Know your Capital Gain on Income from House Property

7 December 2009

Shelter is one of the basic human needs and buying
a house is generally every household’s dream.
These days, keeping in view the rise in income
 levels, households also look at the option of
investing in more than one house property.

People buy a second home for many reasons,
 which, Capital Gains Binter-alia, include
 as an investment for capital appreciation;
 to use it as a holiday home; to get a regular
stream of income by way of rentals;
or to diversify their investment portfolio.

Whatever be the reason, an important aspect to
be considered at the planning stage is the tax
implication of owning and maintaining the second home.

Second House — Self-Occupied

If an individual owns more than one house property
for his use, then under the provisions of the Income
Tax Act, 1961 (the ‘Act’), any one property as per
 his choice is treated as self-occupied and its
annual value is computed to be nil. The other house
 property is deemed to be let-out and a notional rent
as per the provisions of the Act is computed as the
taxable income under the head ‘Income from House Property’.
 In other words, the second house is treated as being
 rented-out and its estimated rental income is treated as taxable income.

Second House — Let-Out

If the second house is let-out to a tenant, the actual
rent received, subject to certain conditions,
is treated as the taxable income under
the head ‘Income from House Property’.

Deduction for Municipal Taxes

The taxes paid to the local authority, generally the
 municipal taxes, are allowed as deduction in the
financial year, in which such taxes are actually paid.
 This is irrespective of whether these taxes pertain
 to the current financial year or the earlier year.
Therefore, an individual should keep a track of the
municipal taxes paid and claim this deduction accordingly.

Deduction for Repair & Maintenance

Further, a sum equal to 30% of the annual value of the
 house property is allowed as deduction towards repair
and maintenance charges. It is pertinent to note that
this deduction of 30% is a fixed percentage, irrespective
 of the actual amount incurred by the individual
i.e., irrespective whether an individual incurs more
or less amount, he can only claim a deduction
for 30% of the annual value of the house property.

Interest Deduction

Interestingly, in both the above scenarios, i.e., whether
 the second house property is deemed to be let-out or
 actually let-out, the actual interest paid on the
housing loan is allowed as deduction.

This is contrary to the case of a
self-occupied property, wherein the
maximum interest on housing loan is restricted
to Rs 150,000 p.a., subject to certain conditions.

Hence, investment in house property even if it
is a second house, does have its own tax benefits.
 If one is lucky enough to own more than one house
property then s/he can avail of tax benefits mentioned
above, in respect to the second house.

Income tax- House property- India simple guide

House Property -  Income Tax effects in India:

Self Occupied house  property:

If the house is self- occupied, then interest on housing loan taken from recognized financial institutions like bank etc. is eligible for deduction under Sec.24. The Annual Value of the property will be taken as nil and hence naturally there will be negative income i.e loss from house property which can be set off against any other income in the said financial year.

The interest allowed for the houses purchased prior to 1.4.1999 is only Rs.30000/- maximum and for subsequent period, the amount allowed is Rs. 150000/-. Only one house can be treated as self-occupied property if anyone owns more than one house and wants to claim self-occupied property either by himself or his relatives or even if it is locked.

House property given on rent:

For rented property, the annual value i.e. rent receivable is to be calculated first allowing deductions like municipal tax paid for the house property,  insurance paid for the house property. This is called net annual value. If it is not possible to calculate rentable value, then the annual value will be taken as ratable value as per municipal /city valuation.

From the Net  Annual value, the deductions are allowed for

1. Vacancy allowance ( house remained vacant)
2. Interest on house Bld loan without any limit
3. Repair allowance of 30% of net annual value.

The remaining amount , if it is negative, then this amount can be set off against other income like salaries and business income. Otherwise, it will be taxed at the appropriate rates  after adding this with other income. This type of calculation can be done for any number of houses owned by individual given on rent.

When you want to sell the house and have some capital gain:

Capital gain is divided into two categories:

1. Short term capital gain.
2. Long term capital gain.

Short Term Capital Gain:

If we sell the house property within 3 years from the date of purchase/ construction, it will be treated as short term capital gain and will be added to the income of that year and taxed according to the slab.  No indexation benefit will be given for the house property.

Long Term Capital Gain:

If we sell the house property after 3 years from the date of purchase/ construction, it will be treated as Long term capital gain. The tax rate applicable will be 20%  after application of indexation on the capital gain.

For example, X sold his property on Jan 1, 2006 for 80 lakhs. He bought it on 22.12.2002 for 35 lakhs. The capital gain will be

Sale price:   Rs. 80 lakhs

Index in 2002 was 447

Index in 2006 was 497.

Indexed cost of acquisition will be:  Rs. 35 lakhs * 497/447 = 39 lakhs(say)

So there is a long term capital gain of Rs. 41 lakhs. This is long term capital gain as there was 3 years gap and eligible for indexation and tax exemptions if capital gains are invested suitably.

There are tax exemptions available on the long term capital gains we make in selling house property.

1. If we invest in a plot, we need to purchase it within 2 years of sale of original property. We have to construct a house on the said plot within a year. In short, if we purchase a plot, within 3 years we have to completely constructed one house on it. Otherwise we will have to pay tax.  We have to invest minimum of Rs. 39 lakhs which is our capital gain. If we invest less than that, then the difference will be added to the income of the concerned financial year and taxed according to the tax slab.
2. If we purchase apartment, it should be done within 2 years from the date of original property sale. Tax conditions are same just like 1 above.
3. We can deposit the capital gains in a capital gains bank account with a nationalized bank within the date of filing returns in which the capital gains accrued. The amount along with the accumulated interest needs to be utilized for purchase of  a property within two years of sale date.
4. We can invest in Capital gains bonds also issued by NABARD ,HUDCO etc. if their bonds cover to give this benefit. But the interest rate will be nominal.

Caution:

When we construct/purchase a house  to avoid capital gains tax after sale of first house:

When we purchase a new house after selling our earlier one , ideally we should own it for a minimum of 3 years or else, the capital gains earlier exempt will be taxed and we will also have pay interest and penalties to income tax dept

Venkata Ramani