• A large portion of the overall assessable income in India is derived from the rental income of properties they possess. Any type of revenue produced from an individual’s property, whether the individual owns it or has it rented out, is regarded as taxable income as per the Income Tax Act of 1961. There are, however, various factors that affect the taxation of this income, such as the nature of the property, its usage, and applicable deductions. Briefly discussing home insurance and property insurance, this article elaborates on how income from house property is taxed in India.

Categories of Properties

According to the Income Tax Act, income from residential property is categorized into two main types:
1. Self-occupied property (SOP)
Housing primarily pertains to ‘self-occupied property’ or ‘SOP’, signifying the property owned and lived in by the owner. If an individual builds multiple self-occupied properties, they must select one to report as self-occupied, while the remaining properties will be regarded as let out.
2. Let-Out Property
A property that is leased out to tenants falls under this category. It is important to note that the rent collected from such property is subject to taxation under the section ‘Income from House Property. ’

Calculation of Taxable Income from House Property

The following steps are employed to determine the taxable income from residential property:
1. Calculate Gross Annual Value (GAV)
• The GAV is nil for a property when the owner occupies it.
• The Gross Annual Value (GAV) of a rented property is calculated based on the rent received or the higher amount among the standard rent, fair rent, or municipal value.
2. Subtract Local Taxes
The NAV is obtained by deducting the owner’s municipal taxes, such as property taxes, from the GAV for the fiscal year. This deduction is permitted only when these taxes have been fully paid for the concerned year.
3. Utilize the Standard Deduction method
Section 24(a) of the Income Tax Act permits a standard deduction of 30% of the NAV.
4. Reduce Home Loan Interest
Interest on a house loan taken for purchasing, constructing, or repairing a house can be deducted from the income under section 24(b).
5. Determine Your Taxable Income
Your taxable income from residential property is the amount left after these expenditures have been deducted.

The Functions of Property and Home Insurance

It is advisable to acquire an insurance policy, including home insurance and property insurance, which are crucial even though they do not influence taxable income in any manner. Building insurance provides coverage for your assets against risks such as theft, fire incidents, or natural disasters.

Conclusion

Indian legislation imposes taxes on income generated from real estate, with distinct rules applicable to rental properties and owner-occupied residences. By understanding these rules and utilizing available deductions, you can reduce your tax liabilities. Although home and property insurance do not directly influence tax calculations, they are crucial for safeguarding your assets, ensuring your financial stability, and maintaining eligibility for specific tax benefits. Therefore, comprehending the tax implications of your rental income is equally vital as possessing adequate property insurance.

Disclaimer: The information provided above is for illustrative purposes only. For additional information, please consult the policy documents and prospectus before finalizing the purchase.