How to calculate tax liability for vacant house property?

A property that’s neither self-occupied nor let-out would be considered deemed to be let-out since the asset has the potential to generate a notional income. This perceived income is taxed under ‘income from house property’ under the tax law of 1961

Under Indian laws, property ownership has tax implications, since every immovable asset has the potential to generate a certain annual income for the landlord, if it’s not self-occupied. Interestingly, the tax liability would arise even if the owner isn’t generating any rental income and the property is lying vacant.

In this article, we will elaborate on the tax implications on a vacant property. To establish what qualifies as a vacant home, we will first find out what qualifies as self-occupied property legally.


What is self-occupied property?

When the owner or his family use a property to reside all around a year, it’s considered self-occupied, where the family of the owner includes parents and or spouse and children of the owner. Under the income tax laws, such properties have no gross annual value (GAV). A property is also considered self-occupied for tax purposes in case the owner lives in another city on rent for business or employment reasons and his property is lying vacant or is occupied by some of his family members.

Vacant property: Changes after Budget 2019-20

The Interim Budget-2019 proposed that two properties of an owner could be considered self-occupied if they haven’t been let out. Prior to that, an owner could claim only one property as self-occupied while filing taxes. Even if the second property was vacant or occupied by some of the family members, tax was levied on the notional rental income of the second property. Now, an owner can declare any two of his multiple properties as self-occupied.

This means that if you have three house properties, two of which are lying vacant, while one is self-occupied, any two of the three properties can be claimed to be self-occupied as far as income tax calculation is concerned. The third property will be considered as ‘deemed to be let out’ and taxed accordingly. A property owner, who has, for instance, three properties none of which is let-out, can show any two as self-occupied while filing taxes. Noteworthy here is that the choice to declare two of his many properties as self-occupied is given to the property holder.

“A property lying in a premium locality has a higher rent generating potential as compared to a similar property in a common locality. Since the law doesn’t specify which of his many properties the holder can declare as self-occupied, it makes perfect sense for them to claim premium properties in their portfolio as self-occupied while filing tax” says Brajesh Mishra, a Gurugram-based lawyer who specialises in property law.

How to calculate tax liability for vacant house property?

Tax on deemed-to-be-let-out property

A property that’s neither self-occupied nor let-out would be considered deemed to be let-out since the asset has the potential to generate a notional income. This perceived income is taxed under ‘income from house property‘ under the tax law of 1961. This calculation is done in the same manner as an actually let-out property. The only difference is that in an actually let-out property,  the actual rental income is taken into account for calculating tax liability while in case of deemed-to-be-let-out properties, the tax liability is fixed based on the rent generating potential of this property in a particular market.

Income tax on let-out house property

Sample this: If 2BHK units typically fetch an annual rental income of Rs 10 lakh in a specific locality, the tax liability on a landlord’s deemed-to-be-let-out-2BHK property in this location would be calculated as such. This amount would be considered as the GAV of the said property. The taxpayer would have to arrive at the net annual value (NAV) of this property, which is arrived at by deducting municipal taxes paid in a year from the GAV.

Deductions allowed on vacant house property

The tax law allows deductions of the NAV on two different parameters:

Standard deduction: For repair and maintenance, a standard 30% deduction on the NAV could be claimed by the taxpayer every year. Do note that the calculation doesn’t factor in the actual expenditure you may have incurred towards repairs and maintenance of the property.
Deduction on home loan: If the property has been bought using housing finance, the actual interest paid towards the repayment of the borrowed capital could be claimed as deduction from a deemed-to-be-let-out property’s NAV.

However, if the home loan has been sanctioned on or after April 1, 1999 and the house purchase hasn’t been completed within five years from the end of the fiscal the capital was borrowed, this deduction is capped at standard Rs 30,000. In case you bear losses on your interest payment because it’s higher than the net annual value of the deemed-to-be-let-out property, loss of up to Rs 2 lakh can be set off against your taxable incomes under other heads in a year. “The loss in the excess of this amount could be carried forward by the taxpayer for eight assessment years as long as it’s being set off against income from house property and not any other head under which an assessee’s income is taxed,” explains Mishra.


What is notional rent?

Notional rent is the rent that can be expected to be earned from a property even if the property is not actually rented out.

How many properties can an owner claim as self-occupied?

According to the Interim Budget 2019, an owner can claim any two properties as self-occupied, if the same have not been let out.

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