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Brilliant Tax Planning with House Property income

Income Tax Act divides your income into five different heads. One of them is ‘income from house property’. It is the rent earned on the property(s) owned by you. Good news! You don't have to pay tax on the entire rental income, but only on a part of the same.

But before we get into that... the word 'house' is a misnomer as "property" covered under ‘income from house property’ comprises any building (house, office building, godown, factory, hall, shop, auditorium, etc.) and / or any land attached to the building (e.g. compound, garage, garden, car parking space, playground, gymkhana, etc.).


[By the way, income from a vacant land is covered under a different head viz. ‘income from other sources’.]

As you will note from the example below, calculation of income from house property is pretty straightforward and simple.

Total Annual Rental income     :    2,00,000
Less: Municipal taxes paid     :     (10,000)   

Net rental income                         1,90,000
Less:

- 30% of net rental income      :     (57,000)
- Interest on borrowed capital :   (1,00,000)
Taxable income from property        33,000

From the total annual rental income, you have to reduce the taxes paid to the local municipal authorities during the year to arrive at the net rental income.

Of this net rental income, 30% is allowed as standard deduction. Further, you have to also deduct the interest paid on the loan taken to acquire the said property. This will give you the final amount of income from house property on which you have to pay tax.

Now some INTERESTING points!

Annual Rental Income: Your rental income will be higher of (a) the rent actually received / receivable by you and (b) the annual letable value (i.e. the amount for which the house property may reasonably be expected to let from year to year on a notional basis).

In other words, even if you don’t actually rent out your property, you have to still consider the market rent (that you could have otherwise earned) as the notional income and pay tax on it.


Therefore, it may be prudent to rent the property instead of keeping it locked. In fact, renting is important from the Wealth Tax perspective too. You have to pay Wealth Tax on all your properties (except one self-occupied property) unless they have been rented out.

Self-occupied property: For one property, classified as a self-occupied property, you have to take rental income as “zero” in the aforesaid calculation. Accordingly, you will not get credit for any municipal taxes paid nor will there be any standard deduction. But yes, you can deduct the interest paid on the loan availed — subject to the specified limit of Rs.2 lakhs. (IMPORTANT: T
here is no such limit on the interest deduction for all other properties).

As you will note, the income from a self-occupied property will always be zero or negative (to the extent of interest paid or Rs.2 lakhs, whichever is lower). This loss from self-occupied property can be adjusted against your income from other sources such as salary, capital gains, business etc. and hence reduce your overall tax liability.

BRILLIANT TAX PLANNING IDEA: If you own more than one property, you can designate any one of these as self-occupied and pay tax accordingly. You can calculate tax liability under various options — by treating different house as self-occupied each time — and choose the one wherein your tax outgo is minimum.
Moreover, you can change this option from year to year. In this regards, you must also read: 'Save Huge Taxes. Make Huge Money. At (Possibly) Zero Risk.'.

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