Tax Calculation on Property: Real estate has long been considered as a safe medium of investment. If you want to invest your capital for a long time, then investment in property comes out as the preferred option among people. Property is purchased for the purpose of living or to collect rent or for the purpose of selling it in future. Capital gains tax is calculated at the time of sale when the value of the property increases and the property is sold for encashment. Apart from this, income from rent and home loan taken from any financial institution also has to comply with the provisions related to tax.
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tax on rental income
- Rental income is charged to tax under the head ‘House property’ but income from subletting of property is liable to tax under the head ‘Other sources’. Subletting means giving the whole or part of one’s house to another person and then using it.
- If there is a joint property, then the tax will be calculated by dividing the earnings on the basis of the share in the property.
- There is no tax liability on residential property for self and family living. This exemption is for a maximum of two properties. However, tax will have to be paid on the rent received from commercial property.
Landlord also gets tax exemption on rent, this way you can take advantage
- Rental income on two residential properties has been kept out of the purview of tax, but if the number of houses exceeding this has not been given to anyone, then the individual will have to pay tax as per the notional rent.
Some deductions are also available under the Income Tax Act 1961 while calculating the tax on the income from rent. Apart from the municipal tax paid by the property owner during the year, 30 per cent of the amount of rent remaining after this tax is eligible for standard deduction and the remaining 70 per cent is taxed. - The benefit of standard deduction is given for the maintenance and repair expenses of the property. However, keep in mind that after taking advantage of this, no deduction is available on other expenses like maintenance charges and insurance etc. in society flats.
Interest paid on home loan
- Under the Income Tax Act, tax relief is also available on interest paid on home loans taken for purchase, construction, repair, renewal or reconstruction of a house.
- In case of self-occupied property, you can claim deduction of interest up to a maximum of Rs 2 lakh. However, no such limit has been fixed in the case of rented properties.
- The higher the interest to be paid on the home loan over and above the rental income, the tax benefit can be availed on that loss. The maximum loss can be set off under any other income head during the relevant year up to Rs 2 lakh.
- The interest on loan taken for construction is divided into two phases – pre-construction and post-construction. The pre-construction interest is divided in equal installments within five years from the year the property is constructed or acquired. In contrast, post-construction interest has been allowed every year.
- Taxpayers can claim deduction under section 80C from their total income for the amount borrowed under home loan. The maximum limit under section 80C is Rs 1.5 lakh.
- Taxpayers can also avail additional tax benefits on loan interest under Section 80EE and Section 80EEA.
(Article: Shailesh Kumar, Partner, Nangia & Co LLP)
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