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EXEMPTED INCOME FROM HOUSE PROPERTY &

DIFFERENT TYPE RENTAL VALUES

INTRODUCTION

Income from House Property is clubbed with the total income while filing Income
Tax Return. One of the most common query is received is on how to calculate income from
House Property. Income from House Property arises when you have a property which is Let
out Property i.e. you receive Rental Income from such property. Though this head is titled
as Income from House Property but it is not necessary that you only gain income from House
property. In case of Home Loan, Income from House Property can be negative i.e. you may
incur Loss from Let out property when Home Loan Interest outflow outweigh the Rental
Income. In another scenario, in case of Self occupied property for sure you will incur Loss
from Self occupied property as Gross Annual Value of Self occupied property is Zero subject
to max limit under income tax act. Any loss from self occupied property is also reported
under Income from house property.

EXAMPLE

Calculation of Income from House Property is very complicated in case you have
multiple properties either within city of residence or in different cities. As per Income Tax
department, Basic thumb rule is that if you have 2 properties then 1st one is considered as self
occupied and 2nd one is Let out property. It is your choice, which one you declare self
occupied and by default 2nd one is Let out Property. Through intelligent tax planning,
Income from House Property can help you save income tax on Mortgaged Let out
property.

In short, if you have availed Home Loan on Let out property then you can claim
income tax deduction on interest component at actual value i.e. actual interest paid and claim
Loss from Let out property. Please note that this section/head is not applicable for clubbing
income from letting out land parcel or vacant plot. Income from Vacant plot is clubbed/taxed
under Income from other sources or Business Income.

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Only exception is land which form part of building like courtyard etc which can be
charged under Income from House Property. Income from any structure like
residential/commercial unit including shop, godowns, office, agricultural land, manufacturing
unit etc which can be rented out is clubbed under Income from House Property. If the
property is used for own business or profession then it cannot be taxed under Income from
House Property. Some of the most common scenarios of Income from House Property which
is Let out are

1. You own a property but it is located in different city i.e. you stay in city A and
property is in city B

2. You own 2 properties in same city. In this case, it is beneficial to declare property
on Home Loan as Let out and 2nd one as self occupied. It is your choice to declare a
particular property as Self occupied or Let out. In case both properties are on Home Loan
then the property with max interest outflow can be declared as Let out property and other one
as self occupied property.

3. Though it can be disputed but if you have single property in same city of residence
then you can rent out your property and declare it as Let out property. You can stay on rent
near to your workplace. You can also claim HRA in this case. Only catch is that you need to
prove that your workplace is far from from your own property.

Rental Income from House Property

Calculation of Rental income is most tricky party. In order to save tax, a tax payer
would like to declare lowest rent but it is advisable to calculate rental income in fair and
transparent manner as per income tax act. In many cases, it is observed that my clients
declared 2nd property as vacant therefore zero rental income.

Unfortunately, even if the property is vacant you need to declare notional or fair rental
value of property for Income tax purpose. Income from vacant house can be declared under
Income from other sources in ITR whereas self occupied and rented property is declared
under head Income from House Property. Rental income is also loosely referred as Net
Annual value of House Property. There are 4 standard methods to calculate rental income.

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I will explain with an example for easy calculation

A = Actual Rent Received: For let out property, actual rent received is as per
agreement between owner and the tenant. Any payment by tenant on behalf of owner is also
clubbed under Actual Rent Received. Example: Tenant is paying a rent of Rs 15000 per
month to owner for property A

B = Fair Rent: It means how much rental income a similar property in vicinity can
fetch with similar facilities and amenities. Example: Fair Rent for Property A is Rs 17000 per
month

C = Standard Rent = Rent fixed under Rent Control Act: States like Maharashtra
have Rent control act, under which rent specified under Rent Control Act is fixed even if is
meager amount. Example: Standard Rent of Property A is Rs 12000 per month

D = Municipal Value: It is similar to circle rate or guidance value. Rental value is


fixed by local municipal corporation or municipal committee. Example: Municipal value of
property A is Rs 10000 per month

After calculating above mentioned values, Notional Rental Income from House
Property can be calculated as per following formula as mentioned in income tax act.

Z = Higher of B or D i.e. Higher of Fair Rent Value or Municipal Value. In this case
it is higher of Rs 17000 or Rs 10000 = Rs 17000 per month

Y = Expected Rent = Lower of Z or C i.e. Lower of Rs 17000 or Rs 12000 = Rs


12000 per month

Gross Annual Value of Property = Higher of Expected Rent or Actual Rent


Received = Higher of Y or A i.e. Rs 12000 or Rs 15000 = Rs 15000 per month or Rs
1,80,000 p.a.

Therefore in this case, Actual Rent Received is Gross Annual Value of Property.
Though it may not be true every time. In most of the cases, Actual rent received is Gross
Annual Value of Property for the purpose of calculation of Income from House Property.

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If in your area, any particular value is not available or not declared then you can take
it as Zero. Net Annual Value is Gross Annual Value minus Municipal taxes like property
tax, sewerage tax etc. For calculation of Net Annual Value, the Municipal Taxes for Income
from House Property will be considered as Zero if it is not paid by the owner of the property.
For e.g. If municipal taxes is paid by the tenant then it will be clubbed under Actual Rent
Received therefore will be Zero and Net Annual Value will be same as Gross Annual Value.

Assuming Rs 10,000 as Municipal taxes per annum paid by owner in this case. Net
Annual Value = Rs 1,80,000 Rs 10,000 = Rs 1,70,000. If the property was let out for part
of year and vacant for rest of the year. In this case, assuming Actual rent received is less
than value of Y. Only for this scenario actual rent received will be considered as Gross
Annual Value of Property even though it is less than Y.

Deduction on Home Loan Interest (Interest on Borrowed Capital): For let out
property, Actual Interest paid on Home Loan during Financial year is allowed as deduction
for calculation of Income from House Property. Besides Home Loan, if the loan is availed for
repair, construction, extension or renewal of property, the deduction on interest component is
allowed at actuals. Any brokerage or commission for Home Loan is not allowed as deduction.
Assuming actual interest paid during Financial year is Rs 3,00,000. Therefore Income from
House Property will be calculated as follows

Income from House Property = Net Annual Value 30% of Net Annual Value
Actual Interest Paid on Home Loan

Income from House Property = 1,70,000 30% of 1,70,000 3,00,000 = 1,81,000

In this case there is a loss of Rs 1,81,000 from let out property. This loss can be
adjusted against income in ITR under the head income from house property thus it will
reduce income tax liability.

CONCLUSION

In case of Self occupied property, Gross annual value is NIL as property is not on
rent. Net Annual Value is also NIL as you cannot deduct Municipal Taxes for self occupied
property.

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Standard deduction towards repair and maintenance is also not allowed. You can only
avail deduction towards Interest on Borrowed capital i.e. Home Loan Interest subject to max
limit of Rs 2,00,000 (Increased to 2,00,000 in budget for FY 2014-15 from Rs 1,50,000 in FY
2013-14). Considering the same example and assuming same property A is self occupied
instead of being let out. Actual interest paid is same Rs 3,00,000. Income from House
Property for self occupied property can be calculated as follows:

Income from House Property = Net Annual Value 30% of Net Annual Value
Interest Paid on Home Loan (Subject to max limit of Rs 2,00,000 in case of Home Loan and
30,000 if the loan is availed for repairs, renewal etc)

REFERENCES

http://incometaxmanagement.com/Pages/Gross-Total-Income/House-
Property/Incomes-Exempted-from-House-Property.html
http://www.charteredclub.com/income-from-house-property-deductions/
http://www.nitinbhatia.in/personal-finance/income-from-house-property/
https://www.bankbazaar.com/tax/how-calculate-income-from-house-
property.html
http://www.business-standard.com/article/pf/how-to-calculate-tax-on-house-
property-income-114031200127_1.html