Tax planning for your income from house property

The Income Tax Act divides the income received by a person into five different heads. One of them is the income from house property that comprises the income earned by a person through the property(s) owned by him/her.

Property covered under income from house property essentially comprises any building (house, office building, godown, factory, hall, shop, auditorium, etc) and/or any land attached to the building (e.g. compound, garage, garden, car parking space, playground, gymkhana, etc.)

(However, income from vacant land is not covered this head. It is covered under another category of income viz.income from other sources.)

As may be seen from the example below, the calculation of income from house property is quite simple.

How to compute income from house property

From the total annual rental income, you have to reduce the taxes paid to the local municipal authorities during the year to arrive at the net rental income. (Note: In case some rent cannot be realised then such amount can be reduced from the total rent.)

Of this net rental income, 30% is allowed as a standard deduction. Further, you can also deduct the interest paid on the loan taken to acquire the said property to arrive at the income from house property that would be liable for taxation.

Annual rental income:

Your rental income will be higher of (a) the rent actually received/receivable by you and (b) the annual letable value (i.e. the amount for which the house property may reasonably be expected to let from year to year on a notional basis).

In other words, even if you don’t actually rent out your property, you have to still consider the market rent (that you could have otherwise earned) as the notional income and pay tax on it. Therefore, it may be prudent to rent the property instead of keeping it locked.

Renting is important from the wealth tax perspective also. You have to pay wealth tax on all your properties (except one self-occupied property) unless they have been rented out.

Self-occupied property:

For a self-occupied property you have to take rental income as zero in the aforesaid calculation. Accordingly, you will not get credit for any municipal taxes paid nor will there be any standard deduction. But yes, you can deduct the interest paid on the loan availed subject to a specified limit (discussed later).

As you will note, the income from a self-occupied property will always be zero or negative (to the extent of interest paid or the specified limit, whichever is lower). This loss from self-occupied property can be adjusted against your income from other sources such as salary, capital gains, business etc. and hence reduce your overall tax liability.

Two points regarding self-occupied property

If you own more than one property, you can designate any one of these as self-occupied and pay tax on the others. You can calculate tax liability under various options by treating different house as self-occupied each time and choose the one wherein your tax outgo is minimum. Moreover, you can change this option from year to year.

If you own just one house and you are unable to occupy it on account of your profession being at a different place, this house will be treated as self-occupied (provided, of course, it has not been actually rented out) i.e. here you do not have to assume any notional income.

Interest on borrowed capital:

For the self-occupied property, there is a limit to the interest that you can deduct. If the property is acquired or constructed after April 1, 1999 (and such acquisition/construction is completed within three years) then you are allowed to claim deduction of interest up to Rs.1.5 lakh. For loans taken to repair or reconstruct the house (and those taken prior to April 1, 1999), the limit is only Rs. 30,000.

However and this important there is no such limit on the interest deduction for all other properties, excepting the self-occupied one. Accordingly, you can take the loan for such property which gives you the maximum benefit.

Thus, taking these provisions of Income Tax Act into consideration, you can work out the most suitable strategy that will keep your tax outgo to minimum and thereby maximize the in-hand post-tax rental income from your property(s).