How losses from residential property can be adjusted against other incomes to reduce tax liability… Here is how…
The interest paid on a home loan taken to buy a house is a common loss under the head 'income from house property'. This can be set off against other incomes of an assessee, thereby reducing his tax liability, and can as such act as a measure of tax planning.
Under the Income Tax Act 1961, 'income from house property' is a separate and distinct head of income. Accordingly, such income is taxed separately. Under the Act, apart from the income actually received, even the deemed or notional income is taxable. Deemed income is the 'income' that is not actually received by an assessee, but is liable to tax. This happens in cases where the assessee owns more than one self-occupied houses. Only one such property is exempt from tax. Deemed income from all other houses is taxable, although it is not actually earned by the assessee.
At the same time, some specified deductions are allowed. These include the municipal taxes paid, interest paid on loan for construction or purchase of the house, and standard deduction. The standard deduction is limited to 30 percent of the net annual value of the house - gross annual value minus the municipal taxes.
In case there still is an income after these deductions, it is taxed under the head 'income from house property'. However, in case the net result is a loss, a special treatment is allowed for set off and carry forward of such loss from the house. According to Section 71B of the Income Tax Act, where an assessee incurs a loss under the head 'income from house property', the loss should be first set off against incomes from other heads - salary, business and profession, and from other sources.
In case such loss is still not fully adjusted against the other heads of income in the same assessment year, the balance loss is allowed to be carried forward and set off in subsequent assessment years. An assessee can carry forward the loss up to eight assessment years. The carried forward loss can be set off against 'income from house property in the subsequent years. The carried forward loss cannot be set off against income under the other heads like salary or income from other sources. Further, only losses pertaining to the assessment year 1999-00 onwards can be carried forward. Losses pertaining to the assessment year 1998-99 or earlier years cannot be adjusted against the current years' income.
Since the carried forward losses can be set off in the subsequent years only against the income under the head 'income from house property', it is essential to have some income under this head in order to avail the benefit of this set off and to thereby reduce the tax liability. In order to claim the benefits of carry forward and set off of losses, an assessee should file his returns of income. Otherwise, the losses cannot be set off against the income.
The losses can substantially reduce the taxable income of an assessee. In case of self-occupied house, the interest that can be deducted is limited to Rs 1.5 lakhs. However, this limit does not apply in case the house has been let-out on rent.
The interest paid on a home loan taken to buy a house is a common loss under the head 'income from house property'. This can be set off against other incomes of an assessee, thereby reducing his tax liability, and can as such act as a measure of tax planning.
Under the Income Tax Act 1961, 'income from house property' is a separate and distinct head of income. Accordingly, such income is taxed separately. Under the Act, apart from the income actually received, even the deemed or notional income is taxable. Deemed income is the 'income' that is not actually received by an assessee, but is liable to tax. This happens in cases where the assessee owns more than one self-occupied houses. Only one such property is exempt from tax. Deemed income from all other houses is taxable, although it is not actually earned by the assessee.
At the same time, some specified deductions are allowed. These include the municipal taxes paid, interest paid on loan for construction or purchase of the house, and standard deduction. The standard deduction is limited to 30 percent of the net annual value of the house - gross annual value minus the municipal taxes.
In case there still is an income after these deductions, it is taxed under the head 'income from house property'. However, in case the net result is a loss, a special treatment is allowed for set off and carry forward of such loss from the house. According to Section 71B of the Income Tax Act, where an assessee incurs a loss under the head 'income from house property', the loss should be first set off against incomes from other heads - salary, business and profession, and from other sources.
In case such loss is still not fully adjusted against the other heads of income in the same assessment year, the balance loss is allowed to be carried forward and set off in subsequent assessment years. An assessee can carry forward the loss up to eight assessment years. The carried forward loss can be set off against 'income from house property in the subsequent years. The carried forward loss cannot be set off against income under the other heads like salary or income from other sources. Further, only losses pertaining to the assessment year 1999-00 onwards can be carried forward. Losses pertaining to the assessment year 1998-99 or earlier years cannot be adjusted against the current years' income.
Since the carried forward losses can be set off in the subsequent years only against the income under the head 'income from house property', it is essential to have some income under this head in order to avail the benefit of this set off and to thereby reduce the tax liability. In order to claim the benefits of carry forward and set off of losses, an assessee should file his returns of income. Otherwise, the losses cannot be set off against the income.
The losses can substantially reduce the taxable income of an assessee. In case of self-occupied house, the interest that can be deducted is limited to Rs 1.5 lakhs. However, this limit does not apply in case the house has been let-out on rent.
