Investments & Tax Fundamentals

Taxation and home-ownership 101

Taxation and home-ownership 101

The taxation of home ownership in India is mandated by the Income Tax Act of 1961. As per amendments by the annual Finance Act, and combined with taxes like stamp duty, GST, and property taxation, this legislation impacts the whole life cycle of buying, constructing, renting, owning, and selling a property. Different types of taxation apply to different aspects of buying a home. This article will focus solely on the taxes involved in home ownership in India.

Taxation for home-ownership in India

Any immovable property that is not occupied by its owner is subjected to taxation known as “income from house property.” This charge represents one’s rental income. This property could be left vacant, the second property of an individual which is occupied by its owner, actually let out, or office space or land that is owned by a business and currently held for rental or capital appreciation purposes. The taxation of this property will be calculated based on :

  • The rent which is actually received.
  • The rental rates that are currently available in the market for a property in a similar location and of similar dimensions.
  • A rental value that is deemed using rent tables which are published by local authorities.

Based on the rates that are published by local governmental authorities, annual property taxation is allowed as an expenditure in the year in which it is actually paid by the homeowner. Take the following example. Suppose one buys a thousand square feet flat in Bangalore. The property tax rate for this by local authorities is about ₹50000 annually. On top of this, the taxpayer is allowed a statutory deduction of 30% of the Net Annual Value. Interest reduction is also included in these expenses. It is capped at a total of ₹2,00,000 per year.

A developer of these properties that is currently awaiting the sale of its vacant units is permitted a tax exemption for a year from the end of the accounting year.  Within this year, the developer will receive the certificate that shows that the construction of the property has been completed.

Taxation for Owning multiple properties in India

Now that property taxes with respect to single home ownership in India have been established, do these remain the same if someone owns multiple properties? The answer is no. The taxes vary when one has multiple properties under its name. In such cases, the taxpayer with more than two properties can use the option of identifying either two of the properties as their residence, and the remaining are assumed to be let out. This is because FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes. The properties which are not labelled as one’s main residence will then be taxable for the owner on account of being unoccupied by their owner.

Taxation for a single property with a partial let out

There is also the case of owning a single property where one portion is let out. A let out property is one where the owner of that property has passed on the right of occupancy of that property to another person(s) against a certain consideration. A property can be let out for rental purposes and this is usually the case for which people partially let out their properties. In cases where one is renting out some portion of a single property, the portion which is let out is subjected to property tax. This can be a room in an apartment or a floor of a bungalow.

When is property taxation not applied?

So far, we have covered that property tax is valid when the owner of a property is not on that property for some reason, leaving it vacant, let out, as a workspace, or holding it for a future sale, among other reasons. There is one case where one’s owned property can be vacant and property taxation does not apply. This is the one exception to property taxation. Such is the case when the residential property’s owner has left their home vacant due to living in a separate accommodation that has been provided by their employer. In this case, the property tax is nil.

The Bottom Line

Property tax is the main form in which home ownership in India undergoes taxation. It is decided based on multiple factors like the property’s rental rate in the market, rent received, and the rent for a similar property in that area and of that size. If one is renting out their home partially, there will be property taxes applied to the area which is being rented out. If one owns multiple properties, those which are not labelled as the owner’s main residence will be taxed.

Conclusion

For any potential homeowner, taxation is an important criterion to learn about and hence, the aforementioned points should be kept in mind. This could help save unnecessary hassles and structure tax in a way that can be beneficial in the long run.