How to Calculate Income Tax on Salary with Examples

To whom is this guide relevant?

Whether looking to buy house or already own a house, this guide shall give you an insight of tax benefits attached with loan repayment and provide different avenues to reduce tax liability on income from house property.

What does the guide cover?

Income from house property:

• Various Types of House Properties
• Home Loan – Tax shield arising on interest payment and principal repayment
• Income arising on property of joint owners;
• Deemed let-out house property
• Property received by Will or Inheritance
• Tax benefits in case of unrealized rent

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What are the various types of house property?

• Let-out property – Letting out the property to another person is covered here. Letting out the property for part of the year also comes here irrespective of the fact that you live in it or keep it vacant for balance part of the year;
• Self-occupied property – When you or your spouse, parents or children reside in the house;
• Deemed let-out property – If you own two or more houses, then one house shall be considered as self-occupied and all other houses as deemed let-out as per your option.

How can you save tax with your home loan?

Taking loan for house property although increases the burden of interest and principal on pocket but saves certain taxes. Both interest payment and principal repayment can be claimed as deduction under different provisions which are outlined as follows:

Deduction of Principal Repayment

Following amounts can be claimed as deduction under Section 80C (overall deduction limit is Rs. 150000/- for F.Y. 2015-16 and onwards):

• Amount of principal repayment;
• Amount of stamp duty and
• Registration charges

Expert Advice: If you avail the deduction under Section 80C, don’t sell the house property for 5 years from the end of year in which possession has been obtained or the property has been obtained. If you do so, the deduction gets reverse and you have to pay tax on the amount of deduction.”

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Deduction of Interest Payment

You can claim the amount of interest payable as deduction under Section 24 of the Income Tax Act. Interest can be classified into pre-construction interest (interest from date of loan taken up to date of completion of construction) and post construction interest (interest after completion of construction).

Tax benefit in case of pre-construction interest payment:

• Deduction is allowed from the year in which construction of house property is accomplished.
• It is allowed equally in 5 consecutive years.
• Example: Meenal started a construction of flat in Mumbai in October 2008 for which she took a loan from a bank of Rs. 15 lacs @ 10% p.a. The construction of the house was completed in May 2011. Deduction towards pre-construction interest will be allowed from Financial Year (FY) 2011-12.

Calculation of deduction for pre-construction is as follows:

• Total Interest paid during pre-construction period (i.e. from October 2008 to March 2011)= Rs. 3,75,000 (75,000+1,50,000+1,50,000)
• Rs. 3,75,000 will be allowed in 5 equal instalments (i.e. 75,000) spread over 5 years starting from FY 2011-12 to FY 2015-16.

Tax benefit in case of post-construction interest payment: The benefit depends on the purpose for which house property is purchased. These have been outlined as below:

• Let out property – Claim the entire amount of interest (Interest of pre-construction period + Interest of post-construction period) as deduction, no amount limit exists for deduction;
• Self-occupied property –purpose of acquisition of loan affects the amount of interest that can be claimed for deduction:
  • If loan taken for repair, renewal or re-construction – lower of actual interest payable or Rs. 30,000/-.
  • If loan taken for acquisition/ construction on or after 1^st April 1999 – lower of interest payable or Rs. 200000/- subject to condition that acquisition/ construction must be completed within 3 years of the end of the Financial year in which the capital was borrowed.

Expert Advice: The limit of 200,000 specified in case of loan taken for self-occupied property is specified for total interest amount payable which is calculated by adding the following 3 amounts: 1. Interest of Pre-Construction Period 2. Interest of loan taken for repair/ renewal 3. Interest taken for acquisition/ construction

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How is my Income From House Property calculated?

Let’s understand the related aspects of terms mentioned above one by one:

Gross Annual Value: Before calculating, let’s understand few terms:

• Fair Rent: Rent which can be received from a similar property in the same or similar locality, if it is let out for a year;
• Municipal Value: Value of house property determined by Municipal Authorities for the purpose of levying municipal taxes;
• Standard Rent: This is the rent fixed under rent control act. The owner cannot charge rent in excessive of standard rent.

Calculation of GAV

• Step 1: Higher of Fair rent & Municipal Value shall be taken
• Step 2: Expected rent = Lower of value derived in (1) or standard rent;
• Step 3: GAV = Higher of expected rent or the actual rent received/ receivable.

Municipal Taxes: Deduction to be allowed only if actually paid by the owner of the house. Even if the tenant pays the tax but recovers it from owner, the deduction shall be allowed to owner.

Standard Deduction: Expenses related to electricity, repairs, water, insurance etc. are deductible from income by virtue of standard deduction. Quantum of actual expenses doesn’t matter; standard deduction @ 30% shall always be granted.

Standard Deduction = 30% of Net Annual Value

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What is the tax implication in case house is self-occupied for a part of the year and let-out for remaining part of year?

You can calculate the tax liability in case of partly self-occupied and partly let-out house in the manner below:

• Step 1: Compute the Municipal Value and Fair rent for the whole year, and select the higher of both.
• Step 2: Compare the value selected in (1) with standard rent for the whole year and select the lower of both;
• Step 3: Compare the value derived in (2) with actual rent received for the let out period and higher value shall be the Gross Annual Value.

Let’s understand the concept with the help of an illustration: Steps of calculations:

• Step 1: Higher of M.V (5,00,000) or FR (4,20,000), so value derived in (1) = Rs. 5,00,000
• Step 2: Lower of Value derived in (1) (5,00,000) or SR (4,80,000), so value computed in (2) = Rs. 4,80,000
• Step 3: Actual rent received = 50,000 x 9 = 4,50,000 (4) GAV = Higher of value computed in (2) or actual rent received Hence GAV = Rs. 4,80,000

What are the tax benefits in case of unrealized rent?

If you did not receive rent from tenant during the year and it has become irrecoverable, then you need not pay tax on such rent. It shall be deducted from Gross Annual Value. Upon fulfillment of following conditions, unrecovered rent is declared as unrealized rent:

• Tenancy is bonafide;
• Defaulting tenant has vacated the property or the owner has taken all steps to compel him to vacate;
• Defaulting tenant has not occupied any other property of the owner;
• Legal proceedings for recovery of rent have been completed by owner.

Expert Advice: “If you receive any unrealized rent subsequently, then such rent shall be taxable in year of receipt even if you are no longer the owner of the house property for which it is received.”

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How does receipt of arrear rent attract tax?

Any arrear rent received shall be chargeable to tax in year of receipt. Standard deduction of 30% shall be eligible to be reduced from such rent.

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What is the tax implications attached to co-ownership?

A house property owned by two or more persons is covered under this head. Income/ loss arising from house property & deductions thereon are allocated in ratio of ownership. In case of house property self-occupied by each co-owner – each of the co-owner shall be entitled to maximum deduction of 30,000/2,00,000 individually on account of interest payable. In case of house property rented – income shall be computed as if house is owned only by single owner and then the income shall be allocated in ratio of ownership. Further limit of 150000 under section 80C is available separately for each of the Joint owner.

Expert Advice: “For claiming the deduction of interest, the co-owners need to be co-borrowers as well. So if you co-own a house but not a co-borrower then you are not entitled to claim any deduction.

Example: Anjali along with her father Anoop (both being the co-owners) purchased a flat in Mumbai for Rs. 90 lacs, for which Anjali took a loan of Rs. 40 lacs and rest of the amount was contributed from family’s saving. In this case, Anjali and Anoop are the co-owners but loan was taken by Anjali only. Thus, interest deduction on loan will be available to Anjali only.

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What is Deemed ownership ?

Deemed ownership is a situation where you are not the legal owner of a house property, but due to circumstances , you are deemed as the owner of the house and liable for paying tax on any income arising from that particular house property. The conditions where a person is deemed to be the owner of a house property can be outlined as below –

• If you transfer your property to your spouse or minor son without adequate consideration (adequate consideration means selling the property at less than current market value of the property);
• Holder of the impartible estate shall be deemed owner of all properties comprised in estate;
• A member of Co-operative society or AOP or Company allotted house under house building scheme shall be deemed owner of such property;
• A person receiving house property on lease for more than 12 years shall be treated as deemed owner of such property.

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Tax implications on property received in will/inheritance

If you receive a property in will/inheritance, no tax can be imposed at the time of inheritance since there is not gift tax. But in case you sell the property, then it shall attract the provisions of Capital Gains.

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Frequently Asked Questions (FAQs)

Can Net Annual Value be negative?

Yes, only when municipal taxes paid during the year exceed the Gross Annual Value.

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Can there be a loss from house property?

• In case if Net Annual Value is NIL or if the deductions are more than the annual value, then the loss can arise from house property.
• In case of Self occupied property, the maximum loss can be “Interest on borrowed funds” which is up to Rs. 30,000/ 200,000 as the case may be.
• In case of let-out property, since there is no maximum limit of deduction w.r.t “Interest on borrowed funds”, the loss shall vary according to the amount of interest.

Let’s understand this with the help of a hypothetical situation:

Suppose:

So now loss from house property will vary according to amount of interest. If interest on home loan is 60,000; loss shall be 21,000 – 60,000 = 39,000. If interest is 1,00,000; loss shall be 21,000 – 1,00,000 = 79,000. Loss arising from house property can be set-off against other heads of income.

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I live in a rented house and my own house is let-out to somebody else?

Giving rent on the house taken at place of job and paying interest and principal on home loan taken for owned house in home city can give dual benefits. Claim HRA for the rent paid under “Income from Salaries” and avail deduction for interest paid on home loan under “Income from House Property”.