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Income from Deemed Let-Out House Property

by | May 3, 2024 | Income Tax | 0 comments

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Important keyword: Income from House Property, Income Heads.

Income from Deemed Let-Out House Property

Under the Income Tax Act, if an assesses owns more than one house property, they have the option to declare two of them as self-occupied for tax purposes. However, any additional properties beyond these two must be compulsorily declared as rented out, even if they are not actually rented. These additional properties are treated as deemed let out properties, also known as vacant properties.

For deemed let-out properties, the assesses is required to calculate the rental income based on the fair market value of the property. This rental income is then subject to taxation as per the applicable slab rates. It’s essential to note that even if the property is vacant and not generating any actual rental income, the assesses is still liable to pay tax on the deemed rental income from these properties.

For deemed let-out properties, the calculation of income follows a similar process as for properties that are actually let out. However, there is a difference in the deduction available under section 24(b) of the Income Tax Act.

Under section 24(b), the deduction for interest on home loan is limited to Rs. 2 lakhs for deemed let-out properties, which is the same as for self-occupied properties. This means that even if the property is deemed let-out and not actually generating rental income, the owner can still claim a deduction of up to Rs. 2 lakhs for interest paid on a home loan.

What is the difference between Self Occupied & Let Out?

Self-OccupiedLet Out
A Self Occupied House Property is the one that you use as your own residence, your spouse, children and/or parents.Let Out is when you give a house property for rent for during the financial year either for the whole or a part of the year. 

Starting from the Assessment Year (AY) 2020-21, taxpayers in India have the option to declare up to two house properties as self-occupied for the purpose of income tax calculation. This means that if an individual owns more than two properties, they must consider the remaining properties as deemed let-out properties, even if they are not actually rented out.

For example, if an individual owns three properties:

  1. They can declare two of these properties as self-occupied.
  2. The third property will be considered as a deemed let-out property, even if it is not generating any rental income.

This provision allows individuals to optimize their tax liabilities by treating certain properties as self-occupied, thereby maximizing the available deductions and minimizing the tax burden.

How to Determine Taxable Income from Deemed Let Out House Property?

Income from a Deemed Let Out Property is calculated through a series of steps to determine the Gross Annual Value (GAV), Net Annual Value (NAV), and allowable deductions:

  1. Calculate Gross Annual Value (GAV):
    • GAV of a Deemed Let Out Property is determined based on the least of the following factors:
      • Fair Rent Value (FRV), which is assessed using the Annual Rent Value of similar properties in the locality.
      • Assessed Value, determined according to the Municipal Tax Value of the property.
      • Standard Rent, established as per Rent Act regulations.
  2. Deduct Municipal Taxes Paid:
    • Municipal taxes, also known as property taxes, are deductible from the GAV. The full amount of municipal taxes paid is allowed as a deduction, effectively reducing the Net Annual Value of the property. However, this deduction is only permitted if the taxes are paid by the property owner.
  3. Calculate Net Annual Value (NAV):
    • NAV is derived by subtracting the municipal taxes paid from the Gross Annual Value (GAV). This computation results in the Net Annual Value of the Deemed Let Out Property.
  4. Claim Standard Deduction of 30%:
    • A standard deduction of 30% is applied to the NAV. This deduction represents expenses related to the maintenance and upkeep of the property.
  5. Deduct Interest Paid on Home Loan u/s 24(b):
    • Interest paid on a home loan, as per Section 24(b) of the Income Tax Act, can be deducted from the NAV. This deduction provides relief for the interest expense incurred by the property owner.
ParticularsSelf OccupiedLet OutDeemed Let Out
Gross Annual Value (Generally, total rent received)NILXXXXXX
Less: Municipal Taxes PaidNot ApplicableXXXX
Net Annual ValueNILXXXXXX
Less: Deduction u/s 24
1. Standard Deduction at 30%
2. Interest on Housing Loan
Not Applicable INR 2 Lakh LimitXX
No Limit
XX
No Limit
Income from House Property(XXX)XXXXX

Read More: Income from House Property and Taxes

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Official Income Tax Return filing website: https://incometaxindia.gov.in/

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