Property pangs for income tax payers

The calculation is based on annual value, not on actual income.

While calculating the tax liability for an assessee, five heads on income are taken into consideration. These are income from salary, house property, business or profession, capital gains and other sources.

Among these, computation of house property income is the most complicated, as this is the only income which is taxed on a notional basis. That is, the tax is based not on the actual income earned but on the inherent capacity or potential of the property to generate income, also known as Annual Value (AV).

HOW IS AV DETERMINED?
A single self-occupied property is not charged any tax. But the tax liability comes into play when the taxpayer has more than one property. Then, the AV of any one house, depending on his/her choice, can be taken as zero. The tax department will consider that the other properties have been rented out and taxed on a notional AV. However, the taxpayer is given the option to choose the property he wants to bring under the tax net every year.
 

HOUSE PROPERTIES
	I	II	III	IV
Fair Rental Value	34,000	25,000	28,000	52,000
Municipal Value	30,000	20,000	32,000	48,000
Standard Rent	36,000	15,000	NA	44,000
Actual Rent	32,000	30,000	25,000	40,000
Annual Value	34,000	30,000	32,000	44,000
*All figures in Rs

Arriving at the AV, in case of rented properties (or more than one self-occupied property, as the case may be). Here, the AV figure is taken as higher of the actual rent received or the sum for which the property might be expected to be earn 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 (MV) of the property or its Fair Rental Value (FRV) has to be chosen, taking into account its size and area in which it is located.

However, where such property is governed by a Rent Control Act, the standard rent fixed thereof will have to be taken for determining the AV.

In sum, the AV of a rented property will be the higher of the MV or the FRV, but restricted to the standard rent. However, if the actual rent received or receivable exceeds this, then such actual rent will be taken as the AV. The following table will make this point clearer.

BUT THERE ARE DEDUCTIONS...
From the AV of the property, any municipal taxes levied by the local authority can be deducted, even if they are paid for past (arrears) or future (advance) years. But such deductions are allowed only if the municipal taxes are borne and have been actually paid during the year by the owner. Taxes due but not paid are not allowed as a deduction.

For each year, the municipal taxes actually paid will be allowed as a deduction from the AV. The value arrived at by deducting the municipal tax is referred to as Net Annual Value (NAV). From such NAV, 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 per cent of the NAV.

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 AV 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 AV is nil, the interest deduction is limited to Rs 1.5 lakh on loans borrowed after April 1, 1999, and Rs 30,000 on loans borrowed prior to that date. Where the property is co-owned, each co-owner is entitled to interest deduction of up to Rs 1.5 lakh. In addition, the Section 80C deduction is available up to Rs 1 lakh on the principal portion of the equated monthly instalment.

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 Rs 5 lakh would be available to them on their combined income.

Also, where a borrower raises a fresh loan to repay the original loan, the interest paid on the second loan would also be allowed as a deduction, as detailed above.

FOR UNDER-CONSTRUCTION PROPERTY
Both the concessions and 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 ready for occupation and the municipal AV 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 instalments, starting from the year in which the acquisition/construction was completed and each of the four immediately succeeding years.

The limit of Rs 1.5 lakh includes the current year’s interest, as well as the instalment of pre- acquisition/construction period. For example, say the pre-construction period interest amounts to Rs 5 lakh and the current year’s interest amounts to Rs 80,000. Now, Rs 5 lakh 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 Rs 1.8 lakh (Rs 1 lakh + Rs 80,000), whereas in the case of a self-occupied property, the deduction would be limited to Rs 1.5 lakh.

The writer is Director, Wonderland Consultants