Tax on Rental Income or Let-Out House Property [AY 2019-20]

Do you own 2 or more house property?

If yes,

Then this article will help you to calculate your rental income under the income head “house property”.

As per the law, a person shall be liable to pay tax on every property he owns even if it is not rented [vacant].

However, a relief from the tax is provided for the following 2 properties:

1. Self-Occupied Property, a person can declare only 1 property as self-occupied and any extra property shall be assumed to be let-out [deemed]. From FY 2019-20, this relief is extended up to 2 house properties.
2. Property used for own business or profession.

Taxation of actual let-out and deemed let out is same.

So, let’s get busy!

Taxable Rental Income 

Rental income from any buildings or lands appurtenant thereto owned* by you shall be chargeable to tax under the head “House Property”.

Example: Rent received from a residential as well as commercial property like shop, malls, godowns etc.

* A person may be considered as an owner of house property even if he is not the original owner, also known as a deemed owner.

You will be considered as the deemed owner of a house property if you transfer house property without sufficient monetary value to your minor child (except married minor daughter).

Rent received by a tenant on subletting is taxable in the hands of the tenant. It will be considered as an income either under the head “Income from PGBP” or under “Income From other sources”.

House Property Owned by more than 1 Owner 

Co-owning house property is one of the most common tax-saving tools.

In case of co-owned property, the net annual value [NAV] will be taxable in the hands of all co-owners to the extent of their portion only.

After the division of NAV, each co-owner will get their own separate deduction of 30% and interest on home loan. [Discussed below]

Calculation of Income from Let out House Property 

Income from letting out or rented house can be computed by using the following formula:

We will cover each of the above components in brief.

Gross Annual Value [GVA] 

We can consider Gross annual value [GVA] as the higher of:

1. Expected Rent of the property based on its size, location, purpose etc.
2. Actual Rent as per the agreement

However due to vacancy if the actual rent is less than expected rent then the actual rent received or receivable shall be considered as the GVA.

In other words, GVA shall be lower of expected rent and actual rent if the property is let out for part of the year.

Example: Where a property is let out for a part of a year and self-occupied for the remaining part of the year, GVA will be the actual rent received for let out period.

Deduction of Rent Not Realised [Bad Debts] 

Unrealised rent can be reduced from the GVA only if:

1. The tenancy is bona fide.
2. The tenant has vacated the property, or steps have been taken to compel him to vacate the property
3. The tenant is not in occupation of any of your other property.
4. You have taken all steps to recover such amount, including legal proceedings.

Recovery of unrealized rent will be taxed under the head “Income from house property” in the year in which such rent is realized. For this part ownership of the property at the time of recovery is not relevant.

Needless to say, the standard deduction of 30% shall also be available.

Deduction of Taxes paid to Local Authority [Municipal Taxes]  

Deduction of municipal taxes is allowed only on payment basis. It must be paid by the owner of the property.

The deduction is available in the year of payment even if such payment is made as advance tax or as arrear tax.

This deduction also includes taxes paid to Gram Panchayats.

Taxes paid by the tenant are not eligible for deduction.

Deduction from Net Annual value [NAV] 

A straight deduction of 30% of net annual value (NAV) is available for let-out properties only. [u/s 24(a)]

This deduction is provided without any terms and condition and that’s why it is called as the standard deduction.

Recommended to Read: Straight Deduction under Salary Income

Deduction of Interest Component of a Home Loan 

Unlike municipal taxes, deduction of the interest component of a home loan is available on an accrual basis. For availing this deduction, the taxpayer must have ready to move house property. [u/s 24(b)]

In other words, interest paid on a home loan for an under Construction property is not eligible for this deduction.

For new house property, Interest on the home loan is divided into 2 periods:

1. Post-Acquisition or Post-Construction Period
2. Pre-Acquisition or Pre-Construction Period [Does not include the interest of current year]

There is no maximum limit for the deduction of Interest relating to post-acquisition or post-Construction period.

Deduction of Interest relating to pre-acquisition or pre-construction period for a let out property shall be limited to 1/5th of the total interest amount accrued during the period.

Both interest components are deductible after the completion of acquisition or construction.

Processing fees and ancillary charges are also considered as interest and thus eligible for dedction under section 24(b)

Recommended to Read: Tax Saving on Home Loan for Self-occupied House

Set off and Carry Forward Losses 

A taxpayer can get a maximum loss of Rs. 2 lakh under the head “House Property” and the unabsorbed loss (in excess of 2 lakh) will get carry forward to 8 subsequent years. [u/s 71B]

This loss can be set off with any of the remaining income heads like salary, PGBP, Capital gain, other sources.

Read: Setoff LTCG and STCG Loss

Exemption to Builders or Realty Company [From AY 2018-19] 

A property which is held as stock in trade is preferred to be kept as vacant in order to showcase it to potential buyers, agent and brokers.

From Assessment year 2018-19, the annual value of a house property held as stock-in-trade by the owner of the property and not let out during the whole or any part of the year shall be Zero [0].

This exemption is available only for the period up to 1 year from the end of the financial year in which the property is completed.

From FY 2019-20, this exemption is extended up to 2 years. [Interim Budget 2019]

Frequently Asked Question [FAQ] 

Ques 1: My son stays in Britain. He owns a flat in Kolkata, India and is on rent. I receive the entire rent amount. Is he liable to pay tax on that property? What if he transfers that house in my name?

Ans:  Tax will be charged in your son’s hand because he is the owner of that house property. Recipient (You) of rent is not liable for any tax.

If the flat is transferred to you, then you will be liable to pay tax on that house property.

Conclusion

For computing income from rented house property, all you need to do is to find:

1. Gross annual value [GVA]
2. Unrealized Rent
3. Municipal taxes
4. Your share of ownership in that house property
5. Interest on home loan

Various if, but and exceptions, as mentioned in the entire article, needs to be kept in mind while calculating the above elements.

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