karan owns a house property with a municipal value of INR 2,50,000, and he pays municipal taxes of INR 53,000. Karan also pays an interest of INR 2,88,000 on his home loan.

  1. Gross Annual Value (for self-occupied properties, GAV is considered NIL) NIL
  2. Less: Municipal Taxes (for self-occupied properties, municipal taxes are considered) (53,000)

Net Annual Value (A-B) (NIL - 53,000) = NIL

Less: Interest on home loan (as per Section 24, interest is restricted to INR 2 lakh) (2,00,000)

Income from House Property (2,00,000 - NIL) = (2,00,000)

What is Let Out Property?

A property that is rented out, either fully or partially, is known as a Let Out House Property. If an individual owns multiple properties, only one can be considered self occupied house property per their preference. It is equally important to understand both self occupied property and let out property.

  • Tax benefits for let Out Property under Section 24

Homeowners can claim a deduction on the interest on housing loan for let out property under Section 24 of the Income Tax Act. If the owner or their family resides in the house property, the interest deduction on let out property can go up to Rs. 2 lakhs.

  • Tax benefits under Section 80EEA

Section 80EEA allows taxpayers to claim an additional deduction of up to Rs. 1.50 lakh on the interest paid on let out property, over and above the deduction of Rs. 2 lakhs available under Section 24(b) of the Income Tax Act.

  • Example Calculation of Tax Benefits for Let Out Property

Anita is the owner of a house property that has been given rent for the whole year. The municipal value of the property is INR 1,45,000, fair rent is INR 1,36,000, standard rent is INR 1,24,000, and the actual rent received is INR 1,15,000. Additionally, the tenant has paid INR 5,400 as municipal taxes.

Read also: What Is An Encumbrance Certificate?: Importance Of Ec For Home Loan

Tax Benefits on Self Occupied Property & Let Out Property

There are several tax benefits that you can claim under different sections of the Income Tax Act, 1961 when you apply for a home loan. While many first-time homebuyers only buy one home for self-occupation, it’s possible that down the line, you take on another home loan to buy another property either for self-occupation or for the purpose of renting it out. In such a case, you may wonder how you can claim the home loan tax benefits on both the loans and if that is even possible. It is possible but there are certain terms. Here is everything you need to know about availing home loan tax benefits for both self-occupied and let out properties:

  • There is no restriction on the number of houses you want to buy and the number of home loans you can take. The only caveat is that your income should be sufficient to service all your home loans.

  • In India, an individual is allowed to claim a maximum of two houses as self-occupied for tax purposes. In case you use more than two properties for self-occupation, you need to pick any two of them as self-occupied. The remaining are going to be treated as let out properties even if you have not actually let them out.

  • The tax benefits for self-occupied properties and let out properties differ. For self-occupied properties, you can claim a tax deduction on the interest paid towards your home loan up to Rs 2 lakh each year under section 24b. This limit of Rs 2 lakh is aggregate for both self-occupied properties.

  • For the property that is let out or deemed to be let out, there is no limit for interest deduction under section 24b. You can claim full interest paid as a deduction against your rental income. However, it’s essential to note that the loss under house property income is only allowed to be set against rental income up to Rs 2 lakh every year and the excess, if any, will be carried forward and set off over the next eight years against income from house property.

  • The section 80C benefit that allows you to claim a tax deduction for the home loan principal repayment is limited to Rs 1.5 lakh a year irrespective of how many home loans you have. In fact, this limit is the aggregate limit for all the section 80C eligible items and not just a home loan.

You can use a home loan tax benefit calculator to get an idea of how much tax you can save when you apply for a home loan. A home loan tax saving calculator uses inputs such as your annual income, investments, loan amount, etc., to give you an estimate of the amount of tax that you can save. This estimate helps give you a fair idea in the beginning of your home loan application process of how your home loan cost can be brought down. However, you should also additionally consult your financial advisor to understand the precise amount of money you can save on your taxable income when you apply for a home loan.

Read also:
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Self Occupied Property and Let Out Properties FAQ’s

1. How to Claim for Tax Exemption Over Self Occupied Property?

Under section 24b of the Income Tax Act, if you own a self-occupied property, you can claim a tax deduction on the interest on let out property, paid towards your home loan of up to Rs 2 lakh per annum.

2. How to Calculate Income from House Property?

If a person charges Rs. 15,000 per month as rent and has paid Rs. 10,000 in municipal taxes for the year, with Rs. 50,000 as interest on borrowed capital, their income from house property can be computed as follows.

  • The total annual rental income value would be Rs. 1,80,000 (15,000 x 12).
  • After deducting the municipal taxes of Rs. 10,000, the net annual value (NAV) would be Rs. 1,70,000.
  • Under Section 24, deductions can be claimed on the NAV of Rs. 1,70,000 minus interest on borrowed capital of Rs. 50,000, resulting in a NAV of Rs. 1,19,000.
  • Hence, the income from the house property would be Rs. 69,000 (1,19,000 - 50,000).

3. Is It Mandatory to File an Income Tax Return for a Let Out Property?

To ensure compliance with tax regulations, individuals who own a house or earn rental income must report such income as "Income from House Property" in their Income Tax Return (ITR).

4. How is the Income from Self-occupied and Let Out Properties Taxed?

Tax benefits for self-occupied properties and let-out properties vary. While you can claim a deduction on the interest paid towards your home loan up to Rs 2 lakh per year under section 24b for a self-occupied property, the tax benefits for let-out properties are calculated differently. It is essential to understand the self occupied property meaning and self occupied property tax benefits before moving forward.

5. How Do I Report Income from a Let Out Property in My Tax Return?

Individual residents in India can use the ITR-1 form to file to get a let out property tax benefit of up to Rs 50 lakh. The form allows you to report income from salary, one house property, income from other sources, and agricultural income up to Rs 5,000.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.