When a taxpayer owns multiple properties, the Income Tax (IT) rules allow him to claim the properties of any two houses as self-occupied, subject to certain conditions. rent income Any other house property is taxable and needs to be reported under the head ‘Income from house property’ in the Income Tax Return (ITR).
If any house other than the two self-occupied houses is vacant and does not actually earn rent, the taxpayer will still have to pay tax on the estimated rent.
According to IT RulesAny vacant property other than self-occupied property is treated as ‘deemed out’ for the purpose of taxation. Accordingly, the taxpayer has to report the estimated rent on such properties in his ITR.
Note that in case of multiple properties, rent from individual house properties has to be computed and declared separately in ITR Form 2/3/4 as applicable to you and not together.
How to Calculate Notional Rent
Deemed rent is calculated as per section 23(1)(a), which states that the annual value of the house property is used for computing the income. The annual value is calculated by taking into account the standard rent, municipal rent and fair rent.
Fair rent refers to the rent that the concerned property can receive at the same location as the same property. The rent of the Municipal Corporation will be decided by the Municipal Authority of the area. Under the Rent Control Act, the standard rent is fixed and a landlord cannot charge more than this. Since the standard rent is fixed, the higher and fair rent of the Municipal Corporation is compared with it and the lower between the two is taken as the notional rent.
How to choose a self-occupied property
The 2019 Budget allowed taxpayers to claim any two house properties owned by them as self-occupied, in place of the previous rule of one. People were exempt from tax on estimated rent on a second home, citing difficulty in maintaining two families in two locations due to job, child’s education or care of older parents.
As per section 23(2), a property can be treated as self-occupied if the owner or his family resides in it or if the owner or his family does not occupy the property by reason of the obligations of the owner in the property. other area and they live in a house that doesn’t belong to them. In the latter case, an additional caveat is that the property or a portion thereof must not be let out at any time during which the notional rent is being considered.
When a taxpayer has vacant house property other than a residence, he has the option to declare any house as self-occupied for taxation. It is recommended that you choose a home with a lower annual value, which is considered to be let out, to reduce your tax expense. For example, if the net annual value of House A, House B and House C is 3 lakhs, 2.5 lakh more 4 lakhs, respectively, declaring House B as let out will result in less tax outgo among the three. Even if House B is vacant, you can declare House B as self-occupied and report the estimated rent on other house properties.
Net annual value must be calculated after subtracting municipal taxes from the gross annual value. Municipal tax can be claimed as a deduction only if it is paid by the home owner. In case of let-out property where the owner pays municipal taxes, he can deduct them from the gross rent while filing ITR.
In case of jointly owned properties, the notional rent is divided among the co-owners in the ratio of their respective shares in the property and taxed accordingly. Similarly, municipal taxes are also divided among the co-owners.
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