Only single property eligible for tax benefit

The five heads under which a taxpayer can earn income are salaries, income from house property, income from business or profession, capital gains and income from other sources. The five

heads under which a taxpayer can earn income are salaries, income from house property, income from business or profession, capital gains and income from other sources. Out of these,

computation of house property income is perhaps the most complicated, as this is the only income that the Income Tax Act (ITA) taxes on a notional basis. In other words, the tax is based not

on the actual income per se, but on the inherent capacity or potential of the property to generate income —- also known as its annual value. Determination of annual value Determining tax

due on property gets complicated as this is the only income that the Income Tax Act (ITA) taxes on a notional basis. A single self-occupied property is not chargeable to tax. If the taxpayer

has more than one self-occupied house, the annual value of any one house, at his option, can be taken as nil. The others will be assumed to have been rented out and taxed on a notional

annual value. The option chosen by the taxpayer can change from year to year. The next step is to see how the annual value is arrived at in the case of rented properties (or more than one

self occupied property, as the case may be). Here the annual value figure is taken as the higher of the actual rent received or the sum for which the property might reasonably be expected to

be rented from year to year. To determine what exactly constitutes the sum for which the property might be reasonably expected to be rented from year to year, the higher of the municipal

valuation of the property or the fair rental value of the property has to be chosen taking into account its size and area in which it is located. However, where such property is governed by

the Rent Control Act, the standard rent fixed thereof will have to be taken for determination of the annual value. The above provisions sound confusing, therefore in a nutshell, the annual

value of a rented property will be the higher of the municipal value or fair rental value, but restricted to the standard rent. However, if the actual rent received or receivable exceeds

such amount, then such actual rent will be taken as the annual value. The table will make this point clearer. DEDUCTIONS AVAILABLE From the annual value of the property as determined above,

any municipal taxes levied by the local authority can be deducted. However, such deduction is allowed only if the municipal taxes are borne and have been actually paid during the year by the

owner of the property. Taxes that are due but not paid are not allowed as a deduction. However, taxes paid during the year are allowed as a deduction even if they relate to past or future

years. That is to say that for each year, the municipal taxes actually paid will be allowed as a deduction from the Annual Value, it doesn’t matter if such taxes are paid in advance or in

arrears. The value arrived at by deducting the municipal tax is referred to as net annual value. From such net annual value, deductions under Section 24 as detailed below are allowed and the

balance finally is the taxable income under the head ‘Income from House Property’. Section 24 basically offers two deductions. The first one is a statutory deduction of 30% of the net

annual value. This is similar to the standard deduction that was available on salary income. The second deduction is to do with interest payable on properties bought on mortgage. For rented

properties (or where the deemed annual value is taxed in the case of more than one self occupied property) the full amount of interest paid without any limit is allowed as a deduction. In

the case of a self-occupied house, where the annual value is nil, the interest deduction is limited to Rs1,50,000 on loans borrowed after 01.04.99 and Rs30,000 on loans borrowed prior to

that date. Here it may be noted that where the property is co-owned, each of the co-owner is entitled to the interest deduction of up to Rs1,50,000. Plus readers would know that Section 80C

deduction is available up to Rs1,00,000 on the principal portion of the EMI. This deduction is also available to each co-owner. Therefore, in the case of a husband and wife, if the property

is bought jointly, then an aggregate deduction of Rs5,00,000 would be available to them on their combined income.  Also, where a borrower raises a fresh loan in order to repay the original

loan, the interest paid on the second loan would also be allowed as a deduction as detailed above. Interest of pre-construction period Both the concessions, deduction for repayment of

capital and deduction of interest are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be

ready for occupation and the municipal annual value should be known. The interest paid for the years prior to the year in which the property was completed, is deductible in five successive

yearly installments, starting from the year in which the acquisition/construction was completed and each of the four immediately succeeding years. Note that the limit of Rs1,50,000 includes

the current year’s interest as well as the installment of pre-acquisition/construction period. For example, say the pre-construction period interest amounts to Rs5,00,000 and the current

year’s interest amounts to Rs80,000. Now, Rs5,00,000 is to be spread over five years beginning from the year in which the construction is completed. So for that year, in the case of a rented

property, the taxpayer can avail of a deduction of Rs1,80,000 (Rs1,00,000 + Rs80,000) whereas in the case of a self-occupied property, the deduction would be limited to Rs1,50,000. _— The

writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at [email protected] _