Did You Know? You Need To Pay Income Tax On Vacant Property

We all want to own multiple properties but a majority of us don't realise the fact that ownership comes at a cost. While property ownership is largely seen as an investment, it also attracts various taxes and levies. So, if you own multiple built-up premises, you will have to pay income tax on all the properties except for the self-occupied property. 

How is vacant property taxed?

Under the head 'income from house property', a tax is levied not on rent but on the potential of the premises to yield income for the owner. This is termed as the annual value of property – the sum the property can reasonably earn when it is rented out in a year.

For the self-occupied property, the annual value of the property is taken as 'nil' because one cannot rent out the property in which one is living. So, if you own one house and live in it, you are not liable to pay any tax on it but if you own more than one built-up premises (not land), you can choose which of the properties should be considered for nil value for taxation purposes. Thus, the annual value of your other self-occupied properties is calculated notionally if they had been rented out. 

To calculate the annual value of a property, four factors are taken into consideration. Firstly, it is ascertained if the actual rent was received on the property (not applicable if the property remains vacant throughout the year). Secondly, the municipal value of the property as determined by the local civic body and thirdly the fair rent of the property. This refers to the rent that similar properties are fetching in the same location. And, lastly, the standard rent if the property in question falls under the ambit of the Rent Control Act.

But, before you total the net annual value of your property, you can claim a few deductions, including municipal taxes. Municipal taxes are to be borne by the landlord and not the tenant. The standard permissible deduction limit is set at 30 per cent of the annual value of the property, which goes towards its repairs and maintenance. 

The smart move

"As the income tax law allows you to choose the property you want to show as 'self-occupied', the smart move is to first determine the net value of all the properties you own and then choose the one with the highest annual value as self-occupied. This will help you save on taxes," says chartered accountant Jugesh Dang. 

However, if you want to cut your tax liability, it is advisable to buy a property in joint ownership with one of the family members so that the income from the house property can be split among the co-owners, thus, reducing the overall tax outgo. "If you already own a property, it would be better to buy the new property in your spouse's name. Both of you would have only one house in your names, which will help cull your tax liability," he adds.