Carefully preserve the records of your financial transactions relating to the house property, proof of payments, sources of investment etc.
Owning a house is a dream for millions of people in India. The Government too is focused on promoting affordable housing and provided various incentives, be it the subvention in interest rate or the tax benefits. Investment in house property (“HP”) is a major financial decision and taxation plays its own role not only when you buy or sell but also when you hold it. Here are the provisions relating to the taxation of HP, which you must understand for better planning and for proper compliance.
Under the Income tax Act, 1961, the owner of the HP is subjected to tax on its annual value under the head ‘income from HP.’
Determining the Value
The annual value of the HP is determined to be the higher of the municipal value or fair rent of that property. The municipal value is the valuation determined by the local authority to collect municipal taxes. Fair rent is the rent fetched by a similar property in the same or similar locality. In case the property is covered under the Rent Control Act, the maximum amount is restricted to the standard rent. The maximum rent that the landlord can legally recover from the tenant is the standard rent.
However, where you are self-occupying a property/properties or could not occupy due to your employment, business or profession being carried on at any other place, the value of up to two of such properties (as the case may be) would be considered as NIL. In case you own more properties that have been lying vacant, the same would be considered to be Deemed to be Let Out (DLO) and subject to tax on notional rent basis to be determined as explained above.
From the Gross Annual Value, deduction is allowed of any municipal taxes (MT) actually paid during the year to determine the Net Annual Value (NAV).
From such NAV, the following deductions are allowed:
(a) flat deduction at the rate of 30 per cent of NAV (towards repairs, maintenance of the property irrespective of the actual expenses incurred or not incurred)
(b) Interest on loan to buy/construct the said HP.
Interest for the preconstruction period is allowed in five equal installment starting from the year in which construction is completed. The deduction for interest, including the preconstruction period interest installment, is restricted to Rs 200,000 in relation to self-occupied HP.
However, for the actual rented out HP or HP which are taxed as DLO, the actual interest incurred is eligible for deduction. In case the net result of this computation is a loss, it can be set off against any other head of income (including salary income) to the maximum extent of Rs 200,000. The remaining unabsorbed loss can be carried forward up to next eight financial years and can be set off against Income from HP only.
This year’s Budget introduced the specific incentive in the form of an additional deduction of Rs 150,000 towards interest, provided the loan is availed during the financial year 2019-20 and the value of house does not exceed Rs 4,500,000.
Joint ownership with your spouse
Where you purchase a house jointly with your spouse and if it is funded by both, each of you would be taxed on your specific property share and can claim deduction respectively as mentioned above. However, where the funding is done by you then any income from such property would be clubbed in your hands unless such transfer is on account of an agreement to live separately.
Withholding of taxes when you buy
If you are buying the HP from a resident seller, you need to deduct tax at 1 per cent of the sale consideration where the sale consideration exceeds Rs 5,000,000. Apart from the sale value, such sale consideration would include charges for club membership fee, car parking fee, maintenance fee or any other charges which are incidental to transfer of said property. Such taxes are required to be deposited with the tax authorities (in form 26QB) within 30 days from the last day of the month in which the deduction is made. A certificate of tax deduction at source should be issued to the seller in form 16B, within 15 days of the due date of furnishing of form 26 QB.
Where the seller of the property is a non-resident, tax deduction would be made at the applicable slab rates for the individual unless a certificate for lower tax deduction is taken, and in which case withholding can be done at such lower rate.
Sale of property
On sale of your property you would be required to pay tax if there is any capital gain. The gain arising on sale of such property would be termed as Long term capital gain (LTCG) if the property is being held for more than two years, else it would be a Short term capital gain (STCG). Indexation benefit is also allowed in the case of LTCG. This LTCG is taxable at the rate of 20 per cent plus surcharge (if applicable) and education cess at 4 per cent and STCG are taxable as per applicable slab rates. However LTCG can be claimed as exempt where gains are re invested in another house property or in certain specified bonds (up to Rs 5,000,000) provided other specified conditions are met.
Carefully preserve the records of your financial transactions relating to HP, proof of payments, sources of investment etc. as they may be asked by the authorities for verification not only for the audit of your return but also the audit of buyer or seller to whom you sold the property or bought from.
(The writer is Partner and Leader Personal Tax, PwC India. Chander Talreja, Executive Director-Personal Tax PwC India also contributed to the article. Views are personal)