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.

1.Income from Salary
2.Income From House property
3.Income from Business or Profession
4.Income from Capital Gains
5.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.

There are two tables which are very much essential to calculate income under this head

Table.1: Computation of Gross Annual Value (GAV)

Step 1: Municipal Rental Value or Fair Rental Value ---------------- whichever is higher
Step 2: Answer of step 1 or Standard rent ----------------------------- whichever is lower
Step 3:Answer of step 2 or Actual rental value ---------------------- whichever is higher

The Answer of step 3 is Gross Annual Value.

Table 2: Computation of Income from House Property.
Particulars Rs: Rs:
Gross Annual Value
Less:Municipal taxes paid by assessee during previous year
Net Annual Value
Less:Deductions under Section 24
Income from House Property
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.

Interest calculated on pre-construction period

It is allowed in 5 equal annual installments starting from the previous year in which house was acquired or construction was complete.

Vacancy Period

This is not a deduction but this is used in case of let-out property. Rent lost by assessee because of vacancy period can be subtracted while calculating Gross Annual Value.

Unrealized Rent

This too is not a deduction but is useful in calculating income from let-out house property. If an assessee has not realized rent then he can use it while calculating Gross Annual Value, but to claim this assessee has to make sure that he has furnished all required details, documents and adhered to rules and regulations.

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.

Example 1

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*12 months= Rs 2,40,000)

Municipal tax paid by owner= Rs 25,000
unrealized rent= Rs 30,000

Expenses on repairs= Rs 25,000

Solution:

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)

Computation of income from house property
Particulars Rs: Rs:

Gross Annual Value
Less:Municipal taxes paid by assessee during previous year
Net Annual Value
Less:Deductions under Section 24
2,10,000
25,000
1,85,000
55,500*

Income from House Property 1,30,000

* 30% of 185000 (Standard Deductions)

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 from such house property. If,

Municipal value= Rs 3,00,000
Fair 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

Solution:

Particulars Rs: Rs:
Gross Annual Value
Less:Municipal taxes paid by assessee during previous year
Net Annual Value
Less:Deductions under Section 24
Nil
Nil
Nil

1,50,000*

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, in such cases this loss is allowed to be set off against income from other sources.

Income from Deemed let-out House Property

When an assessee owns more than one house and has used all of them for residential purpose then only one house is taken for consideration under self occupied property and rest of the houses are taken as let out properties. Selection of house under self occupation is done in such a way that tax liability on assessee is reduced to the maximum extent.

Example 3:
An assessee owns two houses and has occupied both of them. Calculate total income under house property from given data

Particulars House 1 House 2
Municipal value 80,000 1,00,000
Fair Rent 90,000 90,000
Standard rent 1,00,000 95,000
Municipal tax paid - 10,000
Interest on the loan taken 20,000 30,000

In this case suppose that House 1 is taken as self occupied and House 2 as let-out house property.

Calculation of income from House 1:
Particulars Rs Rs
Gross Annual Value

Less:Municipal taxes paid by assessee during previous year

Net Annual Value
Less:Deductions under Section 24
Nil
Nil
Nil

20,000*

Income from House Property -20,000

* 20000 is the interest paid on the loan taken

Calculation of income from House 2:

Calculation of Gross Annual Value

Step 1: 1,00,000 or 90,000 ----------------------------- 1,00,000
Step 2: 1,00,000 or 95,000 ----------------------------- 95,000
Step 3: 95,000 or nil ------------------------------- 95,000

Gross Annual Value = 95000

Computation of income from house property


Particulars Rs Rs



Gross Annual Value

Less:Municipal taxes paid by assessee during previous year



Net Annual Value

Less:Deductions under Section 24

95,000

10,000

85,000

55,500*

Income from House Property 29,500

* 55500 = 25500 + 30000 [standard deduction (30% of 85000) + interest on loan (30000)]

Total income from house property (house1 & house2) = (-20,000) + 29,500

= Rs 9,500
Income from Partly self occupied and partly let out property

Partly let out here may be in terms of portion of the house let out or few months in previous year it is given on rent. In such cases the portion of the house that is occupied is treated as self occupied and that portion which is not occupied is treated as let out property. The calculation is done using the same two tables.
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