To understand that better let us take a case where you have let out the property (LOP) and then DLOP.
Let Out Property (LOP)
In cases where you are enjoying a regular income from the property in the form of rent, then the annual value of your property would be calculated by adopting the following steps:
a) Find out the reasonable expected rent of the property (which is municipal rent or fair rent, whichever is higher)
b) *Consider the rent actually received / receivable c) Take whichever is higher from a) and b)
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d) Calculate loss due to vacancy (i.e. in case if the property is vacant for period(s) during the financial year)
e) The difference between step c) and step d), will be your “annual value” – which is here referred to as the “Gross Annual Value” (GAV)
Now when we go one step further and minus the municipal taxes paid by you (on the property) from “step e)” you’ll arrive at the “Net Annual Value” of your property. But to avail the deduction for municipal taxes; they have to be paid by the landlord only.
*Note: Rent earned by you from the property is calculated after subtracting any unrealised rent from the tenant (i.e. in case if he defaults to pay)
Deemed to be Let Out Property (DLOP)
In case you own more than one house, and the other house(s) apart from the one where you are staying are vacant throughout the month, then the other house property(s) would be considered as a “Deemed to be Let Out Property(s)” - DLOPs. Moreover, you would be liable to pay tax on such property(s) after having calculated the Gross Annual Value (GAV), which will be calculated in the same way as for LOP. But the only difference being that, here rent would be the standard rent calculated as per the municipal laws.
Thereafter, if you as the landlord are paying any municipal taxes towards these properties, then those would be subtracted to obtain the Net Annual Value (NAV).
Remember, over here in case you have multiple DLOPs, then you have an option to consider one of property as a SOP and the rest would be considered as DLOPs under the present Income Tax law. So, say you have 4 such DLOPs then you should ideally select the property with the highest GAV as a SOP property, as this optimises your tax planning exercise, as the remaining properties available with you will have a lower GAV.
Self-Occupied Property
You need not worry here if you are occupying the property, throughout the financial year for your stay (i.e. residential use) and thus the NAV of the property will be considered as Nil.
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But if you are occupying the property for some part of the year, and the rest of the year you have earned an income by letting it out, then proportionately for the rest of the year when the property was let out, the calculation of “annual value” would be applicable as that of LOP.
Deductions:
After having calculated the Net Annual Value (NAV) as seen above, you are eligible to claim deductions under Section 24(b), which further reduces your taxability under this head of income. You broadly get the following deductions:
Standard Deduction [Section 24(a)]
Owning a home and maintaining the same costs you money. But irrespective of the fact whether you have incurred any expenditure or not to do so, you will be eligible to claim a flat deduction of 30% calculated on the NAV of the property. And this deduction is of specific use if one’s property is LOP and / or DLOP. In case if the property is SOP, then you are not eligible to claim any deduction as the NAV of your SOP is Nil.
Interest on borrowed capital [Section 24(b)]
As reiterated above too (in the home loan section), if one wisely takes a home loan for buying a house property then the interest so paid on the borrowed capital will make you eligible for deduction under Section 24(b), irrespective whether the house property is SOP, LOP or DLOP. In case of SOP the income from house property will be negative income, (if interest is paid on capital borrowed by you to buy or construct or reconstruct or renew or repair the house), which will enable you to reduce your overall Gross Total Income (GTI). In case of other properties – i.e., LOP and DLOP the income from house property will be positive, but would be reduced to the extent of standard deduction and interest paid.
The quantum of deduction depends upon the purpose for which you take a loan – i.e. purchase, construction, reconstruction, repair or renewals, and also the type of property – i.e. SOP, LOP or DLOP.
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Hence, in case you have taken a loan for the purpose of purchase or acquisition of the house which is an SOP, then you will be eligible for a maximum deduction of a sum of Rs1,50,000. But if the loan is taken for the purpose of repair, renewal, or reconstruction, then the eligible deduction isrestricted to Rs30,000.
Now if the property is LOP or DLOP, then you do not have any maximum restriction for claiming interest – so it can be above the otherwise limit of Rs 1,50,000, irrespective of the usage – i.e whether for the purpose of purchase, construction, reconstruction, repair or renewals.
Remember, while everyone buys house property(s), it is important to avail the benefits available under the Income Tax Act, wisely as this would enable in optimally saving your tax liability, and off course enjoy the fruits of your investment made too and / or enjoy the comfort of your dream house too.
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