Rent, mortgage, capital gains, losses: A simple guide to real estate taxation

There are many different levels, from rent to time of sale to home equity loans. For example, most of the rules that apply to a house or commercial property are not applicable to land. If a landowner earns rent, lease or any other form of income on undeveloped land (without any development), that income is not treated as rental income. It must be declared as income from other sources or as profit from business activities.

There are separate rules for properties even under construction (see diagram).

In addition, property is divided into three categories: owner-occupied, rented and considered rented. However, there are different rules between the categories regarding the taxation of rent, the amount of deductible interest and loss compensation (see graphic).

The rules vary further depending on whether you choose the new or the old tax system. For example, if an owner has a home equity loan on the house they live in, they will incur a loss of up to ₹2 lakh under the head of ‘income from house property’. This is because in the income tax return, one has to declare the rent for the self-occupied property as zero and claim the interest paid on the loan as deduction. This results in a net loss on the house property equal to the interest paid. This loss is allowed to be deducted from all income, including salary. But only in the old regime. So, homeowners living in their own houses will lose this benefit if they opt for the new regime. In fact, under the new regime, loss deduction is not even allowed for houses rented out and deemed to be rented out.

mint has put together a handy Q&A guide to help you navigate the maze of real estate taxes (see table). The Guide and Owners with a Home Equity Loan.

I have two houses in the same city. I live in one house and the second is empty. Is the second house considered owner-occupied or rented?

The first two houses, which are either occupied by the owner or his family or are vacant, are considered owner-occupied, irrespective of which city they are located in relative to the owner’s residence, said Mayank Mohanka, founder, TaxAaram India and partner, SM Mohanka & Associates. “This condition existed earlier, but now the rule is straightforward. The only condition is that the house cannot be rented out even partially during the year.”

I live in rented accommodation but own a house in the same city. Can I claim both HRA and mortgage interest deduction?

If your property is in a different city, you can claim HRA on the rent paid by you as well as on the interest on your property directly, whether it is occupied by your family, vacant or rented out. However, if your property is in the same city, claiming HRA exemption is not allowed in most cases. If your office is far from your home and you can justify that the reason for renting is to live closer to the office and save commuting time, claiming HRA may be allowed.

The Union budget has prohibited the offsetting of losses incurred on the sale of a property purchased before 23 July. Does this also mean that I ₹2 lakh loss on self-occupied house by claiming mortgage interest?

Loss relief is not permitted for capital losses from the sale of a home. ₹A loss of Rs 2 lakh incurred on a self-occupied property by claiming interest on a home loan is a loss under the head of ‘income from home ownership’. The non-deduction for loss relief applies only to the former.

“Losses on property and long-term capital losses are two different items. There is no change in the provisions for losses on property,” said Prakash Hegde, chartered accountant and senior direct tax advisor at Acer Tax & Corporate Services Llp.

I have a loss carryforward under “real estate ownership”. If I opt for the new regulation, can I offset it against other income?

Losses from “income from real estate holdings” cannot be offset against other income except rental income under the new rules. Losses that are not offset cannot be carried forward to subsequent years. This also applies to losses carried forward from previous years, says Parizad Sirwalla, Partner and Head of Global Mobility Services, Tax at KPMG India.

“If there is a loss carried forward from properties rented or deemed to be rented from previous years, you can only offset it against the current year’s rental income. However, if the current year’s rental income is a net loss, the previous year’s loss cannot be offset or carried forward. It becomes a total loss,” she said.

Please note that loss carryforwards from owner-occupied houses cannot be offset against rent either, as the interest deduction for owner-occupied houses is not permitted under the new regulation.

To explain it with an example: Suppose you have a loss of ₹1 lakh from a rented house in the tax year 2024 which has not been fully offset and transferred. If you opt for the new tax regime in the tax year 2025, you will not be able to offset this. ₹1 lakh loss against all income except rent. If there is no rental income, ₹A loss of Rs 1 lakh becomes a total loss. Moreover, while you can claim interest deduction on the same rented house in the tax year 2020-21 as well, if it results in a loss, you cannot offset it or carry it over to the tax year 2020-21.

Mohanka said once a loss carryforward has become a loss, it cannot be offset in subsequent years even if the salaried taxpayer switches back to the old system.

In the same example, let’s assume you had ₹1 lakh loss again in AY25, which could not be offset or carried over. Now, if you opt for the old regime again next year in AY26, you can ₹1 lakh loss each from 2004 and 2005 as they could not be carried forward.

I took out a home equity loan for a house under construction. The builder handed the house over to me after seven years. How can I claim interest for the years of construction?

Interest paid during the construction years is accumulated and cannot be claimed until construction is completed. The total interest can be claimed in five equal instalments over five years after construction is completed. However, for owner-occupied homes, there are annual caps on the total interest that can be claimed. These include the accumulated interest and the current year’s interest. This threshold also varies depending on whether construction is completed within five years or not.

If the construction is completed within five years of the end of the financial year in which the loan was taken out, ₹2 lakh can be claimed in one year. If the construction is completed after five years, only ₹30,000 interest per year can be claimed as a deduction.

These conditions do not apply to houses that are rented or considered rented. The full interest is deductible every year, regardless of when construction is completed. The only condition is that the interest is divided into five installments before construction begins.

Hegde said that the interest to be claimed annually depends on whether the house is declared as self-occupied or rented. Let us understand this with an example. Suppose the construction of a house is completed in 10 years and the total interest accumulated before construction is ₹10 lakh. Every year ₹2 lakh pre-construction interest is to be claimed for five years. Now let us assume that in the first year the house is occupied by the owner. Therefore only ₹30,000 interest can be claimed. But in the second year the house is rented out. In this year ₹2 lakh interest before the start of construction can be claimed along with the interest of the current year. In the following three years too, the amount of interest to be claimed depends on the occupancy status of the house.

I am selling a house under construction. Can I add the interest paid on the home equity loan to the purchase cost?

With effect from FY 2024, interest on a home loan will no longer be allowed to be added to the acquisition or improvement cost of a property to avoid double interest deduction. “There have been cases where taxpayers have claimed interest on a home loan as a deduction under the head ‘income from house property’ as well as acquisition/improvement cost of the property,” Hegde said. “It should be noted that this resulted in double deduction and hence this amendment has been brought. In the case of an under-construction property, since no interest deduction can be claimed, interest can be added to the acquisition cost if that property is sold while it is still under construction,” he added.