Property income — what is self-occupation?

I am an employee unable to occupy the property because of my employment elsewhere. Do I lose the right to exemption under Sec. 23(2)(b) merely because my parents live in it?

The fact that the parents live in it would mean that it continues to be occupied by the owner though not physically by him. The parents are either dependent on him or not dependent. If they are dependent on him, it has to be treated as occupation by himself. If they are not dependent, the annual value is bound to be taken, as it has to be presumed that it has been let out at a value less than the annual value.


Important Facts of Tax Deduction on Home Loan

Though most of us avail home loans, there are a few less-known facts about home loans which are worth knowing.

1. What are the available tax deductions for your under-constructed house?

2. Do you still have tax benefits for the home loan, if you have taken it from your friend and not from Bank?

Many of you might not be having answers to these questions. To be conscious that you are ignorant is a great step to knowledge. So let’s try and explore these new dimensions of home loans.

1. Tax Deductions for Under-Constructed houses

Do you know that you should have a certificate of ownership and possession of the house to claim tax under section 80c? Without complete and proper analysis, investors presume that they can claim for tax deductions of their houses which are under construction and they go ahead with the loans.
Assuming Mr. Gupta has bought a house on loan on 25th November 2009. He totally paid Rs. 5 lacs as interest in next 3 yrs. He obtained possession on 19th Nov 2012. He can claim this Rs. 5 lacs of interest, in equal installments in the next 5 yrs period, which is 1,00,000 per year in 2013 – 2017 . The total limit for this exemption for this interest will still be 2 lacs per year (As increased by Budget 2014).
The above example explains the real scenario i.e. you cannot claim the interest amount but the deductions can be claimed later on in 5 equal installments for next 5 years from the end of the financial year of possession.

2. For Extension or Renovation of House

If you are taking a loan for extending or renovating your existing house, then you can only claim the interest amount under sec 24 and not the principal part under sec 80C. However, the limit in this case is only up to Rs 30,000 for owner-occupied properties. If it is a rented, leased or second home which is not a self-occupied property, then the tax deduction is not limited.

3. Selling a house serving home loan

If you sell your house within 5 yrs from the date of buying, then all the tax benefits which you have claimed under sec 80C will be added in your salary in the year of sale and termed as income.
For example, if you bought the flat in July 2011 and in next 3 yrs you have claimed 2 lac under sec 80C, and then this 2 lac will become your income in the financial year in which you sell the property and will be taxed accordingly. However interest component are not reversed.

4. Loan taken from Friends and Family

Under sec 24, you can claim the interest on the loan up to Rs. 2 lacs per year. You will be able to claim this even if you want to take it from your friends, parents or any other person. However, in order to be applicable for claiming the principal amount under sec 80C, you need to avail the financial lending from some Bank or financial institution only.

Annual value of a property U/s.22 of Income tax Act

Section 22 provides for taxation of ‘annual value’ of a property consisting of any buildings or lands appurtenant thereto. The term ‘buildings’ includes any building- office building, godown, storehouse, warehouse, factory, halls, shops, stalls, platforms, cinema halls, auditorium etc. as long as they are not used for business or profession by owner. Land appurtenant includes land adjoining to or forming a part of the building. It would depend on the nature of the land, whether it is appurtenant to the residential building, factory building, hotel building, club house, theatre etc. and will include courtyards, compound, garages, car parking spaces, cattle shed, stable, drying grounds, playgrounds and gymkhana.

Some critical issues on Section 22

Tax imposed under section 22 is a tax on `annual value’ of house property. The purpose for which the building is used by the tenant is also immaterial.
Income arising out of the building or a part of the building is covered under this section. Existence of a building is an essential prerequisite.
Any income, arising out of vacant land, is not covered under this section even though it may be received as rent, ground rent or lease rent. Such income would be assessable as income from other sources. Even rent, arising out of open spaces, or quarry rent, is taxed as income from other sources.
It does not make any difference, if the property is owned by a limited company, a firm, a HUF or individual.

When the property is used by the owner for his business or profession, the ‘annual value’ of property is not charged in the hands of the owner.
When a firm carries on business or profession in a building owned by a partner, no income from such property is added to the income of the partner, unless the firm pays the partner any rent for the same.

For the purpose of section 22, the owner has to be a legal owner. However, the Supreme Court in the case of CIT v/s. Podar Cement (P) Ltd. etc. 226 ITR 625 (SC). held that ‘owner’ is a person who is entitled to receive income from the property in his own right. The requirement of registration of the sale deed in the context of Section 22 is not warranted.

Annual value of property is assessed to tax under section 22 in the hands of owner even if he is not in receipt of income or even if income is received by some other person.

If the assessee is not the owner of the building, but is a lessee and he sublets the property, he would be taxed under the head ‘Income from other sources’.
Co-ownership: In case where property is owned jointly by two or more persons, and where shares of such joint owners are definite and ascertainable, the income of such house property will be assessed in the hands of each co-owner separately. For the purpose of computing income from house property the rent/ annual value will be taken in proportion to his share in the property. In such an eventuality, the relief admissible under section 23(2) shall also be separately allowable to each such person [Explanation to Section 26]. However, where the share is not definite, the income of the property shall be assessed as that of an Association of persons.(s 26)
Source : Taxguru

Worried About Tax on Rental Income? Here Are the Solutions !

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
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.

Bad Debt
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.

Source : The Quint dt.8.4.2017

Cases where Income from house property is wholly exempted

1. Income from any farm house forming part of agricultural income;
2. Annual value of any one palace in the occupation of an ex-ruler; Section 10(19A)
3. Property Income of a local authority; Section 10(20)
4. Property Income of an authority, constituted for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.);
5. Property income of any registered trade union; Section 10(24)
6. Property income of a member of a Scheduled Tribe;
7. Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
8. Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group;
9. Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
10. Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities;
11. Property income of an institution for the development of Khadi and village Industries;’
12. Self-occupied house property of an assessee, which has not been rented throughout the previous year;
13. Income from house property held for any charitable purposes;
14. Property Income of any political party. Section 13A

How to Compute & Save tax on Income from House Property

House property includes the building itself and any land attached to the building. Property refers to any building (house, office building, warehouse, factory, hall, shop, auditorium, etc.) and/or any land attached to the building (compound, garage, garden, car parking space, playground, gymkhana, etc.). There are many intricacies and types of house property which is calculated in different ways. Taxability may not necessarily be on actual rent or income received. If the property is not let out, the tax will be charged on the potential income the property is capable of yielding.

Before computing income from house property, it is important to understand the following definitions.

• Annual Value: This is the capacity of a property to earn income is its annual value.

• Municipal Value: This is the value of your property as evaluated by municipal authorities on which they charge municipal tax. Municipal authorities have a host of factors that they consider before assigning a municipal value.

• Fair Rental Value: The rent which a similar property with similar features in the same (or similar) area would fetch is the fair rental value.

• Standard Rent: Under the Rent Control Act, a standard rent is fixed and owners cannot receive rent higher than that specified in the Rent Control Act. This Act ensures that owners are paid fair rent, tenants are not exploited and are protected from eviction.

• Actual Rent received/receivable: This is the actual amount received by the owner from the tenant as rent, depending on who pays the water, electricity and other utility bills.

• Gross Annual Value (GAV): This is the highest among:

• Rent received or receivable

• Fair Market Value

• Municipal Valuation
If the Rent Control Act is applicable, the GAV is highest among:

• Standard Rent

• Rent Received

• Net Annual Value (NAV): NAV = GAV – Municipal Taxes Paid

• Deductions: To arrive at the actual taxable income from house property, two deductions are allowed, under Section 24 of the Income Tax Act :

• Statutory Deduction: 30% of the NAV is allowed as a deduction towards repairs, rent collection, etc. irrespective of the actual expenditure incurred. This deduction is not allowed if the Annual Value is nil.

• Interest on borrowed capital: is allowed as a deduction on accrual basis if the money was borrowed to buy/construct the house. Deduction is allowed on whichever is lesser between Rs.1,50,000 or the actual interest amount (in case the construction was completed within 3 years of taking the loan, on or after 1-April-1999.) In other cases, it’s between Rs.30,000, and the actual interest, whichever is less.

• Annual Value: Annual Value = NAV – Deductions.

• Owner/deemed owner: Income from house property is taxable to the owner of the property. The owner is the person who is entitled to receive income from property. This means that income is chargeable to the person who receives financial benefit from the property, even if the property is not registered to him, i.e. deemed owner. A deemed owner is an owner by implication and not necessarily documented registration

How to Save Tax on Income from House Property?
Careful planning can enable you to save a sizeable amount from taxation. Some of the things you can do to save tax are as follows:

• Joint Home Loan – If you jointly own a property with someone and also apply for a joint home loan with your partner, you will both be eligible for tax deductions on interest up to Rs. 1,50,000 each.

• Planning a second home? If you already have one self-occupied property registered to your name and wish to avoid paying taxes on a second home, register the second property on your spouse/relatives name to avoid excess taxation.

• Joint ownership – Taxation on income from house property can be divided between co-owners, and hence lessen the load.

• Ownership of more than one property – If you own multiple properties, only one of these can be registered as your residence and fall under self-occupied property (SOP). It is important to evaluate the tax liability on all your properties and choose the one with the highest tax liability to call home, and let out the remaining. You can also change the SOP every year.

• Empty houses – that you own will still be taxed based on the fair rental value, so it’s advisable to let any and all empty properties out, enabling income and no loss because of taxation.

Tax Benefits of Having a Second Home

Let us Understand tax implications of second home

Some individuals do own second home or plan to own second home. Let us say some individuals are lucky or have worked hard enough to own a second home. Second home is purchased for the following purpose

  • For investment
  • For regular income in form of rent
  • For diversification in the overall investment portfolio
  • For holiday home, etc

Second home is an excellent asset to own. At the same time it is important to understand the tax advantages or disadvantages of owning a second home. The tax implications are very different based on whether the second home is self-occupied or rented out.

Self-Occupied Second Home

For the situation where an individual uses first and second homes for self, then any one of the home based on individual’s choice is considered as self-occupied. The other home is deemed or considered to be rented out, for taxation purpose. For this situation the following tax aspects are applicable.

  1. Notional Rental Income– A notional rental income, is considered as the income from the deemed rented out home. This notional income is added to total income of the individual for income tax computation
  1. Interest Cost Benefit– The interest paid per year, without any limit, on the housing loan for the deemed rented out home is allowed as deduction from the total income. This is different from the self-occupied home, where interest deduction is only limited to Rs 2 lakhs per year

For the situation where the second home is rented out, the following tax aspects are applicable

  1. Rental Income– The rent received is considered as income and added to total taxable income of an individual
  1. Property Taxes Benefit– The property or municipal taxes paid in a financial year are allowed as deduction from the rental income
  2. Repair & Maintenance Cost Benefit – 30% of the annual rental income is allowed as deduction from the rental income. As 30% of the annual rental income is considered as the annual home repair & maintenance cost. 30% of the annual rental income is fixed irrespective of the actual cost of home repair & maintenance cost
  1. Interest Cost Benefit – The interest paid per year, without any limit, on the housing loan for the rented out home is allowed as deduction from the total income. This is different from the self-occupied home, where interest deduction is only limited to Rs 2 lakhs per year

It is a myth or misunderstanding that interest on second home does not provide tax benefit. Rather it is opposite of that – interest on second home provide tax benefit on the complete interest amount, without restriction of Rs 2 lakhs limit per year.

If Assessee owns more than one house property & is kept for own use,

  • one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
  • Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above.

In respect of such deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit. However, for the second house property, no deduction is available for repayment towards the principal portion of housing loan under section 80C.

 In case of second house if the house is yet to be constructed, 20% of the total interest paid during the pre-construction period is also allowed as tax deduction. There is a limit however here which means that this benefit on pre construction house is available for five years.

Suppose you are staying in Mumbai and you buy your second house at Patna. It is obvious that the second house will not be used by you and there is also a likelihood that the house remains vacant and is not put on rent. In a different scenario, let us imagine that you have given the house to your parents for staying and you are not getting any rent. In order to understand what is the tax benefit of the second house, which is a let out house let us imagine the scenario given below.  Suppose you earn Rs.1.5 lakhs on second house as rental after adjusting municipal taxes. So the annual value of property is taken as Rs.1.5lakhs. A standard deduction at the rate of 30% is allowed on let out property. So this works out to be Rs.45000 and you are paying Rs.1.4 lakhs as interest on the loan taken for second house. So the total income from house property will be considered as ( a-(b+c)) as given in the example below.

Second house is let out property a) Rental Income ( Annual Value) Rs. 150000 per annum b) Standard Deduction @30% Rs. 45000 c) Interest paid on home loan Rs. 140000 d)  Income from House property -35000 The negative income from second house is shown as loss from house property and you can reduce this amount from your taxable income. In case an employer does not allow you to adjust loss, you can claim tax benefit while filing tax returns.

Is it not always beneficial to buy second house from taxation perspective, because, There are two scenarios in which you do not get real benefits. Scenario one is when you have paid your home loan and hence there is no interest that is paid on second home. Two, when the interest paid and standard deduction is less than annual value you do not get any tax benefit on second house.