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Income from house property encompasses all income from land and building and other real estate assets. It is defined as income from, 'house property which consists of any building or land appurtenant thereto of which the assesse is the owner'. (IT Act, 1961). 'House property' includes flats, shops, office space, factory sheds, agricultural land and farm houses, godowns, cinema buildings, workshop buildings and hotel buildings. However, income from vacant or open plots of land without any construction is taxed under 'Income from Other Sources or as business income.
Basis of charge and applicability
The annual value of property consisting of any building or lands appurtenant thereto of which the assesse is the owner shall be subject to Income-tax. Further, the following conditions must be fulfilled. The property must consist of buildings and lands appurtenant thereto, while the assesse must be the owner of such house property. Though the property may be used for any purpose, it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax. (IT Act, 1961).
It is important to note that ownership of property includes lease-hold rights, free-hold rights and deemed ownership. 'Owner' for this purpose means a person who can exercise the rights of the owner not on behalf of the owner but in his own right. A person entitled to receive income from a property in his own right is to be treated as its owner, even if no registered document is executed in his name
Determination of Gross and Net Annual Value
For tax purposes, property is taxed on the basis of an "Annual Value'. Section 23(1) (a) of the Income Tax Act says that the annual value any property is the sum which the property might fetch when let out for rent. This is calculated on the basis of actual rent received or receivable, municipal value, fair rent of the property and standard rent. Further, annual rent is the sum left after deducting municipal taxes.
This can be explained as follows: determine Gross Annual Value as above, and from this deduct municipal taxes actually paid. This will give the net annual value which is the subject matter of income tax.
Self-Occupied and Let out House Property
Property consists of self-occupied property, which is property used by the owner for his/her own personal purposes. Let out house property is property that is let out on rent. This distinction is important as tax treatment differs for the two conditions.
Deductions and Special provisions
Standard deduction - An assesse is allowed a deduction of 30% of the annual value of any property he/she owns. This is allowed for routine expenses like maintenance etc.
Interest on borrowed capital - Interest on amounts borrowed for purposes of construction, repairs, renewals and purchase of property is allowed as a deduction. The interest should be computed and claimed separately. It is immaterial whether the interest has been actually paid or not paid during the year. [Circular No. 363, dated 24.06.1983]
The most important thing to bear in mind is that these deductions are person specific and not property specific.
New measures - In the 2016 Budget a provision 80EE has been introduced. An additional deduction for interest to the tune of Rs. 50,000 can be availed, subject to the following conditions:
This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs. 35 Lakhs. The loan should be sanctioned between 1st April 2016 and 31st March 2017. The benefit of this deduction would be available till the time the repayment of the loan continues.
Tax planning tips
Financial advisors can play a useful role in advising clients on investment strategies while assessing their portfolios. House property when used judicially can be a good source for tax savings, which revolve around principles embedded in the Act itself.
Self-occupied property: The main benefit is that one can claim interest on borrowed capital even though there is no formal income inflow from the property. The limit is for deduction of interest is Rs.2,00,000. This amount will lower the overall taxable amount. Another Rs.1,50,000 is available for repayment of the principal amount under section 80C. However, this is valid only for fully constructed houses. Interest during construction period is accumulated and written off once construction is over. If the house is sold before five years have elapsed after construction, the principal payment is deemed as income of the year in which the deduction is claimed and taxed.
Let out property: When property is let out and rent is received, apart from the standard deduction to cover repairs, maintenance and such expenses, municipal taxes actually paid can be claimed. Further 30% can be deducted for repairs and maintenance. This means that only 70% of income from house property is taxable; a huge saving.But the icing on the cake is that the entire amount of interest paid on housing loans can be claimed without any limit.
If rent collected is Rs.120 and Rs. 20 is paid as municipal taxes this would give a net annual value of Rs.100. Of this 30% or Rs. 30 can be claimed as standard deduction.
Other tax saving measures can be as follows:
Owning property jointly: This will split the income among multiple owners. In this case, the owners can avail of a joint loan as well. The advantage would be that the interest and principal amounts paid can be claimed separately and to the full extent by each joint owner.
Managing multiple properties: Only the property registered as one's residence will fall under the 'self-occupied' property status. Hence choose the property with the highest income as your self-occupied property and declare the rest as let out properties. Please remember that empty houses too will be assessed and taxed. Hence take care to let out all properties.
Buying new properties: Equally, if you already have a property in your name, you can buy new properties in the names of your spouses or relatives. Another idea in the same direction would be to settle existing properties on your children, thus freeing yourself to acquire new properties.
Living away: Even in cases where owners are living away from their homes and claiming HRA, benefits under the Income from House Property head can be utilised. Thus investment in property can be used not only to hedge against inflation but can form the basis for sound tax planning in itself.
Capital Gains: Any property that is held for over three years by the original owner or by successors would be deemed to be a long term capital asset. Sale of such assets would be subject to long term capital gains tax at a flat 20% on the value realised. Costs of improvements can be deducted for calculating tax. Another deduction is investment in Capital Gains Bonds, up to a maximum of Rs. 50, 00,000. Investment in a residential property is fully exempt for one house property.
(Table,Business Today, January 2015)
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