Tax Talk: How to calculate tax on your property

September 15, 2021 1:30 AM

While the appreciation in value of property is taxed at the time of sale as capital gains, concurring rental benefits are taxed on yearly basis in the hands of the owner.

The limit of Rs 2 lakh (in case of self-occupied property and for set-off against other heads of income) applies for aggregate of pre-construction as well as post construction interest.

By Shailesh Kumar

An immovable property has always been considered as a secure mode of investment, especially for long-term investors. Such a property may be acquired for residing or for the sole purpose of enjoying rentals and appreciation benefits. While the appreciation in value of property is taxed at the time of sale as capital gains, concurring rental benefits are taxed on yearly basis in the hands of the owner.

Tax on rentals
While rentals received are taxable under the head ‘house property’, income from sub-letting of property is generally taxed under the head ‘other sources’. In case of jointly owned properties, tax incidence shall be divided proportionately on the basis of share of each co-owner of the property. A house property held for purposes of residing by self and family may not attract taxation up to a limit of two houses, however rentals from a commercial property shall always be charged to tax. Over and above two self-occupied houses, notional rent is taxable in the hands of an individual even though the property may not actually be rented.

While computing the income chargeable from such rentals, the Income-tax Act, 1961 allows certain deductions under this head of income. Apart from deduction of municipal taxes paid by the property owner during the year, a further standard deduction of 30% of the net annual value of rent is provided irrespective of the actual expenses incurred.

This standard deduction is provided to compensate for general maintenance and repair expenses uniformly to all property owners without need to maintain any accounts for such expenses. However, after grant of this standard deduction, no further deduction is allowed for any other expense like maintenance charges in society flats, property insurance, etc.

Interest paid on home loan
The Act also provides certain relief to the taxpayers against the interest paid on home loan which may be for purchase, construction, repair, renewal and reconstruction of the property. The maximum limit for deduction of interest in case of self-occupied is restricted up to Rs 2 lakh, i.e., any interest over and above this monetary limit shall lapse but the Act has not specified any monetary limit for claiming deduction of interest in case of a rented property.
Earlier, the entire loss (i.e. excess of interest expense over rental income, if any) on account of payment of interest on housing loan was allowed to be set off from other heads of income without monetary limit. However, as per amendment vide Finance Act, 2017, now loss of maximum Rs 2 lakh can be set off from other heads of income during the relevant year.

Interest on loan taken for construction is divided into two phases, i.e., pre-construction and post-construction. While post-construction interest is allowed every year, deduction for pre-construction interest is allowed in equal instalments over five years from the year in which the property is acquired or constructed. The limit of Rs 2 lakh (in case of self-occupied property and for set-off against other heads of income) applies for aggregate of pre-construction as well as post construction interest.

Taxpayers can also claim deduction from their total income for principal portion of the home loan under Section 80C (subject to maximum limit of Rs 1.50 lakh) and some additional amount of interest on loan depending upon fulfilment of conditions of Section 80EE and Section 80EEA.

The writer is partner, Nangia & Co LLP

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