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.