Tax on rent income and sold property!

By BankBazaar.com | February 4, 2013

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

We discuss here what you need to know about computing taxes on the rental income for a house and the capital gains from the possible sale of a house is taken up for discussion in this article.

A. Tax on Rental Income from a property

When you own two houses and let out one of them for rent, you receive an income for which you need to pay tax. In such a scenario, the taxable income from the total rent income received by you for that particular financial year will be computed in your tax returns.

How your rental income is computed

For rented out properties the gross rent needs to be the greater of the three values below:

a. Municipal valuation of the property – The rental value fixed by the corporation based on your locality and property value.

b. Actual rent received during the financial year – The rent received by you from your tenant for that particular financial year.

c. Fair rent – The rent of a similar property in the same or similar locality.

From this gross rent, the property tax is deducted to arrive at the net annual value of the rental income.

Deductions possible from the net annual value of the rental income:

1. 30% of the net annual value for repair, maintenance and rent collection expenses for the property

2. Interest paid towards any type of home loan on this particular property.

3. Any property insurance premium you have paid for the financial year.

Here is a simple example:

Actual rent received from property – Rs. 15,000 x 12 =1.8 L

Less: Municipal Tax/Property Tax paid by you – Rs. 5,000

Balance: i.e. Net Annual Value -Rs. 1.75 L

Less:
(1) 30% of the net annual value – Rs. 52,500
(2) Interest paid on a renovation loan for the house – Rs. 30,000

=Taxable rent income =Rs. 92,500

The taxable rent income will be included by your auditor under income from other sources, along with other such incomes as well as your salary income and deductions you are eligible for, to calculate your final tax outgo.

B. Capital gains tax on selling a property

Let us also quickly consider what happens if you decide to sell your property.

Any profit that you receive by selling any asset at a price higher than at which it was acquired by you is classified as capital gain and clubbed under income from other sources.

Short term and long term capital gains

If you sell your house within 3 years from the date of purchase you will incur a short term capital gain or loss which is included under other sources of income.

In case you sell your house beyond three years then it is considered as a long term capital gain/loss.

Exemptions from capital gains tax

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.

For example, if you had purchased a house for Rs 5 L and then sold it for 9 L, the capital gain would be Rs 4 L. However, for the sake of income tax calculation a number called indexation number is used which is a percentage of the gain that is assumed as value addition due to inflation.

Thus if indexation is 20% then only Rs. 3 L (Rs  9L – 20% of 5 L + 5 L =Rs 3L) would be taken as capital gain. A capital gain is usually charged @20% in most cases where the calculation is based on indexation.

A better understanding of the tax rules can make your life easier and help you file your tax returns with clarity.

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12 thoughts on “Tax on rent income and sold property!

  1. sanjay

    I have sold my fathers property, after his death, and now purchasing new house, will capital gain be there, (2)money received after sell of property, can i deposit in bank and earn intrest on it ,any tax libality.

    Reply
    1. Shashi

      If the sold property was purchased and registered at least 3 yrs. back, and you are using the full amt. to purchase new property ! then you do not require to pay tax……….But if you utilise only part of the amount. to purchase your new property. Then the balance amt. after the applicable indexation benefits will be taxable.

      If you wish to deposit the entire amount in Bank to earn interest. For that,… first you have to pay full capital gains tax on the difference between the (purchase price plus other cost incurred in the maintaining your property etc.) and the actual sale receipts. After allowing for standard deductions if any under the tax laws. You will need a guidance of an experienced Chartered Accountant or and Tax expert to help you in saving maximum tax in this matter.
      The balance amount in you hand after payment of taxes can be safely deposited in any FD's of a good bank to earn a regular income from it. This income again is taxable in your hands after allowing for standard deductions.

      Reply
  2. jona

    How capital gains tax is calculated for properties that are 0ver 20 yeays i.e. bought 20 years back The value of the money then paid isn't it equal to the present day purchasing power. Except it appears one paid lees 20 years ago and must pay may many times more. So how does one calculate / What are the concessions available and how can they be applied.? Is it by increasing to the present day values by adding the equivalent amount of stamp papers ? How? ??

    Reply
    1. Shashi

      First of all, You need to find out the Consumer Price Index average as it prevailed 20 yrs back and then compare the difference with Consumer Price Index average as it exists today or the time when you actually conclude the sale deal of your property.
      Based on the that comparison you can work out for yourself the present value of your property's purchase price which you had paid 20 yrs ago.

      The difference Amt. will attract capital gains tax depending on the current tax rates. which at present is 20%.

      Reply
  3. Kekin

    I am not sure about one point on your article. it is stated that income from rent will be shown as Income from Other Sources.This does not seem correct. It will be shown instead as Income from House Property.

    Reply
  4. ARUMUGAM,P

    Helps to understand how to treat one's consider income from House property. But I think it needs to provide clarification for how to treat the short term and long term capital gains.
    Arumugam.

    Reply
  5. tanuj

    I have 2 houses, which are on rent.Im paying the banks for both of the houses.
    can i claim the loss from property for both the houses.

    Reply
  6. S Balasuramanian

    Kindly give more lights on the following points of Long term Capital Gain:

    a) The yearly interest received (for the 3 years lockin period) from the NHAI/REC Bonds under Section 54EC is taxable for the for the individual…

    b) Once such bonds are redeemed after the said 3 year lockin period, how to treat the pricipal amount…

    Reply
  7. Vittalanand

    The calculation cited in the example does not include the land/ property value at the time of sale. Actually, a seller is allowed to comp[ute the present market value or reasonable value of land and proprety that will be available with SRO office and not the basic avlue of the year of his original acquiring the proprety. For Example, If he had purchased the property in 1985 at a market rate of Rupees 2 lakhs and sells the property at Rupees 40 lakhs,, then the fair value/market value which ever is less will be taken and deducted from the actual sale value, and the taxable amount over the property on account of the sale value will be the will be considered as capital gains and the tax will be for this net value only.

    Reply
  8. Shantilal

    I have purchased a flat for Rs.60 lakhs and got registered in August 2010. I intend to sell a site in April 2012, for say Rs.80 lakhs. The capital gains for the site, after indexation works out to Rs.65 lakhs. Can the amount of capital gains be offset by the purchase of Rs.60 lakhs and pay capital gains Tax for the difference of Rs.5 lakhs only. Anyone please clarify.

    Reply
  9. SAMEER

    I have a property dispute for a property which was made in 1978 by my late father and his elder brother, Now we have settled it for a particular amount out of the court. As the property is already registered in my uncle's name and we are ready to vacate our portion on receiving the settled amount. How would i declare this income and can save tax on this. kindly suggest?

    Reply

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