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Please clarify with following on the taxability of second house property. My second 2nd house property rent is expected at Rs. 24,000/- per year. It was purchased last year.
NMC Tax is Rs. 700/- per year. Housing loan interest paid is Rs. 2,50,000 (Rupees Two Lacs fifty thousands only) per year. Clarification is needed on the following issues:
- What will be the annual value of the property?
- Is it to be added to taxable income?
- What will be permissible deduction towards housing loan interest u/s 24(b)? [Dr. V. K. Vermaemail@example.com]
Very frequent queries posted by the readers about the tax implications of second house property reflect the dilemma of the taxpayers. It should be noted that “Income form house property” is taxable not merely on the basis of ACTUAL rent alone. Rather, it is taxable on the basis of inherent capacity of the property to yield income.
If taxpayer owns only one house property, then nothing would be taxable if it is lying vacant or is in self occupation of the taxpayer or any of the family members.
If taxpayers owns two or more houses which are used for own residence, then assessee have the option to choose one house (according to his own choice) as self-occupied and can adopt its annual value as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether or not actually let out] & would be taxable on the basis of its annual value.
Effectively, if Assessee owns more than one house property & is kept for own use,
a] one house property, as per the choice of the Assessee, shall be treated as self occupied and its annual value shall be treated as Nil.
b] Other house property shall be deemed to have been let out and the tax is payable on notional basis as discussed above.
Coming to your query, with above basic insight, it may be noted that:
- The annual value means the amount for which the property might reasonably be expected to be let out from year to year. Annual value of property is considered as higher of
(i) Actual rent received a year or
(ii) Reasonable expected rent of the property.
Reasonable expected rent is deemed to be the sum for which the property might reasonably be expected to be let out from year to year. In determining reasonable rent, several factors have to be taken in to consideration, such as, location of the property, annual ratable value of the property fixed by municipality, rent of similar property in neighbourhood, the rent which the property is likely to fetch having regard to demand and supply, cost of construction, nature & history of the property. These factors play a vital in determining reasonable expected rent of a house property. In a majority of cases, however, reasonable expected rent can be determined by taking in to consideration the following factor:
a] Municipal valuation of the property
b] Fair rent of the property.
The higher of (a) or (b) is generally taken as reasonable expected rent. If, however, a property is covered by rent control Act, then the amount so computed cannot exceed the standard rent.
[The annual value is always taken to be Nil in case of one self-occupied property.]
- Even if not actually let out, one property would be deemed to be let out and would be taxable on the basis of its annual value as mentioned above.
- In case of let out (or deemed to be let out) house property; deduction would be admissible without any monetary cap of Rs. 1.50 Lacs (now enhanced to Rs. 2 Lacs from AY 2015-16). That is to say, entire interest (Rs. 2.50 Lacs in your case) would be deductible in such cases.
I own a tenement at Nagpur which I purchased by taking Housing loan from my office. The Housing loan is fully Repaid along with due interest. Now I want to sale this tenement at Nagpur and buy a flat at Banglore from the sale proceeds received. The flat which I want to buy is on 4th Floor. I have reliably learnt that Nationalized Banks are not giving any ‘Home loan’ for the flats on 4th floor in this case, and therefore, I am having a doubt whether it will be proper for me to buy such flat from the sale proceeds of my tenement at Nagpur and claim capital gain as provide in the Income Tax Rules. Secondly I also want to know whether interest paid by me on my Housing Loan can be added to the cost of my Tenement while reducing the cost of the same from sale proceeds to arrive at the amount of Capital Gain. Please give your valuable opinion in the matter. [Shriniwas Rao- firstname.lastname@example.org]
- It may or may not be related to your query but as a precautionary measure, readers may note that if taxpayer disposes off the house before the expiry of five years from the end of the financial year in which the possession of the property is obtained then
a) no deduction u/s 80C shall be admissible to such assessee in respect of the year in which transfer is effected AND
b) the aggregate amount of deductions allowed in earlier years shall be DEEMED to be the income of the assessee of the year in which the property is sold and shall be liable to be taxed accordingly. [However, such sale does not in any way impact the deduction allowed for interest paid on the housing loan but its only reverses the deduction allowed on the repayment of principal u/s 80C].
- Long term capital gain (LTCG) tax arising on sale of your Nagpur flat can be saved by investing the LTCG in Bangalore flat. Further, though not related to income tax, let me clarify that the bank may not be financing the 4th floor in your case due to some documentary deficiencies like illegal construction, violation of other laws etc. Even if you invests, you would be eligible for exemption u/s 54.
- An interesting question while working out LTCG is regarding the admissibility of deduction against payment of housing loan interest. There is one Chennai tribunal judgment [Assistant Commissioner of Income-tax vs. C. Ramabrhmam (2013) 57 SOT 130 / (2012) 34 CCH 420 (Chennai)] wherein it is held that interest paid on home loan is allowable as deduction while working out LTCG. The tribunal has allowed a double deduction in respect of the same expenditure. Once while computing the house property income u/s 24(b) and again while determining taxable capital gain u/s 48. The tribunal has categorically mentioned that there is no specific prohibition for dual deduction in the law & has admitted the taxpayer claim. Relying on the above tribunal judgment, taxpayer can claim the deduction of housing loan interest while working out capital gain. Though deduction can be claimed on the basis of above judgment, still in my opinion, the issue is highly controversial and may be litigated by the tax authorities till the highest level.
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