Notional rent has been in the news lately. In mid-2018, the income tax appellate tribunal rescued cricketer Sachin Tendulkar from the imposition of notional rent of around Rs 1.3 lakh. Tendulkar owned a house in Pune. It was reported that he had failed to find a tenant for it despite making a reasonable effort to find one. He had, therefore, declared his rental income from the said property as zero. However, the income tax department didn’t see it that way and insisted that a notional rental income be declared. And where there’s income, tax needs to be paid. Fortunately, for Tendulkar, the tribunal ruled in his favour.
Many people have more than one residential property in their name. While one is called self-occupied property (SOP), the others are “deemed let out”. When a residential property is let out, it is generating rental income and becomes part of the property owner’s income and is taxable under law.
However, in the interim budget this month, it has been proposed to waive taxes on a second residential property, thus effectively making it an SOP. This new rule, that comes into effect from April 1, is expected to bring in significant tax relief for people who own two housing properties. With it, they won’t have to declare a notional rent and pay tax.
A taxpayer can choose which of his properties to mark as self-occupied. On the other, a notional rent is to be calculated and declared in the tax return.
Many people have more than one residential property in their name. While one is called self-occupied property (SOP), the others are “deemed let out”. Illustration: Suman Chowdhury
Calculating notional rent
To ascertain the notional rent on a deemed let-out property, you need to find out the following values.
- Actual rent received (It’s vacant, so 0).
- Fair rent: Rental income of a similar property in the area (Suppose, it’s Rs. 12,000).
- Standard rent: Rental value as per the Rental Control Act. (Suppose it’s Rs 8,000).
- Municipal Rent (Suppose it’s Rs 7,000).
To calculate notional rent, find out:
X=Higher of fair rent (B=Rs 12000) and municipal rent (D=Rs 7000), so it would be Rs 12,000
Z=Expected rent=lower of X (Rs 12,000) and Standard rent (C=Rs 8,000), so it would be Rs 8,000
Notional rent (gross annual value)=higher of expected rent (Z=Rs 8,000) and actual rent (A=Rs 0).
So, the notional rent (or the gross annual value) would be Rs 8,000 per month, that is Rs 96,000 per annum.
Further, the taxpayer can deduct municipal taxes paid to get the net annual value (NAV). The standard deduction at 30 per cent and deduction under Section 24 can be applied on the NAV to get the taxable income under house and property.
Post-budget benefits
A few of the announcements made by finance minister Piyush Goyal will benefit home owners, especially owners of multiple homes.
It is often seen that home owners may want to maintain multiple residential properties for business or personal purposes. Even if all such houses are self-occupied, the home owner will still have to declare a notional rental income and pay taxes towards it. Therefore, the waiver of tax on notional rent will come as a relief to such home owners. This is also useful for any persons upgrading to a new residential property as they don’t need to worry about immediately finding a tenant for their older property.
Second, changes have been proposed in Section 54. At present, you can avoid paying taxes on long-term capital gains from the sale of residential property by reinvesting the gains in one new residential property, subject to the terms and conditions.
Under Goyal’s new proposal, you will be able to reinvest such gains up to Rs 2 crore in two residential properties. This benefit will be available to you once in a lifetime, with the new norms that come into force from April 1.
The other rule change you need to be aware of is that currently you are allowed to carry forward losses above the threshold of Rs 2 lakh under Section 24 to the next eight assessment years. But under the new budget proposal, you won’t be allowed to carry forward such a loss from a second house property.
It means that if you have taken a housing loan, you will not be able to carry forward the interest over the threshold under Section 24 to the next year to set-off against your current year income.
However, if you have no outstanding home loan or if your interest towards the home loan is expected to remain lower than Rs 2 lakh, you need not worry about these restrictions.
The proposals in the interim budget, along with the extension of the benefits under Pradhan Mantri Awas Yojana to March 31, 2020, are expected to boost investor sentiments in realty. The next wave of growth in realty will be fuelled by budget housing, with working women and urban millennials aiming to be first-time owners.
The writer is CEO, `BankBazaar.com`