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Its the tax season and its time to explore various facets of tax planning and educate yourself on the various nuances of tax on property. This article discusses taxes on rental income from a house and the capital gains from the possible sale of a house.
When you own two houses and let out one of them for rent,you receive an income for which you need to pay tax. In such a scenario,the taxable income from the total rent income received by you for that particular financial year will be computed in your tax returns.
Computing Rental Income
For properties let out,the gross rent needs to be the greater of the three values below:
* Municipal valuation of the property: The rental value fixed by the corporation based on your locality and property value.
* Actual rent received during the financial year: The rent received by you from your tenant for that particular financial year.
* Fair rent: The rent of a similar property in the same or similar locality.
From this gross rent,the property tax is deducted to arrive at the net annual value of the rental income.
Permissible Deductions:
* 30 per cent of the net annual value for repair,maintenance and rent collection expenses for the property.
* Interest paid towards any type of home loan on this particular property.
* Any property insurance premium you have paid for the financial year.
Here is a simple example:
Actual rent received from property say
R 15,000 x 12 = R 1.8 lakh
Less: Municipal Tax/Property Tax paid by you say R 5,000
Net Annual Value: R 1.75 lakh
Less:
(1) 30 per cent of the net annual value: R 52,500
(2) Interest paid on a renovation loan for the house,say R 30,000
Taxable rental income = R 92,500
The taxable rent income will be included by your auditor under income from other sources,along with other such incomes as well as your salary income and deductions you are eligible for,to calculate your final tax outgo.
Capital Gains From Sale
Let us now look at what happens if you decide to sell your property.
Any profit that you receive by selling any asset at a price higher than at which it was acquired by you is classified as capital gains and clubbed under income from other sources.
Short term and long term capital gains: If you sell your house within three years from the date of purchase you will incur a short term capital gain or loss which is included under other sources of income.
In case you sell your house beyond three years then it is considered as a long term capital gain/loss.
Exemptions from capital gains tax: If you choose to use the capital gains from selling your house to buy a residential property,you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.
You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of three years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.
In case you do not choose to make any investments and opt to pay tax,the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.
For example,if you had purchased a house for R 5 lakh and then sold it for R 9 lakh,the capital gains would be R 4 lakh. However,for the sake of income tax calculation a number called indexation number is used,which is a percentage of the gain that is assumed as value addition due to inflation.
Thus if indexation is 20 per cent then Rs 9 lakh minus (20 per cent of R 5 lakh) minus R 5 lakh,that is R 3 lakh would be taken as capital gains.
A capital gain is usually charged at 20 per cent in most cases where the calculation is based on indexation.
A better understanding of the tax rules can make your life easier and help you file your tax returns with clarity.
The author is CEO,BankBazaar.com
