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Tax Implication on House Property

Income from house property

Income from house property is one of the five heads of income from which total taxable income is calculated.

Individual Income Heads

Following are the five heads of Income from which total taxable income is calculated.

  • Income from Salary
  • Income From House property
  • Income from Business or Profession
  • Income from Capital Gains
  • Income from Other Sources

Points to be taken care of while calculating income from house property

Following are the points which are very important and to be taken care of while calculating income from house property are :

  • Income from house property is paid by the assessees’ who own house.
  • If an assessee uses the house property for his profession or business then, income generated from this house comes under income from business not under income from house property.

    For example: if Mr. X who owns two houses and uses one for occupation and second one for his business, then second house is considered while calculating income from business.
  • The house property that we are taking into consideration under this head should be building, house, etc.

Types of House Property

When we are calculating under this head there are four situations

  • Let-out house property
  • Self occupied house property
  • Deemed to be let-out property
  • Partly self occupied and partly let out

Calculation of Income from House Property

Income from house property is calculated keeping in mind some of the concepts such as;

  • Fair Rental Value: is the rent of the similar house in same locality.
  • Actual Rent: is rent received during the previous year
  • Municipal Value: refers to the rental value fixed by Municipality
  • Standard Rent: refers to rent fixed in Rent Control Act.

Deductions that an assessee can claim

Before going to the calculation of Tax under various types of assessee you need to understand the deductions that can be claimed. Following are the major Deductions that an assessee can claim;

  • Standard deduction
  • Interest on borrowed capital
  • Interest calculated on pre-construction period
  • Vacancy Period
  • Unrealized Rent

Standard deduction

This deduction can be claimed by all assessees. This deduction is given so as to compensate for all the repairs and expenditure that assessee has incurred on the house in previous year. This includes repairs, ground rent, insurance and these cannot be deducted once again. Standard deduction given is 30% of Net Annual Value, irrespective of whether amount spent is more or less than standard deduction calculated. This deduction is nil if the house is self-occupied.

Interest on borrowed capital

If an assessee has borrowed to build that particular house then the interest that he is liable to pay is given as a deduction. Capital borrowed before 1/4/1999 is given a maximum interest limit of 30,000 whereas capital borrowed after this period has interest upper limit up to Rs. 1,50,000 this is applicable for self occupied property. In case of let out property the whole of interest amount on borrowed capital is given as deduction.

Income from House Property

  • Income from let-out House Property
  • Income from Self Occupied Property
  • Income from Deemed let-out House Property
  • Income from Partly self occupied and partly let out property

Income from let-out House Property

Income from House which is let-out in the previous year is taken for consideration here. Even if the property is let-out for certain period say 6 or 8 months and then occupied by assessee, income from such house is taken as let-out property for the whole previous year. If the house is rented even for one day in the previous year then it is taken as let-out property and income taxable is calculated. As told above the assessee can claim unrealized rent and vacancy period for which house was unoccupied.
Example1: Income from house property that Mr. X gets if Municipal value= Rs 1,60,000 Fair Rent=Rs.1,80,000. Standard rent=Rs.1,70,000.Actual rent= Rs 20,000 per month (20000*12months=Rs.2,40,000) Municipal tax paid by owner= Rs 25,000 unrealized rent=Rs.30,000.
Expenses on repairs= Rs 25,000
In this case there is unrealized rent hence the actual rent will be 2,10,000 (2,40,000-30,000)

Calculation of Gross Annual Value
Step 1: 1,60,000 or 1,80,000-----------------------------1,80,000
Step 2: 1,80,000 or 1,70,000-----------------------------1,70,000
Step 3: 1,70,000 or 2,10,000* --------------------------- 2,10,000
Gross Annual Value = 210000
* 210000 = 240000 – 30000 (Actual rent – unrealized rent)

Income from Self Occupied Property

In case of income from self occupied property Gross Annual Value, Municipal taxes, Net Annual Value, Standard Deduction is taken as zero or nil, Simple reason is that self occupied property does not generate any income or rent. Only the interest on borrowed capital is taken into consideration.

Example 2: Mr. X owns a house and resides in the same then compute income fromsuch house property. If, Municipal value= Rs 3,00,000Fair Rent= Rs 2,75,000.Standard rent= Rs 2,88,000.Municipal tax paid = Rs 30,000.Interest on the loan taken in 2006 to construct the house is 1,50,000 for previous year.

Particulars Rs: Rs:
Gross Annual Value Less:Municipal taxes paid by assessee during previous year Nil
Net Annual Value Less:Deductions under Section 24 Nil
Income from House Property -1,50,000

* 150000 is the interest paid on the capital borrowed

In case of borrowed capital for self occupied property, income from house property will no doubt be a loss.

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