Calculating Income Tax on Income from Property

The tax structure according to the income tax Act of 1961 is intrinsically divided into five major categories for calculation of tax. Income from salary, income from house property, profit from business, capital gains and income from other sources constitute the five basic elements used to calculate the final tax.  While income from salary, capital gains and profit from business and other sources are well known, there is not much clarity in the minds of most people when it calculation of income from house property.

Income from house property is calculated as an income earned by an individual. A house, office building, factory or shops etc are covered under house property. The tax on house property may not necessarily result due to actual rent or income received but also the potential income the property is capable of yielding as per the market prices. Let us take a look at the way income from house property and resulting in tax liabilities for various tax payers.

Annual Value of the Property:  Tax liability for any property is calculated by determining the taxable value or the gross annual value or GV of the property. The annual value of the property is taken as the gross taxable value of the property. The final calculation of the annual value of the property depends on whether the property is rented out or deemed to be let out property.

Let out Property (LOP): In case of a let out property or is allowing the owner to receive a regular rental income, the annual value is calculated according to the actual rent received minus the municipal; due paid by the owner or tenant. If the rent is lower than the municipal rent or fair rent, the municipal rent is taken as the basic rent. In case the rent received is higher than the basic rent, the actual rent received by the owner is taken into account to calculate the gross annual value.

Deemed to be let out Property (DLOP): In case an individual owns multiple properties, the one in which the individual is staying is taken as self occupied property while the other vacant properties are considered deemed to be let out. The gross annual value for such properties is calculated in the same way as let out property. The only difference is that the rent taken into account while calculating the annual value is taken as the stipulated municipal rent of the property.

Self Occupied Property (SOP): For self occupied property, the net annual value of the property is considered to be nil.

Deductions: The final figure of Income from house property is calculated by deducting various deductions as per the income tax act from the net annual value of the property as per the section 24 of the income tax Act. The deductions include standard deductions which are 30% of the NAV and deductions on interest paid on borrowed capital if any.

Standard deduction (30% of NAV): Since owning and maintaining a residential house or property costs some money, the income tax act allows for a standard 30% deduction on the calculated net Asset Value or NAV of the property. This deduction is available for both LOP and DLOP properties and not eligible for self occupied properties.

Interest on Borrowed Capital Section 24(b): If one takes a home loan to purchase a property, the total amount of interest paid on borrowed capital is eligible for deduction under Section 24 (b) of the income tax act. This deduction is available for all properties including self occupied properties.

Example Chart: Now that we have understood how income tax on income from property is calculated, let us try and understand tax calculations with an example. Suppose Raman owns a flat which he bought on home loan and has rented out the same and receives a regular rental income of Rs 25,000 per month. Let us assume that the total municipal taxes paid by Raman for the property is Rs. 10,000 per annum.