Property Tax Deduction in Income Tax: Everything That You Need to Know (2024)

Owning a house is like a dream come true. After years of hard work, finally comes a day when you’re able to buy a house. However, once you become an owner of land or property, you’re required to pay a property tax^* to the Government. Additionally, if you’re enjoying an income from your property, your income tax^* liability may also increase.

So, as a responsible property owner, you should be aware of tax^* laws and tax^* obligations on your property. You should also know about the property tax exemptions and income tax deductions that can help you lower your cumulative tax^* outgo.

Continue reading this article to gain an understanding of these subjects.

What is Property Tax?

If you’re an owner of a real estate property, you are required to pay a property tax^* to your state Government or local Municipal Corporation. This tax^* is payable annually on all tangible real estate assets owned by you, including residential apartments and commercial premises.

The property tax^* is calculated based on various factors, including:

• The base value of your property
• The built-up area
• Your current age
• Type of property
• Type of construction
• Category of use
• Floor factor
  

Different agencies use different methods for calculating property tax^* in India. The three most common methods are – Capital Value System (CVS), Unit Area Value System (UAVS), and Rateable Value System (RVS).

Property Tax Deductions in Income Tax

Section 24 of the Income Tax^* Act of 1961 deals with the property tax and income tax deductions available for property owners in India. As per this tax deduction section, both housing properties and commercial properties attract income tax^* under the head “Income from House Property” in the Income Tax^* Return (ITR).

Here are a few points that you need to remember while calculating income tax^* on a housing property:

• The tax^* applies only to the Net Annual Value (NAV) of the property. To calculate the NAV, you will need to subtract the property taxes paid by you from the Gross Annual Value (GAV) of the property.
• The GAV of the property depends on how it is used by the owner. If a property is self-occupied or if the owner of a property is living in it, its GAV is zero. However, if the property is on rent, the total annual rent collected by the owner is its GAV.
• A 30% deduction is allowed on the NAV as standard house property deduction under section 24 of the Income Tax^* Act.
• If you have taken a home loan for buying the property, the interest paid by you towards your home loan is also available for property tax exemption under section 24 (subject to prescribed limits and conditions).
• After subtracting the deductions, the resulting NAV is added to your annual taxable income and is taxed as per the applicable income tax^* slab rate.
  

Computation of the Income Tax from House Property

By now, you must have understood the basic calculation of income tax from house property. One thing that you need to know here is that this tax is applicable only if you own more than one property or if you’re earning an income from your property. Let’s see how income from house property is calculated in various circ*mstances:

Case 1

If you own only one house and you are living in it with your family, the income from that house would be “zero”. Hence, no income tax^* will be applicable to your housing property.

Case 2

If you own only one house and you have rented it, then the annual rent received by you would be considered as your income from your house property. This income will be subjected to an income tax^* after making the property tax deductions available under section 24.

Case 3

If you own more than one house and decide to live in one of them and rent out the others, then the total NAV of all the houses (except the one in which you’re living) will be considered for the income tax^*.

Tax Deductions Under Section 24

• Standard Deduction

  
  A standard deduction of 30% is available for existing taxpayers. You can deduct this amount from the Net Asset Value of your property to calculate the taxable amount. However, this deduction is not available if you’re self-occupying the property.




• Interest on home loan

  
  If you have taken a home loan to buy a housing property, then the interest that you need to pay towards your home loan is available for income tax deductions. There are three sub-clauses for this deduction:
  

  • If you’ve taken a home loan for a self-occupied house, the maximum deduction available under this section is ₹2 Lakh
    
  • If you’ve taken a home loan for the purchase or construction of a property, then you can claim exemptions under this section even before buying or initiating the construction of your house. However, you have to complete the construction within three years to claim the maximum tax^* deduction of ₹2 Lakh
    
  • If you’ve taken a home loan for the renovation or reconstruction of housing property, then you cannot claim the exemptions under this section until the completion of the renovation or reconstruction of your house
    

Tax Deductions Under Section 80C

When you buy a new housing property, you’re required to pay stamp duty and registration charges to the Government. These expenses are available for income tax deductions under section 80C of the Income Tax^* Act. The maximum deduction allowed under this section is ₹1.5 Lakh.

As a house owner, you can also claim property tax deductions for the expenses incurred by you during the transfer of your newly constructed house.

Among the many other tax deductions available under Section 80C of the Income Tax Act, an important one is on life insurance premiums and benefits. Life insurance premium payments are eligible for tax deductions under Section 80C of the Income Tax Act in India.

This section allows taxpayers to claim deductions for certain specified investments and expenses up to a maximum limit of ₹1.5 Lakh in a financial year. The deductions are available for the premium paid towards life insurance policies of self, spouse, and children. The deductions can be claimed by the policyholder, who could be the individual, HUF (Hindu Undivided Family) or partnership firm. The deductions help in reducing the taxable income and ultimately the tax liability.

However, the premiums should not exceed 10% of the sum assured in case of policies taken on or after April 1, 2012 and 20% of the sum assured in case of policies taken before that date. This tax benefit is available for traditional policies such as endowment, money back, and whole life plans, as well as unit-linked insurance plans (ULIPs). It is to be noted that in the case of ULIPs, the taxation benefits are subject to specific policy terms and conditions as per the current income tax laws.

In addition to the tax deductions available under Section 80C of the Income Tax Act for life insurance premiums, there are also tax deductions available under Section 80D for life insurance health riders^#. Life insurance policies come with an option to add a critical illness cover or health riders, which provide additional coverage for specified health-related expenses such as hospitalisation, critical illnesses, and accidental death and dismemberment.

The deductions can be claimed by the policyholder, who could be the individual, HUF (Hindu Undivided Family) or partnership firm. These deductions help in reducing the taxable income and ultimately the tax liability.

Conclusion

Property ownership involves various kinds of legal and financial obligations. You need to be well aware of your tax^* liabilities and house property deductions that you can avail of.