Owning fixed or immovable assets, such as residential or commercial properties, is a common investment strategy. However, these properties can generate both income and losses, which must be reported under the "Income from House Property" category as per the Income Tax Act, 1961.

Understanding how to treat such losses is crucial, as it allows you to optimise your tax liability by offsetting them against other income sources.

In this article, we’ll discover the meaning of a loss from house property, how it is calculated, and how you can effectively offset these losses to minimise your tax liability.

What Is Loss from House Property?

Loss from house property occurs when the expenses associated with a property exceed the income derived from it. This typically arises due to factors such as interest on home loans, municipal taxes, repairs, insurance, and maintenance costs.

Under the Income Tax Act, income from house property is typically calculated based on actual rental income or deemed rental income, which is the income that could have been earned if the property were rented out. However, if the total expenses surpass the rental income or deemed rent, a loss is incurred.

The treatment of this loss – whether it can be set off against other income or carried forward to future years – is governed by specific provisions in tax laws, making it an important consideration for property owners.

What Are the Reasons for Loss from House Property?

• High Interest on Home Loans
  When a property is financed through a home loan, the interest paid on the loan is deductible while calculating the income from the house property. If the interest paid is substantial, it can lead to a significant reduction in the net income or result in a loss. This is especially common in the initial years of the loan when interest payments are higher.
• High Maintenance and Repair Costs
  Regular repairs, maintenance, and improvements to a property can increase the overall expenses related to it. If these costs are significant, they can outweigh the rental income or deemed rental value of the property, leading to a loss.
• Municipal Taxes and Other Statutory Deductions
  Property owners are required to pay municipal taxes and other statutory charges. These can add to the overall expenses associated with the property. In cases where municipal taxes or other mandatory charges are high, they can further increase the costs and contribute to a loss, especially when combined with low or no rental income.
• Decrease in Market Rent or Demand
  In some cases, the rental value of a property may decrease due to factors such as economic downturns, infrastructure changes, or lower demand in a locality. If the rent received is lower than expected and does not cover the associated expenses, the property owner may incur a loss.

How to Calculate Loss from the House Property Calculation?

Here’s how you can do so:

1. Determine the Gross Annual Value (GAV): GAV is the potential rental income from the property. If the property is rented, use the actual rent received. If it is self-occupied, the GAV is considered nil because no rent is being earned.
2. Calculate the Net Annual Value (NAV): The NAV is obtained by deducting property taxes from the GAV (only when paid during the financial year).
3. Deduct Standard Deduction (30%): Under Section 24(a) of the Income Tax Act, a standard deduction of 30% on the NAV is available. This is applicable regardless of actual expenses incurred for the maintenance of the property.
4. Deduct Interest on Home Loan (if applicable): If you have a home loan on the property, you can claim a deduction on the interest paid for that year under Section 24(b). The maximum allowable deduction for a self-occupied property is INR 2,00,000, and for a rented property, there is no upper limit (you can claim the entire interest paid).
5. Check for Loss from House Property: If your deductions, including the interest on a home loan, standard deduction, and taxes exceed the NAV, the result is a loss from house property.

How to Treat Loss From House Property for Taxation

Under Section 71 of the Income Tax Act, 1961, the loss from house property can be set off against other sources of income, such as salary or business income, up to a maximum of INR 2,00,000 in the current financial year. Any remaining loss beyond this amount can be carried forward for up to 8 assessment years, but it can only be set off against future income from house property and not against other income sources.

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Conclusion

Understanding how to treat loss from house property is essential for property owners to manage their tax liabilities effectively. By carefully calculating losses, utilising available deductions, and applying set-off provisions correctly, taxpayers can optimise their tax position. Consider consulting a tax professional to ensure compliance with current tax laws and maximise your tax benefits.

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