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Howistaxcomputedonrentalincome?
DNA/SandeepShanbhag/Wednesday,September7,20118:00IST Taxisapplicablewherethereisincomeandessentiallytherecanbeonlytwokindsofincomesrelatedtopropertyrentalincomeandcapitalgainswhenpropertyissold. Taxonrentalincome Thebasisofcalculatingincomefromhousepropertyistherentalvalue.Thisistheinherentcapacityofthepropertytoearnincome.Propertyincomeisperhapstheonlyincomethat ischargedtotaxonanotionalbasis.Thischargeisnotbasedonthereceiptofanyincomeperse,butisontheinherentpotentialofthehousepropertytogenerateincome. Thefirstpropertythatonebuysisexemptfromincometax,butonlyifitisnotletoutonrent.Anotionalrentvaluebasedonthemarketrentalvaluewillbeadoptedastaxableincome fromsecondpropertyonwards,evenifitskeptunderlockandkey. Toputitdifferently,evenifyouearnnoincomewhatsoeverfromthesecondproperty,itwillbetaxableasifyouhaveputitoutonrent.Therefore,itisadvisabletorentoutthesecond propertysinceyouwillbeobligedtopaytaxonanassumedrentalvalue. Whenapropertyisnotletoutorisselfoccupied,onlythatpropertyisexemptedfromtax. Taxdeduction Therearetwotypesoftaxdeductionsavailableonincomefrompropertyapartfromtheactualmunicipaltaxespaid.Thefirstisstandarddeductionof30%.Thismeans30%ofthe rentalincomecanbereducedasastandarddeductionforrepairs,maintenanceetc.irrespectiveoftheactualamountspent,ifatall,duringthefinancialyear. Theseconddeduction,whichisoverandabovethe30%standarddeduction,istodowithinterestonmortgagefinanceifthepropertyispurchasedonmortgage. Incasethepropertyistaxfree,theinterestdeductionisrestrictedtoRs1.5lakh.Inotherwords,irrespectiveoftheamountofinterestpaid,ifyoudonotpayanytaxontheproperty, thedeductiononaccountoftheinterestpaidhasaceilingofRs1.5lakh. However,forpropertiesthataretaxableoneitheractualrentornotionalrent,theentireamountofinterestpaidwithoutanylimitisdeductible. Nowadays,duetohighpropertyprices,inalmostallcases,theinterestamountfarexceedstherentals.Investorsgenerallybuypropertiesforthecapitalappreciationpotentialand putitonrentsothattheassetdoesnotremainidleandismaintained.However,todayrentalyieldshavefallentoaround34%pa. Forrentedproperties,theentireamountofinterestpayablecanbeadjustedagainsttherentandanyamountthatisleftovermaybecarriedforwardinthetaxreturnaslossfrom propertytothenextyear. Thisisveryimportantfromataxplanningpointofview.Suchcarryforwardoftheunabsorbedinterestcanbedoneforacontinuousperiodofeightyears. Overtheyears,astheloangetspaidoff,theinterestcomponentthatisgettingsetoffagainsttherentalincomeeachyearwillkeeponreducing.Ontheotherhand,typically,therent wouldtendtoincrease(increment)eachyear. Thiswillgoontoleadtoapositivedifferentialbetweentherentreceivedandtheinterestpaidandthisdifferencewouldbetaxable.Atthispoint,thecarriedforwardinterestwillbe extremelyusefultoreducetaxliability. Ifyouwishtocarryforwardloss,itismandatorytofilethetaxreturnbyJuly31(forindividualtaxpayers).Withoutfilingthetaxreturnandthattoobytheduedateprescribedcarry forwardoflosswillnotbeallowed. Interestdeductiononapropertycanbeonlyaftertakingpossessionofit.Oftenpeoplebuypropertiesunderconstructionwherethemortgagepaymentsbeginduringtheconstruction phaseitself.Sowhathappenstotheinterestpaidprepossession? Suchinterestcanbeclaimedfortaxdeductioninfiveequalinstallmentsstartingfromtheyearinwhichthepossessionisobtained. Forinstance,saysomeonehasboughtapropertyunderconstructioninFY200809andispayinganannualinterestofRs20lakh.HegetsthepossessioninFY201011. Therefore,hehaspaidaprepossessioninterestfor200809and200910ofRs40lakh.OnefifthofRs40lakh,thatisRs8lakh,canbeclaimedduring201011overandabovethe Rs20lakhthathemaypayin201011. Therefore,thedeductionofinterestfor201011wouldbeRs28lakh(Rs20+Rs8lakh)assumingthepropertyisrentedorelsethedeductionisrestrictedintoRs1.5lakh.Nexttime weshallexamineindetailthecapitalgainsthatarisefromsaleofproperty. Thewriterisdirector,WonderlandConsultants,ataxandfinancialplanningfirm.Hecanbereachedatsandeep.shanbhag@gmail.com URLofthearticle:http://www.dnaindia.com/money/column_howistaxcomputedonrentalincome_1584125all Permissiontoreprintorcopythisarticleorphotomustbeobtainedfromwww.dnasyndication.com

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