Calculating Taxable House Property Income

August 6, 2007	(2 votes, average: 1.5 out of 5)  Loading ...
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Imposition of service tax on residential property rentals by the government has brought a severe headache for builders. However, rental income is taxable on accrual basis except the unrealized rent, if the non-realisation complies with terms and conditions stipulated in Rule 4 of the Income Tax Rules.

Income from residential property includes both accrual and cash basis of determination. The rental income is calculated on accrual basis. The expenditure towards municipal tax is deducted on cash basis whereas the computation of deduction towards interest on money borrowed is done on accrual basis. Evaluating the tax on rental income may seem difficult as much as the concept seems vague.

The article discusses basics of computing taxable house property income.

Interest on Money Borrowed

If the construction of property is completed in the previous year, it is chargeable to tax under ‘house property’.

The annual value of self occupied house property will always be considered ‘nil’. Interest due on the loan borrowed for acquisition, repairs, construction or reconstruction will be deducted.

In case, you have taken the loan after April 1, 1999, and the completion of construction is made within three years from the end of the financial year of borrowing then the maximum amount of interest that can be deducted from the amount is Rs 1, 50,000.

Deductions from pre-construction interest on money borrowed are done in five equal annual installments starting from the year of completion of construction. Repayment of the principal amount of loan is deducted as per the conditions contained in Section 80C. In addition to being taken from notified sources, the loan must be for either buying or constructing residential house. The property must be taxable under the head ‘income by the assessee or rent out for residential purpose to be eligible for Section 80C deduction.

A Look at Deductions

The taxes tax charged by any local authority in respect of the property shall be deducted on the actual payment basis. Hence, the gross annual value can be a negative figure if the tax dues of previous years have been paid on a lump sum basis and exceed the gross annual value.

The law stipulated in Section 24 allows deductions at 30 per cent of the annual value. It is
irrespective of the actual amount of spent by the assessee towards property maintenance. The deduction is applicable only where the assessee derives rental income from the property or it is treated as deemed let out property.

Understanding Unrealized Rent and Arrears

Any unrealized rent received by the assessee will be taxable without any deduction thereof. Such unrealized rents are chargeable to tax and the assessee need not be the owner of the property in the year of actual receipt.

Apart from the unrealized rents, rent arrears realized by the assessee are also taxable in the year of receipt. After making the deduction of 30 per cent of the amount so realized, the balance is taxed as income under the head income from ‘house property’.

Deemed Ownership

Property transferred in the name of spouse in the absence of necessary consideration would also be taxable in the hands of the transferor.

Likewise, property transferred in name of minor child is also taxable in the hands of the transferor. In case, the minor child is a married daughter, then it is not taxable in the hands of transferor but in such a case, Section 64(1A) would apply independently.

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