Did you know: for tax purposes, when is a house considered to be let out?

If you own more than one residential property, only one of those can be considered to be self-occupied. Which one will that be?


Photo: HT
Photo: HT

According to income tax rules, if you own more than one residential property, only one of those can be considered to be self-occupied. The others should either be let out or, even if they are not actually rented out, they will be deemed to be properties that have been let out.

What doe s it mean?

A property is considered to be let out when the owner passes on the right of its occupancy or usage to another person against a consideration (rent). However, if a person occupies more than one house for residential purpose, then under the tax rules, any of the one of these houses can be considered as self-occupied. Irrespective of whether the other house(s) are vacant or occupied by the owner, they will all be deemed to be let out. And, the annual value of such house(s) will be determined (under section 23(1)(a) of the Income-tax Act, 1961) on which tax will be levied.

Annual value

The inherent capacity of the property to earn income is termed as “annual value”.

Four factors are taken into consideration to determine the annual value of a property. One, actual rent received or receivable. Two, municipal value of the property (value determined by municipal authorities to levy municipal taxes). Three, fair rent, which is equal to rent that a similar property can fetch in the same or similar locality if rented out for a year. Four, standard rent, as fixed under the Rent Control Act.

If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than that. In other words, the reasonable rent for a property can be higher of its municipal value or the fair rental value, but it can’t, in any case, be more than the standard rent for such property.

Taxes, interest

Once the annual rent is determined, the owner can deduct expenses such as municipal taxes and interest on a home loan if any.

However, tax deduction for municipal taxes can only be claimed when the property was let out for some part or whole of the previous year. These taxes must be borne by the owner, and not the tenant. The municipal taxes have to be paid during the year itself.

Similarly, interest paid on borrowed capital is allowed for tax deduction on accrual basis under section 24(b) of the Act, provided it is borrowed to buy, construct, repair, renew or reconstruct the house.

Other permissible tax deductions are standard deduction of 30% of the annual value, under section 24(a) of the Act.

What should you do?

As you are free to specify any one of the properties as self-occupied, before making this choice calculate the annual value of each property and then choose the one that has the highest annual value.

You must remember to claim all the tax deductions while calculating the annual value.

Apart from this, you are also free to change the property that has to be considered as self-occupied year-on-year for taxation purposes. Choose the one that gets you the most tax benefits.

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