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Understanding real estate: income from house property


Understanding real estate: income from house property

The world of real estate can be a confusing mine of legalese. Buying a home is the easiest thing you can do. It’s the documentation that comes after that is the hardest!
In our series of legal explainers, we take you through this complicated world, navigating the world of legalese one law at a time.
If you own any form of house property, any income that accrues from such property will be liable to income tax. Here is a guide to everything you need to know about such tax charged on your house property.
Determining type of income
The Income Tax Act, 1961 (“IT Act”) provides for five heads under which income is charged, namely:
(i) Income from salaries
(ii) Income from house property
(iii) Profits or gains from business or profession
(iv) Income from capital gains
(v) Income from other sources
Income would fall under house property when any income arises or accrues from a particular house property and is taxable in the hands of the title-owner of the property.
‘House property’, in this context refers to a building or the land that is appurtenant to such a building, as against an open piece of land.
Income from an open land would fall under the head ‘income from other sources’.
If the open land or building is being used for commercial purposes, it will fall under the head ‘profits or gains from business or profession’.
Therefore, the three essential conditions to be fulfilled to be ‘income from house property’ are –
(i) Property must consist of buildings or land appurtenant thereto;
(ii) Assessee must be the owner of such property; and
(iii) Property must not be used for business or profession

Exclude self-occupied property

Where the owner has self-occupied a house property for his own residence, or has been unable to occupy it and is staying in a building not owned by him because of carrying on business/profession elsewhere, the value of such property is considered as nil for taxes payable.
This treatment may be made applicable to only one house property.
Where the owner owns more than one house property or is earning some income by letting out the whole or part of some house property, the value of such property shall necessarily be included under the provisions of the IT Act.
Where more than one property is being used for a self-occupation purpose, the value of the property will be calculated and charged accordingly, even if there is no actual rent accruing to it.

Deductions available

Tax on income from house property is charged on the ‘net annual value (“NAV”)’ of the property computed under the provisions of the IT Act. The Act further allows some deductions from this value before the amount taxable income is calculated.

Standard deduction

A standard deduction of 30% of the NAV calculated under the provisions of the Act. This deduction is available to all house property that is liable to be taxed, except in the case where the NAV is nil because of self-occupation, as mentioned above.

Other deductions

Second, if you have bought, constructed or repaired/renewed your house property on a loan from a bank or other borrowed capital, the amount of interest payable against such lending is also deductible from the NAV.
After the deductions, the remaining amount would be taxed at the rate of the tax slab you would fall under.

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