The Indian Income Tax Act divides income received by an individual into five heads for calculating tax. The five heads of income include income from salary, income from house property, profits & gains of business or profession, capital gains and income from other sources. This article will teach you how to find the income from the home you own.
Income from house property includes income earned by an individual through the property owned by him.The property would comprise a house, an office building, godown, factory, shop, auditorium, etc.
Of this net annual income, 30% is allowed as a standard deduction. Further, if you have taken any loan, while buying the property, then you can also deduct the interest paid on the loan. The interest paid on the loan is exempt under Section 24.Renting your additional property is important from the wealth tax perspective. You have to pay wealth tax on all your properties unless they have been rented out.
Rental Income from House Property
Calculation of Rental income is most tricky party. In order to save tax, a tax payer would like to declare lowest rent but it is advisable to calculate rental income in fair and transparent manner as per income tax act. In many cases, i observed that my clients declared 2nd property as vacant therefore zero rental income. Unfortunately, even if the property is vacant you need to declare notional or fair rental value of property for Income tax purpose. Income from vacant house can be declared under Income from other sources in ITR whereas self occupied and rented property is declared under head Income from House Property. Rental income is also loosely referred as Net Annual value of House Property.
There are 4 standard methods to calculate rental income. I will explain with an example for easy calculation
A = Actual Rent Received: For let out property, actual rent received is as per agreement between owner and the tenant. Any payment by tenant on behalf of owner is also clubbed under Actual Rent Received. Example: Tenant is paying a rent of Rs 15000 per month to owner for property A
B = Fair Rent: It means how much rental income a similar property in vicinity can fetch with similar facilities and amenities. Example: Fair Rent for Property A is Rs 17000 per month
C = Standard Rent = Rent fixed under Rent Control Act: States like Maharashtra have Rent control act, under which rent specified under Rent Control Act is fixed even if is meager amount. Example: Standard Rent of Property A is Rs 12000 per month
D = Municipal Value: It is similar to circle rate or guidance value. Rental value is fixed by local municipal corporation or municipal committee. Example: Municipal value of property A is Rs 10000 per month
After calculating above mentioned values, Notional Rental Income from House Property can be calculated as per following formula as mentioned in income tax act.
Z = Higher of B or D i.e. Higher of Fair Rent Value or Municipal Value. In this case it is higher of Rs 17000 or Rs 10000 = Rs 17000 per month
It is advisable to choose the property where you have to pay minimum municipal tax as self-occupied property.The plus point od house property is you can claim deduction on principal component u/s 80C subject to max limit of 1.5 lakh u/s 80C.