How to save tax through mul­ti­ple prop­er­ties

If you own more than one prop­erty the sec­ond house at­tracts tax, but the law al­lows as­sessees to claim de­duc­tions on hous­ing loan in­ter­est HOUS­ING LOAN BOR­ROWED AND IN­TER­EST PAID HOUS­ING LOAN BOR­ROWED


One of the most popular av­enues for in­vest­ment is an ad­di­tional house prop­erty. Its value not only ap­pre­ci­ates in the long term but also helps the in­vestor mit­i­gate the risk of in­fla­tion.

An in­vestor, how­ever, needs to be mind­ful of the tax im­pli­ca­tions on the ad­di­tional house prop­erty, es­pe­cially in case of a va­cant prop­erty. It must be noted that tax im­pli­ca­tions will mean ad­di­tional taxes; but not al­ways. Gen­er­ally taxes are levied only on ‘ real in­come’. How­ever, an ad­di­tional house prop­erty which is re­tained as va­cant or is used by the owner for his per­sonal pur­pose has tax im­pli­ca­tions. The deemed rent from the prop­erty is charged to tax, es­pe­cially of the prop­erty is let out.

As per the In­dian In­come Tax law, if a per­son owns more than one house prop­erty and th­ese prop­er­ties are not let out, one prop­erty may be con­sid­ered as self-oc­cu­pied by the owner and the other prop­er­ties con­sid­ered as ‘deemed to be let out’.

Where a prop­erty is con­sid­ered as deemed to be let out, no­tional rent for such prop­erty is re­quired to be of­fered for tax. The no­tional rent is usu­ally determined based on the rent re­ceiv­able for a sim­i­lar prop­erty in the same lo­cal­ity. The ex­pected rent of a sim­i­lar prop­erty may be sub­jec­tive and could de­pend on var­i­ous fac­tors like qual­ity of con­struc­tion, in­te­ri­ors pro­vided and other fea­tures. In such sit­u­a­tions, an in­di­vid­ual should en­sure that a best es­ti­mate is used to ar­rive at the ex­pected rent, and the in­di­vid­ual should be able to sub­stan­ti­ate the same if any ques­tions are raised by the rev­enue au­thor­i­ties.

The in­tent of law seems clear; to curb the ma­li­cious prac­tice of as­sessees not dis­clos­ing the rent re­ceived from the sec­ond prop­erty and to dis­cour­age un­oc­cu­pied prop­erty. It should be noted that even if both the prop­er­ties are va­cant or are self-oc­cu­pied, deemed pro­vi­sions will ap­ply.

While a no­tional in­come is re­quired to be of­fered to tax as rent from the prop­er­ties that are not let out, the law al­lows the as­sessee to claim de­duc­tions as if the prop­erty is let out.

In­ter­est­ingly, some­times this may lead to a ben­e­fi­cial sit­u­a­tion for as­sessees as they may be able to claim a de­duc­tion of the hous­ing loan in­ter­est with­out any re­stric­tion. For the tax year 2015-16, the limit for in­ter­est on house prop­erty is ₹ 2,00,000 on self- oc­cu­pied prop­erty. Con­sid­er­ing t he house prop­erty for which there is a higher in­ter­est payable on hous­ing loan as a deemed letout house prop­erty, it would be ben­e­fi­cial to the owner.

In ad­di­tion to the above de­duc­tion, one may also claim a de­duc­tion for the mu­nic­i­pal taxes paid to the lo­cal au­thor­i­ties dur­ing the fi­nan­cial year. Fur­ther, a stan­dard de­duc­tion of 30% is also avail­able to the owner of the house prop­erty. Th­ese de­duc­tions would have oth­er­wise not been avail­able, if the prop­erty was self-oc­cu­pied.

Th­ese de­duc­tions from the no­tional in­come may also re­sult in a loss from house prop­erty. To un­der­stand the above bet­ter, let us con­sider the be­low il­lus­tra­tions, where the same prop­erty is con­sid­ered as self-oc­cu­pied and also as deemed let out: An­nual rent re­ceiv­able from house prop­erty: ₹ 2,40,000 In­ter­est on hous­ing loan per an­num: ₹ 5,00,000 Mu­nic­i­pal taxes paid: ₹ 1,000 Based on the il­lus­tra­tion 1, one can see that the loss from the house prop­erty would have been ₹ 2,00,000 if it was con­sid­ered as self-oc­cu­pied. It is evi- An­nual value Less: Mu­nic­i­pal taxes Net an­nual value Less: Stan­dard de­duc­tion @ 30% Less: In­ter­est on hous­ing loan In­come/ Loss from house prop­erty Nil Nil Nil Nil dent from the above that there is higher loss from the house prop­erty con­sid­ered as deemed let out. How­ever, the sce­nario changes when there is no in­ter­est pay­ment made, as shown in il­lus­tra­tion 2. When the two are com­pared, read­ers will no­tice that there is a loss from house prop­erty of ₹ 3,32,700 in the for­mer and in­come of ₹ 1,67,300 (and con­se­quently ad­di­tional tax li­a­bil­ity) in the lat­ter.

The loss re­sult­ing from the house prop­erty, if any, may be ad­justed against any house prop­erty in­come or any other in­come of­fered to tax in the same An­nual value Less: Mu­nic­i­pal taxes Net an­nual value Less: Stan­dard de­duc­tion @ 30% Less: In­ter­est on hous­ing loan In­come/ Loss from house prop­erty Nil Nil Nil Nil fi­nan­cial year. The loss may also be car­ried for­ward for the next seven fi­nan­cial years and ad­justed with any house prop­erty in­come aris­ing in those years.

One needs to be cog­nizant of the fact that an ad­di­tional va­cant house prop­erty has tax im­pli­ca­tion. Hence, be­fore in­vest­ing in a house prop­erty one should be clear about the ob­jec­tive of the in­vest­ment and un­der­stand the cost of main­tain­ing the house prop­erty in­clud­ing the tax cost and com­pli­ances in­volved.


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