Out of all the heads under which income is chargeable to tax, income from house property is the most difficult to calculate. This is because this is a tax which is paid on notional income, i.e the annual value of the house which is its capacity to earn income and not on the actual income earned.
If you own only one self occupied house, it is not chargeable to tax.
If you have more than one property, you have an option of choosing one of them as self occupied whose annual value will be taken as NIL. The other property, even if it is not rented out and earning you an income would be deemed to have been rented out and tax is payable on the annual value based on this deemed rental income. This annual value is calculated as per the provisions of section 23 of Income Tax Act. Let us see how this is done step by step.
- If the second property is rented – Higher of the actual rent received or the expected annual rental value. This expected rental value is the municipal value or the fair rental value, whichever is higher. For properties which come under the rent control act have a fixed standard rent restriction. So it will be the higher of the municipal or fair value limited to the standard rent.
- If the property is not rented out – The expected annual rental value calculated as above.
- From this annual value, deduct the municipal taxes paid during the year to arrive at the net annual value.
- From the net annual value reduce 30 % of this net annual value as a standard deduction. If the rented or the deemed rented house has a mortgage on it, the annual interest paid without any limit also is deducted from the net annual value. If the house is self occupied and on mortgage with the annual value as NIL, a maximum interest of upto 1.5 lakhs per annum is deductible. Any interest paid during the construction period can also be deducted in five equal instalments over five years from the year of possession.
- The value thus arrived at after all these deductions is the “Income from house property” which is then taxed as per your respective tax slab.
Let us understand this better with an example:
Mr. Krishna has two houses. One is self occupied, and the other one is on mortgage and rented out.
Calculation of the gross annual value ( Rs.) –
Fair Rental Value : 150000
Municipal Value : 140000
Standard Rent : 160000
Actual Rent received : 120000
ANNUAL VALUE : 150000
Calculation : The higher of actual rent received OR the higher of the fair rental or municipal value limited to the standard rent.
Gross Annual value : 150000
Municipal taxes paid : 10000
Net annual value : 140000
Std. deduction (30 %) : 46700
Interest on loan : 70000
Income on house
Property : 23300