How Income From House Property Is Taxed
All sorts of incomes are taxable, and the amount you have been earning by renting out your property is no different. If you are earning money from your property by letting it out, India's income tax law mandates you pay taxes under the provisions of 'Income from House Property' category.
How does one arrive at the income from house property?
There is a specific amount your property is capable of earning on an annual basis. This is known as the annual value of your property. This value decides what kind of tax you will be paying for the property. But, how to know what is the annual value of your property? For those who are looking to rent out their property, knowing this is crucial.
There are two ways to do it.
Based on their estimates that take into account several factors, municipal authorities assign a value to every property, known as municipal value. This is primarily done for levying municipal taxes. This officially helps you calculate the value of your property. Another way to calculate the gross value of a rented property is to arrive at its fair value. What kind of income people who has given on rent similar property earn?
In most cases, the fair value of properties is much higher than the municipal value.
Then there are other ways to arrive at the property value.
In case you are earning more as rent than the annual value assigned by the municipal body to your property, you will have to pay your tax according to the rent received, which is, of course, higher. But what if you are earning less as rent? You pay the tax based on the amount you are expected to get as rent for your property.
At places where the rent control law is effective, the standard rent determines the annual value and the property is taxed accordingly.
Do remember that your income from house property will be taxed based on the net annual value of the property, and not the gross annual value. The net annual value of the property is arrived at by deducting the amount of taxes you incurred towards paying the municipal body.
Under the provisions of Section 24 of the Income-Tax Act, a statutory deduction of 30 per cent of the net annual value towards repairs, etc.
What about the home loan that you have taken for the property?
A landlord enjoys deductions on the interest he pays for the loan taken for the purchase of his rented property. Earlier, after all the deductions resulted in zero rental income for the owner, he could show it as loss and set it off against other heads of income. However, the Budget 2017-18 has proposed to restrict set off of loss from house property to Rs 2 lakh. This meausre would restrict the tax benefits landlords enjoy on the home loan interest they pay for the property.
This measure is aimed at equalising tax benefits enjoyed on self-occupied and rented out properties.
Also read
Property tax tax deductions rent control laws income tax propguide