How to calculate income tax on house rent?

If you own a house and given it on rent, you will have to calculate income tax on it and pay your taxes.

You cannot claim any expenses against rent received for any repair or maintenance done by you. However government do give a standard deduction of 30%.

In this article I will explain you about calculating income from house property.

Under income-tax any income from house property (building or any structure on land), is charged under the head "Income from house property".

Income from vacant land is to be charged under head "Income from other sources".

If you are receiving rent for house and also for other services then income from house should be charged under the head "Income from House property" and income from other services should be charged either under the head "Income from Business or profession" or "Income from other sources".

Only legal owner of the house can pay tax under the house property head. If you own the house only then you can calculate tax under this head otherwise tax will be under the head income from other sources.

Conditions to pay tax under the head Income from House Property

The very first condition is that you should own the house. It is the legal owner of a house property who is chargeable to tax in respect of property income.

In following cases a person will be treated as deemed legal owner of a house property.

  1. Property is transferred to spouse without adequate consideration or minor children. People gift house property to wife for saving taxes, but under income tax even if you transfer the property, income will be taxed in your hands.
  2. Holder of an impartible estate.
  3. A member of a co-operative society, company or other association of person, where a building or part is alloted or leased under a house building scheme.
  4. A person who comes to have control over the property in part performance of a contract of the nature referred in section 53A f the Transfer of Property Act of by virtue of such transactions as are referred in clause (f) of section 269UA (taking property on lease for a period not less than 12 years).

Calculation of Income from House property

Income from house property is calculated as below.

Particulars Amount (Rs.)
Gross Annual Value (GAV) xxxx
Less: Municipal taxes  xxx
Net Annual Value (NAV)  xxxx

Less: Deduction under section 24 

 

Standard deduction (30% on NAV)

XX

Interest on borrowed capital

XX
Income from from House property xxx

The first step in calculating income from your house is to calculate Gross Annual Value (GAV).

How to calculate Gross Annual Value of a house?

To calculate GAV of a house follow these steps.

  1. Find out reasonable expected rent of the property. To find out the expected rent of property you have to compare municipal value, rent of house in similar locality, rent the property can generate based on current demand and supply etc. Normally you have to consider minimum of following as reasonable expected rent:
    1. Municipal valuation
    2. Fair rent of the property
    3. Standard rent under the Rent control Acts
  2. Find out the actual rent received or receivable for the property.
  3. Find out loss due to vacancy of property.

Once you have done the above steps, you have take higher value from step 1 and step 2 and deduct value from step 3.

For example, if expected rent as per step 1 is Rs. 1,20,000 and actual rent received was Rs. 60,000 then you have to consider Rs. 1,20,000 as GAV. Again, if house was vacant for 5 months then you have to deduct 50,000 (5*10,000) from your GAV.

You can calculate Net annual value by deducting municipal taxes from gross annual value.

Deductions under section 24 of Income Tax

Now you know that you cannot claim any expenses while calculating income from house property. However, Income tax act provides deductions under section 24.

Following expenses can be deducted from Net annual value (NAV) while calculating income from house property:

  1. Standard deduction (30% of NAV)
  2. Interest on borrowed capital

Standard deduction of 30% is allowed irrespective of actual expenditure.

Interest can be claimed if borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of house property. Interest on borrowed capital is allowed, but if you have any unpaid interest, interest charged on unpaid interest is not allowed.

Even interest of pre-construction period is allowed in five equal installments. If you took a loan to construct house, you can claim interest paid during construction time in five equal installments.

Complete example of calculating income from House property

I will take a simple example to explain you calculation of income from house property.

Mr. A has a flat and rented it to Mr. B for Rs. 10,000 per month (10,000 is fair value and higher than municipal value). He paid municipal taxes of Rs. 5,000 for the flat and interest of Rs. 1,00,000 on loan he took to buy the flat.

This is a simple example and covers most of the practical cases. Here is the calculation of his income from House Property.

Particulars Amount (Rs.)
Gross Annual Value (GAV) 1,20,000
Less: Municipal taxes  5000
Net Annual Value (NAV)  1,15,000

Less: Deduction under section 24 

 

Standard deduction (30% on NAV)

34,500

Interest on borrowed capital

1,00,000
Income from from House property (Loss) -19,500

If you have any doubt on Income tax, GST or any other mercantile law. Login to Knowyourgst and ask you question, I will be happy to help you.


Author
Posted by Pulkit Sharma under Income-Tax

A Chartered Accountant by qualification. I am founder of KnowyourGST.com to provide free resources to enable smooth compliance by Tax Payers. You can use GST Invoicing application developed by m...Contact



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