TAX TALK-20.02.2017-THE HITAVADA
CA. NARESH JAKHOTIA
Second house property: Income tax without actual income
The first housing loan has taken by me in year 1994 and I am taking benefit in income tax, rebate of amount of Rs. 50,000/- in interest and some amount in principal. Now, we have taken 2nd loan for new flat in the year 2016 and taken possession on dated 23rd Jan 2017, paying interest of amount of Rs. 1,26,000/- & some amount of principal also. Now I am shifted in new flat and old one is vacant now. My questions are:
- Can I take rebate of interest and principal of both loans? The total interest paid my me Rs. 1,76,000/- which is below 2 lakh?
- Can I also take rebate of principal of both Loans?
- Is it mandatory to show rent of old house? If is mandatory then will I show the rent of old house? [Sanjeev Paul- SANJIV.PAL@licindia.com]
Readers may rightly drawn the conclusion that income tax is payable without actual income also.
- Tax Treatment of second house property:
Tax treatment of the second house property is not same or similar to that applicable to first house property. If taxpayers have two or more houses which are used for own residence, then they have an option to choose any one of the house (according to their own choice) as self-occupied house, for which they would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether or not actually let out] & would be taxable on the basis of its annual value. In short, if taxpayer owns more than one house property then even if the house properties are not let out,
a) One house property can be treated as self occupied house property and nothing would be taxable from such house property.
b] Other house properties shall be deemed to have been let out and its income shall be taxable on notional basis considering its annual value.
- Computing Income from House Property:
As mentioned above, Income from house property is not taxable on the basis of actual rental income alone but is taxable on the basis of its annual value. Annual Value is the sum for which the property might reasonably be expected to be let out from year to year.
To determine Annual Value of the property, one has to get familiar with four terms i.e., Municipal Value, Fair Rental Value, Standard Rent and Actual Rent. The same is discussed hereunder:
- Municipal Value: For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property. Normally municipal authorities charge house tax on property based on various factors like type of residential, floor, facilities available in the premises etc.
- Fair Rental Value: The rent which a similar property in the same or similar locality would have fetched is the fair rental value of the property. This is nothing but notional rent a property can get if it has been let out for a year. e.g. In case of flat, one can assume approx rent of other similar flat which is already let out with some addition or reduction in rent with reference to facilities of both flats.
- Standard Rent: It is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.
- Actual Rent: For any let out property, Actual rent received or receivable is important for annual value. Actual rent received or receivable is always subject to agreement entered by owner and tenant or matter of negotiable between them whereby if tenant agree to pay for municipal taxes on behalf of owner then these taxes should be added in actual rent received/receivable to derive annual value. There could be vice versa case, where owner has agreed to pay some obligation of tenant, in that case rent will be reduced by that amount.
With above brief idea of the relevant terminology, it may be noted that for any house property, Gross Annual Value is higher of Actual Rent Received or Expected Rent. Expected Rent is nothing but higher of Municipal Value or Fair Rental Value but restricted to the Standard Rent. From the amount of gross annual value, municipal taxes would be deducted to arrive at the net annual value. There are only two types of deductions which can be claimed from net annual value, as under:
a] First is standard fixed ad-hoc deduction of 30% towards repairs & maintenance. This means 30% of the net annual value can be reduced towards repairs, maintenance etc. The deduction is available irrespective of the amount actually spent or not.
b] The second deduction is of interest if the property is purchased/ constructed with borrowed fund, up to a maximum of Rs. 2 Lakh p.a. for self occupied house property. The ceiling of Rs. 2 Lakh is not applicable in case of let out or deemed to have been let out house property till FY 2016-17. (In the recent Union Budget-2017, a new provision is proposed w.e.f. AY 2018-19 as a result of which only Rs. 2 Lakh of overall loss can be adjusted against other income and balance amount of loss can be carried forward.
In your specific case,
- You are keeping both the house property for your own occupation. You can claim interest on both the house property – against one property as self occupied house property and against second house property treating as deemed to have been let out house property. You can decide which property you want to treat as self occupied and which property you want to treat as “deemed to have been let out”.
- Deduction u/s 80C towards principal repayment of housing loan is available only against one house property. Repayment of principal of the second (or subsequent) house property is not eligible for deduction u/s 80C.
- Since both the properties are in your self-occupation, one house property is deemed as let out property and would be taxed on the basis of notional basis. Notional income would be taxable in respect of deemed to have been let out house property.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at email@example.com]