Property Tax is a tax levied by the local government on all tangible real estate under the ownership of an individual and it includes houses, office buildings, factory building, flats and shops. The Annual rental value (ARV) forms the basis of calculation of the tax. The tax can be paid either to the local government or municipal corporation, depending on government policies. However, the rate, tax collect procedure and valuation method is determined by the governing authority.
The property that is occupied by the owner or do not generate any rent is assessed on cost and the figure then obtained is converted into annual rental value (ARV) with the application of a percentage of cost. A vacant land is generally exempted from the tax. The tax is usually accompanied by a number of service taxes like, water tax, sanitation tax, lighting tax, all using the same tax base.
Calculation of income from House Property
The Property tax calculation is calculation is based on annual value of your property. There may be different annual values for Self-occupied properties and let out properties.
Self-occupied properties – The annual value is considered as zero, provided the property is used for stay by the owner or it is vacant. However, If the property is let on rent for few months or year, the annual value will be calculated respectively.
Let out properties – The annual value will be equal to maximum of municipal calculation, rent received and fair rent as determined by the Income tax department.
Gross Annual Value
Gross Annual Value (GAV) of property will be required to determine the annual value, which is higher of:
- The sum for which the property might reasonably be expected to let from year to year. In case where standard rent has been set, such sum cannot exceed this value. However, in case of property which was vacant for whole or part of the previous year and rent received is less than expected rent, then rent actually received is taken as GAV.
- Where property is actually let out and the rent received or receivable is more than amount determined in (a), the annual value will be actual rent received.
Exclusions while determining GAV
- The Amount of municipal tax realized from a tenant
- Notional interest on the amount received towards ‘rent/security deposit’ from the tenant
- Repairs carried out by tenant
When Annual value is Nil?
The annual value of your property shall be considered ‘nil’ in following cases: –
- Self-occupied properties
- If the owner of only one residential house is unable to occupy it on account of his employment, business or profession in any other place and he is residing in a property not owned by him.
Net Annual Value
The Net Annual Value is arrived after deducting the municipal taxes and the unrealized rent (subject to certain conditions). The receipt of any unrealized rent shall be chargeable to tax in the year of receipt.
Deductions under Section 28 of Income Tax Act 1961
Following deductions are allowed under Section 28 –
- Standard deduction – Standard deduction is 30% of the Net annual value. This 30% is allowed even when your actual expenditure on the property is higher or lower. Therefore, the deduction is irrespective of the actual you may have incurred on insurance, repairs, electricity, water supply etc.
- Deduction of interest on Home loans for property – In case you take a home loan for construction, repair, purchase or reconstruction of your house property, the interest is allowed as a deduction from Net Annual Value. Deduction for interest on money borrowed is allowed on accrual basis. So keep claiming your interest deductions on each year basis interest that is due. Deduction is allowed on whichever is lesser between, Rs 1,50,000 or the actual interest amount (in case the construction was completed within 3 years of taking the loan on or after 1-April-1999). In other case it is between Rs 30,000 and the accrual interest, whichever is less.
How to save tax on Income from House Property?
- Any empty house that you own, will still be taxed based on the fair rental value, so you should let any or all vacant properties out. This will ensure income and no loss because of taxation.
- If you own multiple properties, then only one can be registered as your residence and will fall under Self- occupied property.
- Taxation on income from house property can be divided between co-owners and hence lessen the burden.
- If you are planning on buying a second house, and you wish to avoid paying tax on the second house, register the second property on your spouse/relative’s name to avoid excess taxation.