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How is Tax Levied on Rent from Vacant Land?


Last Updated on February 29, 2024 by Kanakkupillai

Every movable asset has the potential to produce certain annual revenue for the landlord if it is not self-occupied; the property ownership holder has tax repercussions under Indian law. It’s interesting to note that the tax obligation would exist even if the owner had no rental revenue and the property was vacant during the year.

In this article, we shall go into more detail about the tax effects of an empty property. To determine what constitutes an empty home or vacant land, we must first ascertain what constitutes legally self-occupied property.

Meaning of Self-occupied property

A property is deemed self-occupied when the owner or his family lives there for at least a year. For this, the owner’s family may consist of his or her parents, spouse, and children. Such properties have no gross annual value or GAV, the yearly value under income tax legislation. For tax purposes, a property is also deemed self-occupied if the owner rents a home in another city for professional or personal reasons. In contrast, his own home is unoccupied or occupied by family members.

Vacant land: Modifications following the budget

According to the Interim Budget proposal, two properties owned by one person could be considered self-occupied if they haven’t been rented out. An owner may only declare one property self-occupied on their tax returns before this proposal. The tax was charged on the fictitious rental revenue from the second property, regardless of whether it was vacant or occupied by some family members. Any two of a property owner’s many properties may now be declared self-occupied.

As a result, if you own three houses, two of which are vacant and one of which is self-occupied, any of the three properties may be claimed as self-occupied to calculate your income tax for the year.

The third property will be taxed as though it were “deemed to be let out.” If a landlord has three properties and none are rented out, they can declare any two of them as self-occupied on their tax return. It’s noteworthy that the property owner, in this case, can declare two of his several residences as self-occupied, which can be beneficial.

Compared to a comparable property in a common or normal neighbourhood, a property located in a premium neighbourhood offers a larger potential for rent generation. It makes perfect sense for them to claim premium properties in their portfolio as self-occupied while filing income taxes, according to experts who specialise in property law and other allied laws, since the law doesn’t specify which of his many properties the holder can declare as self-occupied.

Tax on real estate presumed to be rented out.

An asset that has the potential to produce a notional income but is neither self-occupied nor rented out would be deemed to be let out.

By the tax code 1961, this fictitious income is subject to tax levied on “income from house property”. It is similar to how a property would be calculated if rented out. The sole distinction is that the actual rental income determines the tax liability for a rented property. However, for properties deemed to be rented out, the tax liability is determined by the property’s potential to generate rent in a given market.

Income tax on rental house property

As an example, let’s take this. The tax obligation on a landlord’s deemed-to-be-let-out 2BHK property in a particular area would be calculated as follows:

If 2BHK units generally fetch an annual rental income of Rs 10 lakh in a certain locality, the calculation would be as follows.

The GAV of the mentioned property would be this sum. The taxpayer would need to determine the property’s net annual value, or NAV, calculated by subtracting the municipal taxes paid in a year from the gross assessed annual value or GAV.

The deductions that are allowed on Vacant House Property

The tax code permits the NAV to be deducted based on two different criteria:

  • Standard deduction

The taxpayer may deduct 30% from the NAV each year for repairs and upkeep. Please be aware that the estimate does not account for any actual costs you may have incurred for property upkeep and repairs.

  • Home loan deduction

The real interest paid toward the repayment of borrowed capital may be deducted from a deemed-to-be-let-out property’s NAV if the property was purchased using a home loan.

However, this deduction is limited to the regular Rs 30,000 if the home loan was approved on or after April 1, 1999, and the property purchase hasn’t been finished within five years of the end of the fiscal year the capital was borrowed.

Losses of up to Rs 2 lakh can be deducted from a taxable income under other headings in a year if you have losses on your interest payment because it is greater than the NAV of the property that is presumed to be rented out.

As long as it is offset against income from residential property and not any other head under which an assessee’s income is taxed, the taxpayer may carry the loss above this amount for eight assessment years.


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