Introduction to House Property:
In this Article, we will explore the differences between Self-Occupied Property (SOP), Deemed Let out Property (DLOP), and Let out Property (LOP) in the context of house property ownership. Understanding the nuances of house property is key to making informed decisions about real estate investments and tax obligations. Understanding the different types of house properties and their tax implications is crucial for property owners. Let’s explore the classifications and their respective characteristics.
1.Q What is the Definition of Self Occupied Property?
Ans. SOP refers to a property used for self-residence and not rented out. It provides homeowners with the benefit of enjoying their space without generating rental income. Self-Occupied Property can be better understood with the help of the following points:
1. Exclusive Occupancy: A self-occupied property refers to a house property used for personal residential purposes, providing exclusive occupancy.
2. Taxation Benefits: Owners of self-occupied properties are eligible for tax deductions under certain sections of the Income Tax Act.
3. Maintenance Costs: Owners bear the expenses of maintaining the property without any rental income.
Q.2 What are the Characteristics of Self Occupied Property?
Ans. The different types of Characteristics of Self Occupied Property are as follows:
1. Property Usage: SOP offers homeowners the convenience of living in their property without worrying about rental considerations. SOP is used for personal residential purposes.
2. Mortgage Interest Deduction: Limited interest deduction is possible for SOP. Individual can get a deduction of Rs 2, 00,000 under section 24b on interest of housing loan.
3. Annual Value: Notional rent is considered as the annual value of SOP for tax purposes.
Q.3 What are the Tax Implications of Self Occupied Property?
Ans. The tax implications revolve around the inability to claim rental income and deductions associated with SOP properties. Owners can claim tax exemption on the notional rent.
Q.4 What is the definition of Deemed Let out Property?
Ans. DLOP refers to a property that the owner does not rent out but is considered to be let out for tax purposes. It implies that the potential rental income is treated as taxable. Deemed Let out Property can be better understood with the help of the following points:
1. Deemed Rental Income: DLOP refers to a property that is considered to be let out, irrespective of whether it is actually rented out or not.
2. Offer for Rent: Owners may choose to keep the property vacant while being deemed as let out for taxation purposes.
Q.5 What are the Characteristics of Deemed Let out Property?
Ans. The Characteristics of Deemed Let out Property are as follows:
1. Notional Rental Income: Owners must pay tax on the rental income, even if the property is not rented out.
2. Reasonable Rent: DLOP is expected to generate a reasonable rental income for tax purposes.
Q.6 What are the Tax Implications of Deemed Let out Property?
Ans. Owners are required to pay tax on the notional rental income, even if the property is not rented out. But the Owners can claim deductions for mortgage interest and property tax on DLOP.
Q.7 What Constitutes Notional Rent in Deemed let out Property?
Ans. Typically, residents either live in the house themselves or rent it out. In the past, a person could only list one residence as self-occupied and might be required to pay taxes on the notional rent received from a second residence, even if it was also self-occupied. Nonetheless, notional rent from the second residence will not be subject to taxes starting in FY 2019–20, according to interim finance minister Piyush Goyal, who made this announcement at the Interim Budget presented in Parliament on February 1, 2019. To put it another way, starting with the following fiscal year, you are free to declare two homes as self-occupied and avoid paying any taxes on them.
Q.8 Why to tax the Notional Rent in Deemed let out property and how to compute Notional Rent?
Ans. The purpose of imposing a hypothetical tax was to incentivize individuals to rent out their unoccupied homes. This would increase the number of rental properties available to tenants and provide an additional source of income. Many professionals in the workforce who are spread around the nation search for rental properties.
In the event of a presumed let-out property, income subject to taxation under the heading “Income from house property” is calculated as follows:
|
PARTICULARS |
AMOUNT |
| Gross Annual Value | 205000 |
| Less: Municipal Taxes | (5000) |
| Net Annual Value (NAV) | 200000 |
| Less: Deduction under section 24 | |
| – Deduction Under section 24(a) @30% of NAV | (60000) |
| – Deduction under section 24(b) on account of interest on borrowed capital | (35000) |
| Income from house property | 105000 |
Q.9 What is the definition of Let out Property?
Ans. LOP refers to a property that is rented out to tenants, generating rental income for the owner. It involves renting out the property to earn financial returns. Let out Property can be better understood with the help of the following points:
1. Rental Income: LOP refers to a property rented out to tenants for generating regular rental income.
2. Tax Obligations: Owners need to declare the actual rental income and pay tax accordingly.
3. Lease Agreements: Owners are required to maintain proper lease agreements and declare the rental income for taxation.
Q.10 What are the Tax Implications of Let out Property?
Ans. The Tax Implications of Let out Property are as follows:
1. Maintenance Costs: Owners can claim tax deductions for maintenance expenses incurred for the let out property.
2. Taxable Rental Income: Owners must report the actual rental income and pay tax accordingly.
3. Tax Benefits: LOP owners can benefit from several tax concessions related to rental income and property maintenance.
Q.11 What are the Key Difference between Self Occupied Property, Deemed Let out Property, Let out Property?
Ans. The Key Difference between Self Occupied Property, Deemed Let out Property, Let out Property are as follows:
1. Usage: Self occupied Property Used by the owner for residential purposes on the other hand Deemed Let out property Considered to have been let out whereas Let out property is rented out to tenants.
2. Income Tax Treatment: Self Occupied Property has No rental income, Deemed Let out Property is considered to have Notional rent for taxation. Whereas Let out property has Taxable rental income.
3. Loan Provisions: Deductions for home loan interest and principal repayments. Can be claimed in Self Occupied Property, Deemed Let out Property and Let out Property. Whereas Deductions for expenses and repairs related to the rental property can be claimed in Let out Property.
Q.12 What if there is a loss in Income from House Property?
Ans. Section 71B of the Income Tax Act defines the set-off of losses from residential property. The following is the definition of the provision under this section: For any assessment year in which the net result of computing the income under the head “Income from house property” is a loss and said loss cannot or will not be entirely set off against the income from any other head of income, the entire amount of the loss, subject to the other provisions of this Chapter, shall be carried forward to the subsequent assessment year and may be set off against the income from house property for the relevant assessment year.
Q.13 What is pre construction Interest and how it is computed to save taxes in later years?
Ans. The interest that an assesse pays while the residential house is being built is known as pre-construction interest. While the house is being built, there is no way to claim a deduction for home loan interest. Only after construction is complete may this pre-construction interest be claimed. Following is the example to calculate pre construction Interest:
In July 2018, Yash obtained a loan of Rs. 25 lakhs to begin building his Dombivli residence. Since then, he has been making EMI payments of Rs. 60,000.
August 2020 saw the completion of the construction, and he was given a completion certificate.
The rent for this residence began in September of 2020. Yash is unsure on how to itemize his home loan interest deduction on his income tax return.
Only the year when the property’s construction is finished is eligible for the interest deduction for homeowners. Yash may claim it in this instance from FY 2020–21.
Yash makes EMI payments of Rs. 12, 60,000 between July 2018 and March 31, 2020. Regarding the FY 2018-19, total EMI Payments are of Rs 60000*9=540000, of which Rs 3,60,000 is paid towards Principal Payment whereas 1,80,000 towards interest. And during the F.Y. 2019-20, total EMI Payments are of Rs 60000*12=7,20,000 of which Rs 5,00,000 were paid towards principal payment whereas Rs 2,20,000 were paid towards Interest.
In F.Y. 2020-2021 he makes a total EMI payment of Rs 500000 out of which Rs 380000 is towards Principal Payment and Rs 1, 20,000 is towards Interest. For FY 2020–21, the total interest on a home loan is Rs 120,000. He is able to deduct the whole interest as the property is rented out.
Additionally, starting in FY 2020–21, Yash is eligible to deduct Rs. 1,50,000 (or Rs. 3,80,000 or Rs. 1,50,000, whichever is less) from his principle repayment under Section 80C. He needs to keep in mind not to sell this house for the following five years. If the property is sold within five years of the date of construction completion or possession, the amount claimed under Section 80C will be returned back to his income in the year of sale and he will be taxed accordingly. Let’s now examine the interest that was paid while the house was being built:
The pre-construction phase is the time frame from borrowing funds until March 31 of the year before the house’s construction is finished.
Interest payments made from the date of borrowing until March 31st prior to the fiscal year in which the construction is finished are eligible for the pre-construction interest deduction.
The total interest on the home loan is Rs 4,00,000, or Rs 180,000 for the fiscal year 2018–19 and Rs 2,20,000 for the fiscal year 2019–20.
Pre-construction interest is Rs 4, 00,000 and can be claimed in five equal installments of Rs 80,000 beginning in FY 2020–21.
Thus, Yash is eligible to deduct interest from his home loan in FY 2020–21 of Rs. 120,000 (interest from FY 2020–21) plus Rs. 80,000, or Rs. 2, 00,000.
All things considered, one must remember that:
The maximum amount of loss from real estate that can be deducted from other sources of income is Rs. 2, 00,000. If no property is purchased or construction is completed within five years of the end of the financial year in which the home loan was obtained, the benefit of Rs. 2 lakhs will be reduced to Rs. 30,000.
Q.14 What are the Examples of Self Occupied Property, Deemed Let out Property and Let out Property?
Ans. The Examples of Self Occupied Property, Deemed Let out Property and Let out Property are as follows:
Example 1: Self Occupied Property
Mr. X resides in his house and doesn’t let it out. He can avail tax benefits on the home loan and does not face taxation on rental income.
Example 2: Deemed Let out Property
Ms. Y owns a second home in a different city which is not rented out. She needs to consider notional rent for filing taxes.
Example 3: Let out Property
Mr. Z rents out his inherited property and earns rental income Rs 1,55,000, which is taxable under ‘Income from House Property’.
Conclusions:
Understanding the distinctions between SOP, DLOP, and LOP is crucial for property owners to navigate the tax implications and maximize the benefits of their real estate investments.
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The above article has been prepared as by Mr. Yash Bagadi (yash.bagadi@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in).
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