Budget 2023 Update and Capital Gains Implications
The Budget 2023 introduces a key update that affects sellers of residential property. When computing capital gains on the sale of a property, it is proposed that the seller cannot include the home loan interest—previously claimed as an income-tax deduction throughout the holding term—in the cost of acquisition. This could potentially impact the capital gains calculation by increasing the taxable amount since a reduced cost of acquisition would result in a higher capital gain.
The Dream of Homeownership and Tax Responsibilities
Owning a house is a dream for many, with individuals diligently saving to turn this aspiration into reality. Nonetheless, this dream comes bundled with the responsibility of paying annual house property taxes. As a homeowner, it’s crucial to understand how to navigate these taxes efficiently.
Basics of House Property Tax
Every property type—residential or commercial—is taxed under ‘income from house property’. This encompasses your home, offices, shops, buildings, and accompanying land such as parking spaces. The law recognizes anyone with legal ownership rights as the owner for tax purposes.
For Business or Profession
Properties used for business or professional activities are taxed under ‘income from business and profession’. Costs related to repairs and maintenance of such properties can be claimed as business expenditures.
A Self-Occupied House Property
Properties used for personal residence—whether by you or your immediate family—are considered self-occupied. Previously, tax regulations permitted only one such property to be claimed as self-occupied. Any additional properties were deemed let out (rented), even if they weren’t.
However, starting FY 2019-20, you may claim up to two properties as self-occupied while labelling any others as let out for taxation purposes.
Let Out House Property
A let-out house is any property rented out for either part of the year or the full year. The rental income earned from such properties must be reported when filing taxes and is subject to its specific regulations.
Inherited Property
An inherited property—acquired from family members through will or other means—can also be categorized as self-occupied or let out based on its use. The same taxation rules apply depending on how you utilize this property.
Calculation of Income from House Property
Calculating income from house property can be intricate, but understanding it is essential for accurately filing your taxes. This article will break down the process into clear steps to help you determine your taxable income from any property you own.
Determining Gross Annual Value (GAV)
The Gross Annual Value forms the basis of your income from a house property. For a self-occupied house, GAV is considered zero. In contrast, the GAV for let-out properties is primarily the rent collected over the year.
Addressing Property Tax
The Property Tax paid during the financial year can be subtracted from the GAV of the property to compute the Net Annual Value (NAV). This step ensures that you’re not taxed on municipal dues already paid on the property.
Calculating Net Annual Value (NAV)
NAV constitutes your property’s earnings after deducting the paid Property Tax from its GAV. It represents a more accurate figure of what your property generates.
Standard Deduction on NAV
A flat 30% deduction from NAV is permitted under Section 24 of the Income Tax Act. This allowance covers potential expenses such as repairs and maintenance without the need to provide receipts or actual expenditure figures.
Accounting for Home Loan Interest
If you have a housing loan, remember to decrease this year’s interest from NAV under Section 24 to arrive at your income from the house property.
Finalizing Income from House Property
After all deductions, the resulting figure stands as your taxable income from house property. It’s added to your overall taxable income and gets taxed according to your applicable slab rate.
Handling Loss from House Property
If deductions lead to a loss because your self-occupied property holds no GAV or due to high-interest outgo, you can adjust this loss against other incomes. However, there is a cap of 2 Lakhs per annum for set-off with any remaining loss permissible for carry forward.
Computing Gross Annual Value for Let-Out Properties
For let-out properties, you must choose the greater value between Expected Rent and Actual Rent Received or Receivable. The Expected Rent is determined by comparing fair rent with municipal value while being capped by standard rent.
Example Calculation:
Taking Manoj’s scenario:
- Municipal Value: Rs.80,000
- Fair Rent: Rs.90,000
- Standard Rent: Rs.75,000
- Actual Rent Collected: Rs.72,000
The Expected Rent here is restricted to standard rent – Rs.75,000.00 despite both fair rent and municipal value suggesting higher figures. Therefore, Manoj’s GAV would be based on Actual Rent Received since it is lower than Expected Rent yet not exceeding standard rent.
By following these guidelines methodically, you can accurately calculate your income from house property and ensure compliance with tax regulations while optimizing deductions.
Gross Annual Value (GAV) of Property
When calculating the Gross Annual Value (GAV) of a property, several factors are taken into account. Below is a systematic breakdown presented in a tabular format to clearly illustrate the process:
| Particulars | Amount (INR) |
| Municipal Value | 80,000 |
| Fair Rent | 90,000 |
| Higher of Municipal Value and Fair Rent | 90,000 |
| Standard Rent | 75,000 |
| Expected Rent (Lower of Higher of MV & FR and Standard Rent) | 75,000 |
| Actual Rent Received | 72,000 |
| Gross Annual Value (GAV) (Higher of Expected Rent and Actual Rent Received) | 75,000 |