Owning more than two house properties can bring some tax responsibilities, even if one of them is sitting empty. This is where the concept of deemed rent comes into play. Basically, it means you might have to pay income tax on a vacant property, as if you were earning rental income from it.
Deemed rent kicks in when you own a vacant property during a financial year, but it only applies to properties beyond the first two that you use for yourself. The idea is that even though the property is empty and not making any money, it’s assumed to be rented out.
To figure out how much tax you owe on a deemed rental property, there are a few things to consider.
Calculating the Gross Annual Value (GAV) of the house:
When you calculate income from a vacant house property (deemed rent), the first thing you need to determine is the GAV. This is the expected rent you could reasonably earn from the property if it were rented out.
Calculating the GAV involves two steps
First, compare the municipal value and the fair rent, and choose the higher of the two. Then, compare this value with the standard rent (if your property falls under the Rent Control Act) and choose the lower of the two. The resulting value is the reasonable expected rent, which becomes the GAV. Keep in mind that since the property is deemed to be let out, there’s no actual rental income. The GAV would be the higher value if the property were actually rented out.
Choosing the right Income Tax Return (ITR) form and computing income for each property:
If you own multiple house properties, you can’t simply fill ITR-1 or ITR-4 forms. You need to pick the correct ITR form based on factors like the nature and source of your income, your residential status and other relevant considerations. It’s important to compute the income for each property separately and claim the necessary deductions accordingly.
Exceptions for properties held as stock in trade:
If you happen to own several vacant house properties, the tax department might consider all of them, except for two, as deemed to be rented out. However, there’s a way to avoid this classification. If you maintain proper accounting records, treat the properties as inventory for stock in trade and file the correct income tax returns, you can avoid the deemed rent scenario.
Choosing the right property for self-occupation:
To reduce your tax burden, it’s wise to designate the property with the highest GAV as your self-occupied property. By doing this, the remaining properties will have a lower value, resulting in a lower income tax liability for you.
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