Jigar M. Patel
International Tax Attorney
Income from house property for purposes of income-tax is based on the concept of ‘annual value’ of the property. The annual value of house property is the estimated rental value of the property, rather than its actual rent. The calculation of the annual value of a house property is based on the factors such as the property’s location, size, amenities, rental rates in the area, etc. If, however, a house property is occupied by the taxpayer for the purposes of his business or profession carried on by him, value of such property is not chargeable to income tax.
Computation of Income from a Let-out House Property
The Annual Value (AV) of a Let-out property (LOP) is determined on the basis of the following:
- The fair rental value of the property, not exceeding the standard rent determined or determinable under the relevant Rent Control Act.
- Actual rent received or receivable, if such amount is higher than the fair rental value.
- Where the property has remained vacant for whole or part of the year and owing to such vacancy, the rent received or receivable is less than the fair rental value, such lesser amount.
Attractive Tax Deductions from Rental Income
While computing the taxable income from LOP, whether residential or commercial, the taxpayer can enjoy attractive tax deductions from the rental income. This includes interest payable on borrowed capital for acquiring the house property without any monetary ceiling and Standard Deduction of 30% of the annual value of the property. Such AV is computed after deducting municipal taxes from the rent received, if the liability to pay taxes is borne by the owner.
Benefit available even under the New Tax Regime
It needs to be borne in mind that taxpayers opting for the beneficial tax rates under new tax regime as per Section 115BAC, cannot claim any benefit for deduction up to Rs. 2 lakhs in respect of interest payable on housing loan for a self-occupied house property available under the provisions of Section 24.
However, it must be noted that under the new tax regime, for purposes of computation of income from let-out property, there is no bar for claiming deduction in respect of interest payable on borrowed funds for purchase or construction of such property. In fact, there is no monetary ceiling as regards the amount of interest deductible against the rental income, received by a taxpayer.
In a situation where the deductions against the rental income result in a loss, it needs to be kept in mind that the provisions of Section 71 allow set off of such loss against income under any other head, only to the extent of Rs. 2 lakhs and any excess is required to be carried forward for set-off against income under the head house property in the subsequent years.
Case Study: Mehta purchases a property for Rs.2 crores, funding it partly with a 10 years loan of Rs.1 crore, at 10% interest. He lets out his property, earning an annual rent of Rs.20 lakhs. Considering the annual interest payable on EMI basis of Rs.9,72,000/- and the standard deduction of Rs.6,00,000/- (30% of Rs.20 lakhs), Mehta’s net taxable income under the head property would be Rs.4,28,000/-. Mehta, being is in the tax bracket of 31.20%, the tax payable would be Rs.1,33,536/-.
Considering the benefit of the attractive deductions available against the gross rental income of Rs.20 lakhs, the tax payable of Rs.1,33,536/- works out to just around 6.68% of this income.
