You May Lose The Tax Benefits after You Sell Your Residential House
Real Estate, one of the most conventional investment options has been seen to perform fairly well in comparison to other sectors when it comes to measuring the Return on Investment (ROI) with respect to the level of the low risk that it offers. However, this does not mean one loses sight of ‘when and how’ to take decisions pertaining to one’s owned property.
Recently, Kalpana and Suresh sold off a property they had purchased just two years ago. In their justification, they said that the house was fetching them nearly 40% profits on sale at this time. What they did not realise was that selling the house at this point meant having to pay a huge sum in the form of taxes on the profits and they also had to forget about the tax exemptions that Suresh was enjoying so far, owing to the home loan he had borrowed. Matters like buying and selling of house property need careful investigation.
Like Kalpana and Suresh, if an individual decides to sell off the house he/she owns within the first three years of purchase, it may completely reverse the situation of tax benefit being availed on the home loan. These tax benefits claimed earlier are included in the income earned during the year in which the property is sold. This is not only applicable to the self occupied property but to all the properties owned by an individual, including those from which earning is made (let out property) and also property that has not yet been let out for rent (deemed to be let out property/DLOP. Notably, in the case of a property like a farm house owned by an individual, the tax is not applicable since it is considered as an agricultural income.
Lets understand how to calculate annual value of the house property before claiming tax benefits.
Let Out Property
This is a situation where an individual is earning returns on his/her property in the form of regular rent. In this case, the following steps need to be followed to figure the annual value of the property:
1. The value of rent needs to be assessed by comparing municipal value with fair rent. (Fair rent is the rent of properties that fall under a similar category). The higher value can be used but it should not exceed the standard rent.
2. Evaluate the actual rental value that is received on that property.
3. Out of the values calculated from the above steps, choose the value that is higher.
4. The value of the rent amount lost has to be found out for the months of the financial year when the property was not let out.
5. Calculate the difference between the values found out in steps 3 and 4. This difference gives you the annual value of the property also known as Gross Annual Value.
6. Finally, you calculate the Net Annual Value (NAV) of the property by deducting the value of the Municipal tax due and paid during the year from GAV.
Deemed to be Let Out Property
Such a property is owned in addition to one residential property. Only one of the owned residential properties can be considered to be ‘Self Occupied’, putting the others in the DLOP category. The owner is eligible to claim deduction of municipal tax paid on this property post calculating the GAV (in the same way as for LOP). However, the rental value calculated for such property will be the standard rent fixed as per provisions of the Rent Control Act.
In case of multiple properties, the property with the highest GAV can be considered to be self occupied and the rest as DLOPs.
Deductions
The tax paying owner of such properties may claim the following deductions from the calculated net annual value under Section 24 of the act:
a) Standard Deduction: Under Section 24(a), the possession of a residential property leads to a great maintenance cost. However, whether the taxpayer spends any amount as expense on the maintenance or not, he/she can directly claim 30% on the NAV of the property as a deduction. Importantly, such a deduction is only applicable for properties under LOP and DLOP. For the self occupied property, the taxpayer is not eligible to claim any standard deduction as the net annual value of the self occupied property is reduced to zero.
b) Interest on the Borrowed Capital: Under Section 24 (b) of the IT-act, the interest that is paid by the owner on the home loan is deducted from the Net Annual Value of the house property. In case of a self occupied property such deduction is limited to Rs. 1,50,000 (The deduction stands reduced to Rs. 30,000 in case of loans taken prior to Mar 01, 1999) but there is no such limit applicable in case of Let Out Or Deemed To be Let Out Property. Such deduction can be claimed only from the years in which construction of the house is completed. Total interest paid during pre-construction period can also be claimed as deduction in five equal annual instalments commencing from that financial year.
Principal amount repaid during the financial year is eligible for claiming deduction u/s 80C of IT-act within the limit of Rs. 1 Lakh.
For the owner of a property, it is highly pertinent to clearly understand the applicable taxes on house property and find the best suited arrangement that provides him optimal benefits as a taxpayer.
