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.