Tax Talk: How to Calculate Tax on Your Property

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By Shailesh Kumar

Real estate has always been considered a secure mode of investment, especially for long-term investors. Such a property can be acquired to reside there or for the sole purpose of benefiting from rental advantages and capital gains. While the appreciation in the value of the property is taxed at the time of sale as capital gains, the concomitant rental benefits are taxed on an annual basis in the hands of the owner.

Rental tax
While rents received are taxable under “real estate ownership”, income from subletting real estate is generally taxed under “other sources”. In the case of co-ownership, the tax incidence is distributed proportionally on the basis of the share of each co-owner of the building. Real estate held for residence by oneself and one’s family cannot be taxed up to a limit of two dwellings, however rents for commercial property are still taxed. Beyond two independent houses, the fictitious rent is taxable in the hands of an individual even if the property is not actually rented.

When calculating the income attributable to these rentals, the Income Tax Act, 1961 allows certain deductions under this head of income. In addition to the deduction of municipal taxes paid by the landlord during the year, an additional standard deduction of 30% of the annual net rent value is provided regardless of the actual expenses incurred.

This standard deduction is provided to offset general maintenance and repair expenses evenly to all homeowners without the need to keep accounts for these expenses. However, after granting this standard deduction, no further deduction is allowed for other expenses such as maintenance costs in social apartments, property insurance, etc.

Interest paid on the mortgage
The law also provides some relief to taxpayers against interest paid on the home loan which may be for the purchase, construction, repair, renewal and reconstruction of the property. The maximum interest deduction limit in the case of self-employed is limited to Rs 2 lakh, that is to say that any interest beyond this monetary limit expires, but the law has not specified any monetary limit to claim the deduction of interest in the case of a rented property.
Previously, the entire loss (i.e. excess of interest charges over rental income, if any) on the interest payment on the home loan could be deducted from other counts income without monetary limit. However, in accordance with the amendment of the 2017 finance law, the loss of up to Rs 2 lakh can now be deducted from other heads of income during the year concerned.

Interest on construction loans is divided into two phases, i.e. pre-construction and post-construction. While post-construction interest is allowed annually, deduction of pre-construction interest is allowed in equal installments over five years from the year in which the property is acquired or built. The limit of Rs 2 lakh (in case of independent ownership and for compensation with other heads of income) applies for all interest before and after construction.

Taxpayers can also claim a deduction from their total income for the main part of the home loan under section 80C (subject to a maximum limit of Rs 1.50 lakh) and a certain additional amount of interest on the loan. based on meeting the conditions of Section 80EE and Section 80EEA.

The writer is a partner, Nangia & Co LLP


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