The present article is framed, presenting an overall idea on the income earned from house property. There are basically 2 types of income relating to it, (A) rental income (B) capital gain arising from selling out the property.

Taxation of rental income

Income from house property is the only income charged to tax on notional basis. The first property purchased is free from taxes with a condition that it’s not been rented out. Whereas, from second property onwards they become taxable and a notional rent value on the basis of market rental value becomes applicable, even if its closed and not in use. It would be a wise decision to rent out the second property as its mandatory to pay taxes.

Computation of rental income

The gross rent needs to be greater than the three mentioned below:

1)    Rental valuation as fixed by municipal corporation on the basis of locality and value of the property

2)    Actual rent received by you from your tenant during that financial year

3)    The rent of a similar property in same or similar locality

Property tax is deducted from gross rent to arrive at net annual value of the rental income

  1. Possible deduction from annual value of the rental income apart from actual municipal taxes:

1)    Standard deduction of 30% for repairs, maintenance, etc irrespective of actual amount spent during a financial year

2)    Interest paid towards loan if the house is purchased on mortgage.

3)    Any property insurance premium paid during that financial year

In case the property is tax-free than the deduction related to interest paid by you is limited to Rs.1.5lakh. However for property that attracts taxes, the entire amount of interest paid is deduced. The amount of interest generated can be adjusted against the rent and the remaining interest amount can be carried forward denoting it as loss from house property for an uninterrupted period of 8 years. Further it’s compulsory to file the tax return by 31st July for individuals if they wish to carry forward losses. Late filing or no filing of return will not allow any carry forward of losses.

Capital gain arising from selling out the property

The profit amount generated if in case you sell out a property at a price higher than it was possessed can be considered as capital gain and is clubbed under the head income from other sources. Selling of property within 3 years of its possession is termed as short term capital gain/loss whereas, selling it off after 3 years is termed as long term capital gain/loss and included under income from other sources.

Exemption from capital gain

Purchasing a residential property from the amount generated through capital gain is exempt from taxes as per Sec. 54F of the income tax act. Further if the capital gain is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as per Sec 54 EC. If you do not wish to make any investments you got to pay taxes than, your income will be calculated using the indexation method.

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Related posts:

  1. Taxability of Fixed Income under DTC
  2. Understanding Property Buy-Sell Fundamentals
  3. Tax Implication On Foreign Investments
  4. A list of Non Taxable Income Sources
  5. Tax Treatment On Capital Gains
  6. Advance Tax Planning

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