Jigar M. Patel
International Tax Attorney
While computing the taxable income from a let-out house property (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 (AV) 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.
Practical Case Studies
Keeping in view the benefit of the above referred two deductions, a taxpayer can enjoy quite significant tax savings while computing his tax liability on rental income, as will be evident from the practical case studies presented hereunder:
Case Study-1: Sheth purchases a residential flat for Rs.1 Crore from his own capital and gives it out on monthly rent of Rs.50,000. The municipal taxes are to be borne by the tenant. In this case, the AV of the LOP will be Rs.6 lakhs. However, considering the Standard Deduction of Rs.1.80 lakhs (at 30% of the AV), the taxable income from property will be Rs.4.20 lakhs
Being in the tax bracket of 31.20%, the income-tax on the taxable rent payable by Sheth would be Rs.1,31,040. Considering the benefit of Standard Deduction, the effective tax rate would work out to 21.84%, much lower than his applicable tax rate of 31.20%.
Case Study-2: Mishra constructs commercial premises for Rs.2 Crores utilizing Rs.50 lakhs out of his own funds and borrowing Rs.1.50 Crores at 10% interest per annum. He lets out the property at an annual rent of Rs.30 lakhs. The annual property taxes of Rs.5 lakhs are borne by Mishra.
In this case, the AV will be determined at Rs.25 lakhs after deducting the property taxes from the rent received. Considering the Standard Deduction of Rs.7.50 lakhs (at 30% of AV) and Interest payable on Borrowed Capital of Rs.15 lakhs (at 10% of Rs.1.50 Crores), the net taxable income will be Rs.2.50 lakhs and if Mishra is in the tax bracket of 34.32% (his total income being above Rs.50 lakhs), the income-tax thereon will work out to Rs.85,800.
Keeping in view both the deductions enjoyed, the income-tax of Rs.85,800 on the liquid income of Rs.10 lakhs (after deducting interest of Rs.15 lakhs and property taxes of Rs.5 lakhs from the rent of Rs.30 lakhs), effectively works out to just around 2.86% of the rent of Rs.30 lakhs and 8.58% of the liquid income of Rs.10 lakhs.
Loss beyond Rs.2 Lakhs not allowed for Set-off against other income
While planning for rental income, it needs to be borne in mind that as per the provisions of Section 71, any loss arising under the head ‘Income from House Property’ is allowed to be set off against income under any other head only to the extent of Rs.2 lakhs and any loss beyond this amount shall be carried forward to the following assessment year, to be set-off against the income from house property assessable for that assessment year. Such carry forward and set-off is permitted up to eight assessment years, immediately succeeding the assessment year for which the loss is first computed.
