When it comes to calculating income tax in India, the Income Tax Act, 1961 allows taxpayers to offset losses incurred under one head of income against income from another head. This is known as set-off of losses. One of the most common scenarios where set-off provisions apply is in the case of losses from house property. Understanding the rules for house property loss set-off can help you reduce your tax liability and plan your finances better.
What is Income from House Property?
Under the Income Tax Act, income from your house property basically refers to the income earned from owning a property. It could be a residential house, a commercial building, or even a vacant land attached to the building. The taxability arises not from the actual rental income received but from the annual value of the property, which is calculated based on certain prescribed rules.
The income from house property is classified into two types:
- Self-occupied property – The property is used by the owner for residential purposes.
- Let-out property – The property is rented out or deemed to be let out.
The Income Tax Act also allows deductions such as municipal taxes paid and standard deduction (30% of net annual value), and most importantly, interest on borrowed capital under Section 24(b).
What is House Property Loss?
House property loss arises when the total deductions allowed (especially interest on home loan) exceed the gross annual value of the property. This situation is more common in self-occupied properties, where the annual value is treated as nil, but the taxpayer still claims interest deductions up to a certain limit.
For example, if you have a self-occupied house with nil annual value but claim interest on a home loan of ₹2,00,000, your income from house property will be – ₹2,00,000, which is a loss.
Limits on Interest Deduction
The deduction available under Section 24(b) is as follows:
- Self-occupied house: Maximum deduction is ₹2,00,000 per financial year.
- Let-out property: There is no standard upper limit on the interest deduction. The entire interest paid can be claimed easily as a deduction.
However, since Assessment Year 2018-19, the Income Tax Act places a cap on the amount of house property loss that can be set off against other heads of income.
Set-Off Rules for House Property Loss
As per current rules:
- Inter-head set-off (setting off house property loss against other heads of income): Allowed up to ₹2,00,000 in a financial year.
- Any unabsorbed loss exceeding ₹2,00,000 can be carried forward to future years.
- Loss from house property can be carried forward for 8 assessment years and can be set off only against income from house property in those years.
Let’s understand this with examples:
Example 1: Inter-Head Set-Off Within Limit
You have a salary income of ₹10,00,000 and a house property loss of ₹1,80,000.
- Set off the entire ₹1,80,000 loss against salary.
- Net taxable income = ₹10,00,000 – ₹1,80,000 = ₹8,20,000.
Example 2: Inter-head Set-Off Beyond Limit
You have a salary income of ₹10,00,000 and house property loss of ₹3,50,000.
- You can set off only ₹2,00,000 of the loss against salary income.
- The remaining ₹1,50,000 must be carried forward.
- Net taxable income = ₹10,00,000 – ₹2,00,000 = ₹8,00,000.
- ₹1,50,000 carried forward for up to 8 years.
Carry Forward and Set Off in Future Years
The carried-forward house property loss can be set off only against future house property income. It cannot be set off against salary, business, or other income in future years.
Also, to claim the carry-forward benefit, it is mandatory to file the income tax return within the due date under Section 139(1).
Example:
Year 1: House property loss = ₹3,00,000
Salary income = ₹8,00,000
Set off allowed = ₹2,00,000
Carry forward = ₹1,00,000
Year 2: House property income = ₹70,000
Set off allowed from brought forward loss = ₹70,000
Balance loss to carry forward = ₹30,000 (can be set off in subsequent years)
Treatment in the Case of Multiple Properties
If you own multiple properties, the total loss from all house properties is aggregated and the combined loss is subject to the ₹2,00,000 inter-head set-off limit.
For example, if you have:
- Loss from Property A: ₹1,50,000
- Loss from Property B: ₹1,20,000
- Total = ₹2,70,000
Only ₹2,00,000 can be set off against other income. The balance ₹70,000 must be carried forward.
Key Conditions and Points to Remember
- Timely Return Filing: To carry forward the loss, you must file your return before the due date.
- Loss Set-Off Hierarchy:
- First, intra-head adjustment (among multiple properties).
- Then, inter-head adjustment (subject to ₹2,00,000 limit).
- Finally, carry forward if needed.
- Income Clubbing Rules: If house property is owned jointly, the income/loss is divided in proportion to ownership. If clubbing provisions apply (e.g., property in spouse’s name but purchased with your funds), loss still gets clubbed back with your income.
- Property Under Construction: Interest paid during construction is eligible for deduction in 5 equal instalments after completion.
Tax Planning Tips
- Joint Home Loans: If a property is jointly owned and both co-owners are co-borrowers of a home loan, each can claim the ₹2,00,000 deduction limit, effectively doubling the benefit.
- Maximize Interest Deductions: Letting out the property allows you to claim full interest on home loans, which can help in case of large EMIs.
- Combine with Section 80C: You can claim principal repayment of home loans under Section 80C, in addition to interest deduction under Section 24(b).
- Use Carry Forward Smartly: If you foresee house property income in future years (e.g., after finishing a project or starting rent), you can plan your tax filings to maximize loss set-off benefits.
Recent Legal and Budget Updates
- Budget 2017 (effective from FY 2017-18): Introduced the ₹2,00,000 limit on inter-head set-off.
- No changes in Budget 2024: The ₹2,00,000 cap continues as is.
- New Tax Regime (Section 115BAC): If opted, deductions such as interest on home loan (for self-occupied house) are not available. Set-off provisions do not apply under the new regime unless the property is let out.
Conclusion
The provisions for house property loss set-off are a very useful tool for taxpayers with housing loans or multiple properties to settle their house loans in a legal manner. It allows you to minimize your overall tax burden by adjusting property-related losses against other income, within specified limits. By getting the proper understanding about the process of set-off and carry-forward rules, filing returns on time, and planning your home loan investments carefully, you can make your task easier, and you can also make the most of these provisions to optimize your tax liability.
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