by Mr. Adhil
Shetty, BankBazaar.com
Timing is significant
in financial planning especially when you are looking to earn a profit as you
need to know when to take advantage of the increase in value.
However, it is
equally important to be careful to avoid paying a huge amount as income tax.
Mr. Amit learned this
lesson when he sold his house in Delhi in 2012 within two years of purchasing.
Tax
Exemptions on Home loan...!
According to him the
property was raking him 60 % profits, an offer he could not resist. However, he
was not aware of the income tax implications of his rushed decision.
Not only he had to
pay a considerable amount of tax on the profit, but also had to let go of the
tax exemptions he was availing on his housing loan.
If you sell your
house within three (3) years of purchase, the income tax benefits you are
enjoying on your house loan get reversed and are included in your income when
you file your income return.
After presenting its
compassionate side, the Income Tax Act eyes all properties owned by you for
taxation. This includes property from which you are earning that is let out
property as well as any other property which it is vacant and not rented out
(known as Deemed to be Let Out Property / or DLOP) as the annual value of the
property after standard deductions is taxable under Sec 24B under the head
income from house property.
However, if you own a
farm house, it is considered an agriculture income & does not fall under
the income tax net.
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| Adhil Shetty, CEO, BankBazaar.com. |
Let Out
Property..!
A scenario where an
individual enjoys a fixed income from a property in the form of rent, it is
known as let out property(LOP). The
annual value of the property is calculated through the following steps:
1. ^ Find out the expected rent from the property
by comparing the rents of similar kinds of property in different areas and use
whichever is higher
2. ^ Calculate the actual rent received in a year
3. ^ Take the amount
which is higher (from steps 1 and 2)
4. ^ Calculate the
amount lost while the place is vacant in a financial year
5. ^ The difference between 3 and 4 is the annual
value of the property, known as the Gross Annual Value (GAV)
6. ^ The net annual
value of the property can be calculated by subtracting municipal tax from the
gross annual value Deemed to be let out property (DLOP)
If a taxpayer owns
more than one residential property, he/she can treat only one of those as self
occupied while others will be treated as a ‘deemed to be let out property’, the
benefit for which can be claimed under Section 23 (2) on the tax payer’s
choice.
The tax payer is
liable to pay tax on these properties after calculating the GAV which is
calculated the same way as in case of a Let Out Property.
However, the rent
calculated will be the standard rent which has been calculated as per the
municipal laws. If a taxpayer is a landlord and is paying the municipal taxes
for these properties, then both of these will be subtracted to obtain the Net
Annual Value (NAV).
If the tax payer has
four properties, they should preferably consider the property with the highest
GAV as self occupied and the rest should be regarded as DLOPs.
Self
Occupied Property..!
A property is
considered to be self occupied when an individual uses it for their own living
purpose. If they own more than one property, only one can be considered as a
self-occupied property & the rest
are considered to be LOPs or / DLOPs. Certain important points to be noted here
are:
* ^ A property is not
taxable under house property taxes if it is used for commercial purposes.
* * The NAV on the
property will be zero if the property is occupied throughout the financial
year.
* * However, if it is occupied for some part of
the year and procured income - rent - then the LOP will be calculated for the
time period it was let out. The annual value will be calculated in the same way
as the LOP.
Deductions..!
* A tax payer can
claim the following deductions from the NAV under section 24 (b):
* Standard Deduction
under Section 24 (a): Possession of a residential property leads to high
maintenance cost; however, regardless of the fact whether the taxpayer has
incurred any expense or / not, they can claim a flat exemption of 30 % on the
NAV of the property.
This deduction is
applicable only for an LOP or / DLOP.
In case of a self
occupied property, a taxpayer is not eligible to claim any deduction as the NAV
of the property is nil.
Interest on borrowed
capital under Section 24 (b): The interest paid on the housing loan capital by
a tax payer is exempted under section 24 (b) regardless of the fact whether the
property is self occupied or / not.
It is, therefore,
important to understand the taxes applicable on house property and work out an
arrangement that is both beneficial and convenient for a taxpayer.
Mr. Adhil Shetty is
CEO at BankBazaar.com
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