The deduction for interest paid on purchase of a self-occupied property is restricted to R2,00,000. However, for a let-out or deemed-to-be-let-out property, the entire interest paid for purchase of the property is allowed as a deduction without any limit. The loss, if any, can be set off against salary or other income during the same year
The Bharatiya Janata Party (BJP) government, in its first full-year Budget, had announced houses for all by 2022. The government had also announced a tax-efficient structure for Real Estate Investment Trusts (REITs) to give the sector a boost. Now, more and more people are looking at real estate as an attractive investment option.
However, one should be aware of tax implications of owning more than one house.
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As per the domestic tax law, if a person owns more than one house and both/all are vacant, only one property can be considered as self- occupied. The other property will have to be considered as ‘deemed to be let out’. This means a ‘notional rent’ of all properties other than the property that is self-occupied will have to be considered as income and be subject to taxation.
The individual has an option to choose the property he/she would like to consider as self-occupied for which the annual value will be considered as nil. The other properties have to be considered as deemed to be let out, if they are vacant.
To arrive at the taxable income, certain deductions are allowed:
a) Municipal taxes paid to the local/municipal authority during the fiscal. Irrespective of the year for which the tax is paid, it will be allowed as a deduction;
b) A flat deduction of 30% of the net amount after deduction of municipal taxes; and
c) Interest taken for purchase/construction of property, depending on whether the property is self-occupied or let out.
There is nothing provided in the law as to what should be considered as notional rent. Typically, the fair rent/ market rent expected in the same locality can be considered as the notional rent. The tax officer may ask for evidence for the notional rent considered for taxing the income from the house.
The deduction for interest paid on purchase of a self-occupied property is restricted to R2,00,000. However, for let-out or deemed-to-be-let-out property, the entire interest paid for purchase of the property is allowed as a deduction without any limit. The loss, if any, can be set off against salary or other income during the same year. Further, the loss remaining, if any, can be carried forward for next eight years to be available for set-off against income from house.
An employee can also disclose the income from house to his/her employer and it would be considered while computing taxes. If the individual suffers a loss from the house property, it will be adjusted against salary income and the employer needs to deduct tax only on the net income.
Hence, a refund situation may be avoided by disclosing the loss on house property to employer for withholding purpose.
So, while investing in real estate seems an attractive proposition, one must also consider the tax cost associated. Accordingly, based on the cost-benefit analysis, one may choose to invest in real estate or make other investments.
By Homi Mistry
The writer is partner with Deloitte Haskins & Sells LLP