Skip to main content

All about house tax

Over the years, readers have been writing in with their queries relating to taxation with respect to house property. Therefore, this week, I have attempted to answer the same. 

Determination of annual value

Determining tax due on property is complicated because this is the only income that the Income-Tax Act taxes on a notional basis. In other words, the tax is based not on the actual income per se, but on the inherent capacity or potential of the property to generate income — also known as its annual value.

A single self-occupied property is not chargeable to tax. If the taxpayer has more than one self-occupied house, then the annual value of any one house, at his option, can be taken as nil. The others will be assumed to have been rented out and taxed on a notional annual value. The option chosen by the taxpayer can change from year to year.

The next step is to see how the annual value is arrived at in the case of rented properties (or more than one self-occupied property). Here, annual value is taken as the higher of the actual rent received or the sum for which the property might reasonably be expected to be rented.

To determine the sum for which the property might be reasonably expected to be rented out, the higher of the municipal valuation of the property or the fair rental value of the property has to be chosen, taking into account its size and the area in which it is located.

However, if the property is governed by the Rent Control Act, the standard rent fixed thereof will have to be taken for determination of annual value. In a nutshell, the annual value of a rented property will be the higher of the municipal value or fair rental value, but restricted to the standard rent. However, if the actual rent received or receivable exceeds such amount, then such actual rent will be taken as the annual value. The table will make this point clearer.

Deductions available


From the annual value of the property as determined above, municipal taxes levied by the local authority can be deducted. However, such deduction is allowed only if the municipal taxes have been actually paid during the year. Taxes that are due but not paid are not allowed as deduction. However, taxes paid during the year are allowed as a deduction even if they relate to past or future years.

Thus, for each year, municipal taxes actually paid will be allowed as a deduction from the annual value. The value arrived at by deducting the municipal tax is referred to as net annual value. From this value, deductions detailed below are allowed under Section 24, and the balance is the taxable income under the head 'Income from House Property'.

Section 24 offers two deductions. The first is a statutory deduction of 30% of the net annual value.The second deduction is to do with interest payable on properties bought on mortgage. For rented properties (or where the deemed annual value is taxed in the case of more than one self-occupied property) the full amount of interest paid is allowed as a deduction.

Also, where a borrower raises a fresh loan in order to repay the original loan, the interest paid on the second loan would also be allowed as a deduction.In the case of a self-occupied house, where the annual value is nil, the interest deduction is limited to Rs 1.5 lakh on loans borrowed after April 1, 1999 and Rs 30,000 on loans borrowed prior to that date.

Here, it may be noted that if the property is co-owned, each of the co-owner is entitled to the interest deduction of up to Rs 1.5 lakh. Plus, Section 80C deduction is available up to Rs 1 lakh on the principal portion of the EMI. This deduction too is also available to each co-owner.

Therefore, in the case of a husband and wife, if the property has been bought jointly, then an aggregate deduction of Rs 5 lakh would be available to them on their combined income.

Pre-construction period

Both the concessions, deduction for repayment of capital and deduction of interest are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value should be known.

The interest paid for the years prior to the year in which the property was completed is deductible in five successive yearly installments starting from the year in which the acquisition/ construction was completed and each of the four succeeding years. Note that the limit of Rs 1.5 lakh includes the current year's interest as well as the installment of pre-acquisition/ construction period.

For example, say the pre-construction period interest amounts to Rs 5 lakh and the current year's interest amounts to Rs 80,000. Now, Rs 5 lakh is to be spread over five years beginning from the year in which the construction is completed. So for that year, in the case of a rented property, the taxpayer can avail of a deduction of Rs 1.8 lakh (Rs 1 lakh + Rs 80,000) whereas in the case of a self-occupied property, the deduction would be limited to Rs 1.5 lakh.

 

Popular posts from this blog

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now