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How is Income from a House or a Property Taxed -Tax Planning in India?





Use Tax Planning to save tax on your house:

There is nothing like owning a house or a property and it is considered a symbol of wealth. But what would happen if one owns more than a single property. Would that person be taxed for this? In India low cost housing is a prime agenda of the Government and if one were to own a second home and lock it up for investment purposes it would be detrimental to the cause. In order to discourage this practice and encourage one to give the second home on rent the Government taxes one’s second home if it is not given on rent.

How is property classified?

A property is considered to be self occupied if one resides in it. One has to stay or live on the property and this is defined as self occupied property. If one owns more than one property the second property is known as a let out property. What would happen if the second property is not given on rent or is left vacant? According to tax rules this kind of a property is deemed to be let out.

What is meant by income from property?

Unlike other heads of income an income from property is a notional value called annual value. If property is deemed to be let out one would not know the exact rental value he would obtain as the property is not actually given on rent. This is basically the amount one would earn if he gives the property on rent. The annual value may be a value higher than the rent actually received if one were to give his property on rent. Consequently if one does not give his second house or property on rent the market rent would be considered as the annual value for the purpose of taxation.

The Art of Tax Planning:
So how does one compute the annual value of a house property which is let out?

The inherent value of a property to earn an income is called annual value. This amount is taxed in the hands of the owner. The gross annual value is the highest of the following :

  • Rent received or receivable
  • Fair market value
  • Municipal valuation

a. One has to determine the reasonably expected rent on the property. This could be the municipal rent based on the municipal valuation or the fair rent whichever is higher among the two

b. One has to consider rent actually received

c. One then considers which is the higher amount between (a) and (b)

d. (d) One may not be able to give the house or a property on rent during part of a particular year or during the whole financial year. This is considered as a loss due to vacancy or loss which arises from leaving a property vacant
The difference between (c) and (d) is known as annual value commonly known as gross annual value. One then subtracts the amounts known as municipal taxes in order to calculate the net annual value of the property.

How does one compute the annual value of a house property which is deemed to be let out?

What happens if one owns two or more properties? These properties which may not be given on rent are known as deemed to be let out properties. The property one resides in is known as the self occupied property and the other properties are deemed to be let out under the present income tax laws. The gross annual value is calculated in the same way as the let out property. Since rent is actually not received as these properties are not given on rent the standard rent calculated as per municipal laws are considered. If one pays municipal tax these amounts are deducted in order to compute net annual value. One needs to note that in case he owns more than a single property the others being deemed to be let out properties he needs to select the property having the highest gross annual value as the self occupied property. This would help one in optimum tax planning.

How does one compute the annual value of a self occupied house property?

If one resides on the property throughout the financial year, this property is considered as a self occupied property. The net annual value of the property is zero for a self occupied property.

  • A property is not taxed as per house property laws if it is used for commercial purposes
  • If this property is self occupied for a part of the year and give on rent for the remainder of the year then the annual value is calculated in the same way as a let out property

Information on Tax Planning:
What are the deductions one can obtain from the income from house property?

One gets Income tax deductions on the annual value of the house property while calculating income from house property under Section 24.One gets two types of deductions under Section 24.

  • Standard deductions under Section 24 (a)
  • Interest on borrowed capital Section 24 (b)

Standard deductions under Section 24 (a) under Income from house property

One can obtain a standard deduction of 30% on the annual value under “income from house property” under Section 24(a) irrespective of the amount of expenditure one incurs during the financial year. This does not apply to self occupied houses as the net annual value is 0.This law applies specifically for a let out property or one which is deemed to be let out.

Income on borrowed capital under Section 24 (b)

  • If one borrows an amount from a bank or a financial institution for the purchase, construction, repair, reconstruction or the renewal of the house property then under Section 24 (b) the interest component is allowed as a deduction from the house properties net annual value. This is irrespective of whether the property is self occupied, let out or deemed to be let out
  • The amount or the quantum of deduction depends on whether the loan is taken for repair, renovation or a reconstruction and also if the property is self occupied, let out or deemed to be let out
  • If the property is let out or deemed to be let out then there is on maximum restriction for claiming interest irrespective of whether the loan is taken for the purchase, construction or repair
  • The interest amount is charged on the loan and can be claimed as a deduction even if one does not directly pay the amount and it is charged on the loan account
  • If one avails a second loan in order to repay the amounts on the first loan then the interest component of the second loan is allowed as a deduction under Section 24 (b) from the net annual value.

Interest on the borrowed property when the house property is self occupied

  • If one acquires or constructs a property out of a loan borrowed on or after 1st April 1999 and the construction is completed within 3 years from the end of the financial year in which the loan amount is borrowed the interest portion is eligible for a deduction up to INR 1.5 Lakhs
  • If the loan has been taken for repair and reconstruction and not for the purchase of a house and the loan amounts are borrowed before 1st April 1999 or the loan has been taken to construct a house but the construction takes more than 3 years then the eligible deduction is only INR 30,000
  • In case of a self occupied property if one takes a loan to construct, repair or renovate the house then the interest can be claimed as a deduction from gross total income. The income from house property would be negative as annual value of a self occupied property is nil

There is a famous saying “ Home is the nicest word there is“. Investing in a second home as well as studying tax charged on it is a must in order to save on tax. Remember for every benefit one receives a tax is charged.

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