Owning a property or living in your own house is a dream of everybody. However, this dream requires significant responsibilities to get fulfilled. Paying your house property tax is one out of those responsibilities.
Perhaps it becomes very important to know about different types of house property and taxes if you own a house or flat that is rented or vacant, as it can help you in income tax calculations that could be beneficial in tax saving.
Today, we are going to talk about such different types of house property and taxes in this article.
What is House Property?
House property could be defined as any building, whether it’s your home, shop, office or a piece of land attached to your building like a parking space.
The income tax act of India does not differentiate between any residential and commercial property. Perhaps, all types of properties, whether it’s a commercial or a residential, are taxed under the category of ‘income from house property’ tax while filing the income tax returns. When this type of house property is utilized for professional or business purposes, it is taxed under the category of ‘income from business and profession’ while the income tax returns filling. Maintenance and expenses of such property are allowed as business expenditures.
What are the Different Types of House Properties?
There are three major types of house properties, such as:
- Self-occupied house property
- Let out house property
- Inherited property
- Self-occupied house property:
Self-Occupied house property is defined as the property used by an owner for his personal residential purposes. It could be occupied by the family of a taxpayer including his/her parents, children or spouse. A vacant house is also categorized under the self-occupied house property under the income tax act.
Before the Financial year 2019-20, if a taxpayer owns more than one self-occupied house property, out of them only one was considered as his/her self-occupied house property, and the other ones are treated as the let out house properties and the taxpayer always has a choice to choose the property to be categorized under self-occupied.
But for the financial year 2019-20, the taxpayer is allowed to consider two houses as self-occupied property. According to which a homeowner can for sure claim his/her two properties as the self-occupied ones and others as the let out ones.
- Let out house property:
All the house properties that are rented for a part or whole year are categorized under the let out house property while filing the income tax returns.
- Inherited property:
Inherited property is defined as the property bequeathed from grandparents or parents. It can either be let out or a self-occupied space depending upon its usage as defined above.
When a person receives a property on inheritance, it is not taxable for the person. But when the receiver who is also the inheritor of the property sells it to someone, the capital gains on the property are taxable for the respective inheritor. He/ she can easily calculate the taxable capital gains by:
Step 1: The inheritor shall know the acquisition and indexation cost to calculate the capital gains on the sold property.
Step 2: Property Cost:
Though inherited property does not cost anything to the receiver/inheritor, for the calculation of capital gain, the cost of the property from the previous owner is considered to be the acquisition cost of the property.
Step 3: Indexation cost: The year of property acquisition of the owner from whom the property is inherited is considered for counting the indexation cost along with the years of the sale of the inherited property.
Step 4: Perhaps you can calculate the total cost of capital gains through the formula i.e.
Acquisition cost X Cost inflation index (CII) of the acquisition year/ Cost Inflation Index (CII) of the year of the property sale.
Note: the cost of the index may vary from one FY to another.
How can You Earn Income from House Property?
You can only earn income through house property in below-given cases:
- Through rental or a let out property
- Through the annual value of the owned property, i.e. self-occupied by the owner, which is Nil
- Through the annual value of the deemed property that is to be rented or let out for the income tax purposes (when a taxpayer owns more than two self-occupied house property)
The annual value of a property, i.e. self-occupied is considered as the municipal taxes paid, and in case of the let out properties, the rent received by the owner is counted as the gross annual value. For a let out deemed property, the rent of the same place is counted as the gross annual value, and for the self-occupied space, the gross annual value is counted Nil.