How to reduce tax on rent from vacant houses

Rent earned from real estate property, both residential and commercial, is added to the total income and taxed at applicable tax slab. As per Income Tax (I-T) laws, a taxpayer is required to pay tax on the rent actually earned on a let out property and also on notional rent applicable to properties that are not let out but cannot be classified as self-occupied.

A taxpayer can reduce tax under the ‘income from house property head’ by two ways - through tax benefits and carefully declaring the self-occupied property.

Notional rent

Properties are classified as self-occupied, let out and deemed to be let out for taxation purposes.

For a property to be declared self-occupied, it should either be occupied by the owner or their family or should have remained vacant for the entire financial year. A taxpayer is allowed to declare up to two properties as self-occupied and don’t have to pay rental tax on them.

All other properties besides the two self-occupied ones attract tax on rent. If any such property was vacant and no actual rent was earned on it, it is declared as deemed to be let-out and tax is paid on notional rent.

Notional rent is equivalent to the gross annual value (GAV) of the property, as per I-T laws. The GAV is determined by comparing standard rent, municipal rent and fair rent. Municipal rent is determined by the municipal authority of the area where the property is located, fair rent is equivalent to the rent being charged on a similar property in the same locality and standard rent is decided as per the Rent Control Act.

The higher of the municipal rent amount and fair rent is compared with the standard rent, and the lower of these two is taken as the GAV. For example, say, the municipal rent is decided as ₹2 lakh, the fair rent is ₹2.3 lakh and the standard rent is ₹2.1 lakh, the GAV for this property will be ₹2.1 lakh, which is treated as the rent earned on it.

How to reduce tax

Under the ‘income from house property’ head, taxpayers can claim various deductions. Foremost, a standard deduction of 30% is allowed on rent from let out and deemed to be let out properties. You should claim standard deduction after deducting the municipal taxes, if any, from the GAV of the property. Second, home loan interest up to ₹2 lakh for self-occupied and deemed to be let-out properties is available as deduction, while for let-out properties, the entire interest amount paid can be deducted.

Another benefit is in the form of loss from house property. If you are paying a loan on a self-occupied property, you incur a loss in the form of the interest paid, which can be set-off against any income. “In your ITR, you declare GAV of the self-occupied property as zero and claim the interest paid on the loan as deduction. This results in a loss from the house property equivalent to the interest paid,” said Nitesh Buddhadev, founder, Nimit Consultancy.

Another method to optimise tax is when you have more than one vacant house apart from the house you live in. In this case, declare the one with lower GAV for tax optimization. For instance, if the net annual value (GAV minus municipal tax) of house A and B are ₹4 lakh and ₹4.5 lakh, respectively, declaring house A as deemed to be let out will result in lesser tax outgo.