Real estate is one of the best asset classes for investment. While it does fetch high returns, it also attracts several taxes and levies. If you own more than one property, then read to find out your tax liabilities.
In India, a person is liable to pay income tax on all the properties owned except the one which is self-occupied. Under ‘income from house property‘ in the Income Tax Act, 1961, the tax on the property is not levied on the rent but on the potential of the property to yield income.
You must understand that the tax here is on a notional basis. In simple terms, the annual value of the property is the amount that a property can earn when it is rented out in a year.
Case I: Property is self-occupied
For self-occupied property, the annual value of the property will be ‘nil’. Thus, you are not liable to pay any tax on the property if you are living in it. Also, you can select which of the properties should be considered nil for tax purpose.
Case II: Property is vacant
If the property is vacant, then the actual rent received, or receivable will be the gross annual value of the property. The calculation of ‘income from house property’ is made in the same way as in the case of let-out property. That means interest is deductible without any limit.
Know the deductions
You can claim deductions like municipal taxes that are to be borne by the landlord and not the tenant. The standard permissible deduction limit is set at 30% of the annual value of the property for repairs and maintenance.
Calculating tax on vacant property
Step 1: Determine the gross annual value of the property. There are four factors considered for calculating this. These include:
- The actual rent received on the property (not applicable if the property remains vacant throughout the year).
- The municipal value of the property as determined by the local civic body.
- The fair rent of the property, which is similar to what other properties are fetching in the same locality.
- The standard rent if the property in question falls under the purview of the Rent Control Act.
Step 2: Deduct municipal taxes
Step 3: You get net annual value, also known as NAV
Step 4: Deduct standard deductions from the net annual value
Step 5: Include the result under income from house property
Now, let’s take a real example. The property was on rent for three months and vacant for the remaining nine months.
Actual rent received for three months: Rs 36,000 (Rs 12,000/month)
Municipal value of the property: Rs 90,000
Fair rent: Rs 1,40,000
Standard rent: Rs 1,20,000
Municipal taxes paid: Rs 20,000
Calculations:
Gross annual value: Rs 1,20,000 (Higher of a or b)
Higher of municipal value or fair rent but limited to standard rent – Rs. 1,20,000
Actual rent received – Rs 36,000
Municipal taxes: Rs 20,000
Net annual value: Rs 1,00,000 (Rs 1,20,000-Rs 20,000)
Standard deductions: Rs 30,000 (30% of net annual value)
Net income under the head: Income from house and property: Rs 70,000
Is it good to tax vacant properties?
With rising unsold inventory in major metropolitan cities, the decision to consider the second property as ‘let out’ doesn’t look like a bad idea. It can bring down the number of vacant housing units across cities by unlocking them for rental purpose. This will, thus, give a significant boost to the rental housing market in the country.
Learnings from abroad
Properties are often treated as stores of wealth across the globe. India is not the first country to jump to this bandwagon. London faced a similar situation a few years ago, with vacant properties soaring at a fast pace. To tackle the situation, in North London, a 50% premium tax was levied on vacant properties. The strategy worked as the percentage of vacant properties dropped to a large extent. In 2016, Vancouver also imposed an additional $7,450 annual tax to the owners of vacant housing units.
A word of advice
As the income tax law allows you to select the property you want to show as ‘self-occupied’, the best practice is first to determine the net value of all the properties you own and then choose the one with the highest annual value as self-occupied. Experts also suggest buying property in joint ownership to cut tax liabilities.
Read more: A practical guide on the Indian government’s website.
Informative article with the figures of tax laid on the vacant properties. Thank you for sharing the information.