Rental Income or income from house property is one of the most common sources of income in India after salary. There are many households which earn their livelihood from rental income only.
For those who’re interested in investing money in the property as well as earning interest on the same, they should also be aware about tax planning so that they can reduce their tax liability to the minimum.
Tax Planning vs Tax Evasion
One also needs to understand the difference between tax planning and tax evasion. Evading tax is illegal, and certainly not recommended in any case. However, tax planning is a legal term, and is within the ambit of law.
Deemed Rental Income
Many are not aware about the concept of ‘deemed rental income’. However, this is a reality. If you own property other than a house, then the second and subsequent properties are considered as deemed let out even if you are not earning any amount on it.
Further, you have to pay the tax based on fair market value of the rental income on that property.
Calculating Rental Income
Calculation of income from house property follows a simple formula:
There are a couple of additional concepts one should be aware of in this context.
Municipal Taxes: Municipal Taxes are also known as house tax. Hence, if you have paid any amount, then you can claim it as deduction.
Standard deduction: As an owner of the property, you incur many expenses on the property including repair, etc. However, these expenses cannot be claimed as an expenditure against the rental income. In order to overcome this hardship, one can avail the option of 30 percent standard deduction given to the assessee.
Benefits of Housing Loan
It sounds strange, but if you buy a house via a housing loan, you can cut down the cost by claiming it against your income, and ultimately reducing the tax liability.
Principle amount as deduction: As per section 80C, the principle amount can be claimed as a deduction, subject to the total limit of Rs 1,50,000.
Interest Payment: The interest payment can also be claimed as expenditure while calculating the income from house property. However, two possible cases need to be understood:
1) If property is self occupied: If the property is self-occupied, then interest deduction shall be limited to Rs 2,00,000.
2) If property is let out or deemed let out: If the property is let out or deemed let out, then in that case, there is no upper limit of Rs 2,00,000.
Additional benefit granted in Budget 2016 – Section 80EE
The additional benefit has been granted in Budget 2016, in order to fulfil the dream of every individual to buy a house. An additional deduction of interest of Rs 50,000 can also be incurred subject to certain conditions:
- House Value should be less than Rs 50 Lakh
- Loan sanctioned should be between 1 April 2016 to 31 March 2017.
- The total value of loan should not exceed Rs 35 Lakh.
This benefit of Rs 50,000 is over and above the interest deduction of Rs 2 lakh.
First Residential Property and Taxation
If you are planning to purchase your first house, and you are paying interest on housing loan. Then you can claim interest of Rs 2,00,000 as a loss from house property which could be adjusted against your salary income subject to maximum of Rs 2,00,000 (as per the Finance Act, 2017).
This is a sheer advantage of owning house property.
Second Residential Property and Taxation
If you already own a house and plan to purchase another one, then here are the factors that will determine your tax:
- The second home/house shall be treated as deemed let out even if the house remains empty. Hence, you should not forget to include the income from this house in your ITR.
- The limit of Rs 2,00,000 on interest does not apply, and hence, you can claim the deduction for amount more than Rs 2,00,000.
- On the rental income, you can claim the standard deduction.
- You can also claim expenses like stamp duty in your ITR.
If you have any unrealised rent, then don’t worry, the income tax department has good news for you. Due to any reason, if you have not received the rent, then it shall be deducted from the total rent received.
Further, it shall be taxable in the year in which it is actually received.
Benefit of Co-Ownership
If two people have purchased a house, then it could be really beneficial, as far as the taxes are concerned. You can understand this by way of example:
Suppose Mr Ram is planning to buy a house and rents out the property for a monthly rent of Rs 1,00,000. Calculate the income from house property stating whether he should buy independently or opt for co-ownership.
Solution: If a house is co-owned and their share is ascertainable, then the income shall be taxable for both the partners in accordance with the ratio of their ownership. Assuming they own 50:50, the calculation is as under:
You can see the difference, if property is co-owned, the tax liability comes down drastically from Rs 95,970 to Rs 24,720. The total benefit amounts to Rs 71,250.
Exemptions on Sale of Property
As per section 54 of the Income tax act, 1961, you can save your capital gain tax from the house property income if you invest the entire sum in a residential property.
The exemption does not extend to the commercial properties, and hence, due caution should be taken before claiming the exemption.
We have tried to summarise all the tax planning points in order to help you reduce the tax to the minimum. However, it is equally important to file the Income Tax Return properly so that you don’t make silly mistakes which leads to denial of deductions.
(The writer is a Chartered Accountant and a taxation expert who helps various startups, corporate in Income Tax Filings, Tax planning, business registration services, etc. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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