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Friendly introduction to Income From house Property

Annu Agarwal 
on 30 April 2014

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Hello everyone!!

Have you ever realized that reading a book alone is always boring as compared to reading the same book along your friends. In this new article of mine, I have tried to discuss the topic in an interactive manner to make it more interesting. Hope you find it useful!!

Here it starts:

Me and my friends were in a coffee shop when one of them mentioned about her house in Delhi, which she had rented out. She was afraid that the rent would increase her total income and she would end up paying more taxes.

Let me introduce you to my friends:

Varsha- She is from Science background

Pallavi- She is a Charterd Accountant

Shailza-  She is a MBA

Annu-Me –myself-  Chartered  Accountant

Question 1

Varsha: Guys! I have a house in Delhi. Though I am happy with my rent, but  I am a bit confused with its taxability?

Pallavi: So, our next coffee is at your place J

Well jokes apart, let’s come to the point. Your rental Income shall be taxable under the head ”Income From House Property”

Question 2

Shailza: This means she shall pay tax on whole of the rent?

Me: Relax Shailza, our Income Tax Law is not that unjust.

The Rental Income will get eligible deductions. There is a standard deduction of 30% of the Net Annual Value (NAV) and a deduction of interest paid if any on loan taken for acquisition, construction or repair of the house.

Question 3

Varsha: This is great Annu! But what if I have two properties?

Shailza’s (remarks): That means you are the richest among us.

Annu: Come on Shailza don’t be jealous!! In that case Varsha there are a few possibilities, which would need consideration before your query could be answered!

I think the below would make things a little more clear:

Cases

Tax Treatment House 1

Tax Treatment House 2

Case I:

Both  the houses are self occupied **

Treated as self occupied, NAV shall be NIL

Treated as Rented, NAV shall be Rent had the property been let –out

Case II:

House 1 is self-occupied and House 2 is vacant

Treated as self occupied, NAV shall be NIL as self-occupied

Treated as Rented, NAV shall be Rent had the property been let –out

Case III:

House 1 is self-occupied  and House 2 is rented

Treated as self occupied, NAV shall be NIL as self-occupied

Treated as Rented, NAV shall be the actual rent received

**In this case, Varsha has the liberty to choose any of the houses to be treated as self occupied for Tax Purpose

Question 4:

Shailza: Varsha you are listening to them so seriously, do you even know the meaning of NAV or you are just trying to act smart?

Pallavi: No issues Varsha, I will tell you what is the NAV we are talking about. See, in case of rented property you receive rent, but income from House Property is taxable on the basis of AV (Annual Value)

Annual Value of any property is the sum which the property might reasonably be expected to fetch if it is let-out.

The Annual Value is higher of:

1. Reasonable Rent  OR                               

2. Actual Rent Received or Receivable

Question 5:

Varsha: Guys, I am getting very confused, can you explain the same with some flowchart or so?

Me: Varsha, well I will be your Arts teacher then. Now See:

Annual Value (Higher of)

Reasonable Rent                                                                                    Actual Rent received or receivable

Higher of A and B but subjected to Standard Rent                                        Rent Receivable For 12 months

                                                                                                                 Less:Unrealised Rent

Municipal Value (A)                                           Fair Rental Value (B)     Less:Rebate For Vacancy

(Value on which Municipal                         (Rent prevalent in

Taxes are levied)                                             neighborhood)

Question 6:

Varsha: Well then, I understood the Reasonable Rent Part. In case of Rent Receivable or received  what does this  unrealized rent or rebate for vacancy mean?

Pallavi: Good question! See by the term unrealized rent we mean that the amount of rent payable by the tenant but not paid by him and so proved to be lost and irrecoverable despite of all the legal actions taken by the assessee.

And by the term Rebate for vacancy means the period during which the property remain vacant and prospective rent could not be earned.

Question 7:

Shailza: Well there, even I wanted to share a happy news with all of you. You guys know that even I have booked a Property  in my name & even my  loan for its acquisition is sanctioned by the Bank.

Me:  By the way you are living with your parents in Delhi here, your job is also here then why have you bought a property in Ghaziabad? No worries,leave it,we are just waiting  for your house warming party J

Shailza: Come on guys after hearing all these tax  implications I am not in for any party L

Me:Relax Shailza! First you tell us whether  you will rent it or self occupy it?

Shailza: Why? Is there a difference in taxability if I opt for any of the options?

Me: Yes dear, If you opt for renting it, you will get the following deductions from the NAV:

1) Deduction of 30% of NAV

2) Interest Deduction (deduction of interest on loan taken for property)

Pre-Construction Period Interest                                             Post Construction Period Interest

(Whole interest is allowed as deduction                               (Whole interest is allowed as deduction

In 5 equal installments)                                                              without any limit)

In case you opt for Self-occupancy

1) 30% deduction is not available

2) Interest Deduction (deduction of interest on loan taken for property) subjected to some conditions

Pre-Construction Period Interest                                             Post Construction Period Interest

(whole interest is allowed as deduction                               (Interest is allowed as deduction

In 5 equal installments)                                                              upto 1,50,000 or 30,000)

Question  8:

Varsha: What is this pre-construction Period and post-Construction Period?

Pallavi: The pre construction period and post construction period arise in case of a loan taken for construction or acquisition of a under –construction property.

Say, if you took a loan for Construction of property on 01.06.2012(P.Y 2012-2013) and the Construction is completed on 01.10.2014 (Previous Year 2014-2015)

Pre-construction Period:  P.Y. 2012-2013 and P.Y. 2013-2014

Post-construction Period: P.Y 2014-2015 onwards

Qusetion 9:

Shailza: Annu said that in  case of self-occupied property there are some conditions to avail the interest deduction, what are they?

Pallavi: Ya,she was right actually. In case of self-occupied property ,you need to make sure that the property is Constructed or acquired within 3 years from end of the Financial Year in which the loan is taken to avail the deduction of upto 1,50,000/- Also to avail the deduction of upto Rs 1,50,000 ensure that:

Firstly,the loan is taken  for construction /acquisition and not for repair /renewal of the property.

Secondly,the loan is repaid within the stipulated 3 years.

To sum up ,please refer to the table below:

Income From House Property

Annual Value:(higher of Reasonable Rent and Rent actually Received)

Reasonable Rent

Higher of Municipal value and Fair Rental value but sumbected to the Standard Rent

Actual rent received or receivable

Rent Receivable for  12 months'

Less:Unrealised rent

Less:Vacancy Rent

Annual Value derived

Less:Municipal taxes paid by assessee

NAV

Let-out

Self occupied

Net Annual Value

xxxxx

Nil

less:Deduction

1)30% Deduction

xxxxx

Nil

2)Pre-construction Interest (In 5 equal installment)

xxxxx

xxxxx

3)Post -construction Interest(Laon for acquisition/construction)

No limit

upto 1,50,000

4)Post -construction Interest(Loan for  renewal,repair)

No limit

upto 30,000

5)Condition for loan for construction/acqusition

No condition

Acqisition/construction to be completed within 3 years otherwise interest deduction of Rs 30,000

Hope this article was of some use  to the readers.


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