OFTEN people buy real estate to reduce their income tax burden. It sounds great, but you should never make real estate investment decisions based solely on tax considerations. One must do due diligence and invest on the basis of cash flows, returns, renovation costs, rental income, etc. The I-T Act provides for various deduction and concessions to property holders.

Chargeable to tax

Income from house property is taxable in the hands of its legal owner in whose name the property stands. Ownership includes both free-hold and lease-hold rights and also deemed ownership. Rent earned from leasing of house property, whether for commercial or residential purposes, is chargeable under the head ‘Income from House Property’. Income from a house property located outside India is computed in the same manner as if it is is located in India and rent received is converted as per the rate of exchange for conversion of such foreign currency
into rupee.

What’s chargeable to tax

Income from house property is taxable on the basis of annual value. Even if the property is not let out, notional rent receivable is taxable as its annual value. While computing property income chargeable to tax, one can claim deductions as per the provisions of the I-T Act namely:-

• Municipal taxes paid by the owner are allowed as a deduction from Gross Annual Value
• Thereafter, a standard deduction of a sum equal to 30% of the net annual value
• Interest payable on borrowed capital – Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital is allowed as a deduction.

The amount of interest payable yearly should be calculated separately and claimed as a deduction every year. It is immaterial whether the interest has been actually paid or not during the year. However, interest paid/payable for the period prior to the previous year in which the property is acquired/constructed will be aggregated and allowed in five successive financial years starting from the year in which the acquisition/construction was completed. Here what one can do is take loan jointly like husband & wife  or father & son, and both of them can claim deduction for interest payable on such loan.

After claiming the aforesaid deduction, you may have a loss from house property, which can be set off against income from other heads and the remaining loss can be carried forward to be set off in future as per the provisions of I-T Act.
Another stream of income that may arise to a property owner is capital gain arising on sale, which can be short term or long term, depending upon the period of holding. However, if one is in the business of sale or purchase of house property, income arising therefrom is chargeable under the head ‘Business Income’. One can claim exemption from long-term capital gains if the sale consideration is invested in a new residential house or purchase if bonds of NHAI or REC.

In case of transfer of house property by resident transferor to resident transferee, there will be a tax deduction at source (TDS) at the rate of 1% of the amount, if the amount is above R50 lakh.

The writer is managing partner, Nangia & Company. Inputs from Neha Malhotra