Question: I have purchased a new house on a home loan for which I am paying Rs 2.5 lakh as interest on an annual basis. Further, I am also deriving rental income amounting to Rs 40,000 per month from a tenant.
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I have also paid municipal taxes of Rs 5,000 during the year. Considering the same, kindly guide me on tax implications of the above components and what would be the amount which would be subjected to tax?
Answer by Dr. Suresh Surana, Founder, RSM India: Any rental income derived by a taxpayer would be subjected to tax under income from house property. It is pertinent to note that taxpayers may take the benefit of nil annual value on any two house properties as self occupied properties (SOPs). However, a self-occupied property would constitute a property owned by the taxpayer which is occupied throughout the year by the owner for the purposes of his own residence and is not actually let out during the whole or any part of the year. Thus, the taxpayer may not be able to claim the benefit of SOP on any property given on rent.
The provisions of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) provide for computing the income/ loss from a house property based on the annual value of such property. They also provide for reducing a standard deduction as well as interest paid on home loan availed by the taxpayer.
Computation of Income from House Property for the above-mentioned case would be as follows:
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As the amount of interest paid on home loan and standard deduction exceeds the Net annual value, there is a loss amounting to Rs 1,67,500/- on account of the house property for the purpose of taxation. In case loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred.
Note 1: Municipal taxes levied by local authority are to be deducted from the gross annual value if such taxes are borne and paid by the owner during the financial year.
Note 2: Under section 24(a) of IT Act, a standard deduction of 30% on the Net Annual Value can be claimed with respect to expenses such as painting, repairs, insurance, repairs, electricity, water supply, etc. It is pertinent to note that such standard deduction can be availed by the taxpayer irrespective of the said expenditure incurred.
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Note 3: Under section 24(b) of IT Act, a deduction of up to Rs. 200,000 for home loan’s interest can be claimed by the owner of a self-occupied property. Further, owner of a let out property shall be eligible to claim the entire interest on the home loan as a deduction.
