How to calculate income tax of vacant property

Property ownership is seen as an investment everywhere! But most people don't realize that this ownership is taxable. If you own a property like a villa in Thrissur, be it either on rent or kept vacant, you need to pay taxes to the government. If you own more than one built-up property, you are expected to pay income tax on all your properties except on the self-occupied one.

Asset Homes, reputed builders in Kerala tries to give you a run-in on:

Taxation on vacant property

The Income Tax Act, 1961 defines that income from house property is levied not on the basis of rent but on the potential of the property to yield income for the owner. The taxation is on a notional basis, which is based on the annual value of the property - the sum the property could have generated if it was let out in a year.

If the let-out property is vacant for a part of the year, the actual rent received will be the gross annual value of the property & the calculation is the same as in the case of let-out property. That means interest is deductible without any limit.

For a self-occupied property, no tax is charged but if you own more than one built-up property, you can choose which property to show as 'self-occupied'. All others are compulsorily required to be declared as rented out. 

Calculating tax on vacant property

Step 1: Determine the gross annual value of the property considering these four factors:

• The actual rent received on the property (not applicable if the property remains vacant throughout the year).
• The municipal value of the property as determined by the local civic body.
• The fair rent of the property (similar to what other properties are fetching in the same locality)
• The standard rent if the property in question falls under the scope of the Rent Control Act.

Step 2: Deduct municipal taxes

Step 3: You get net annual value, also known as NAV

Step 4: Deduct standard deductions from the net annual value

Step 5: Include the result under income from house property

Now, let’s take a real example. The property was on rent for three months and vacant for the remaining nine months.

Actual rent received for three months: Rs 36,000 (Rs 12,000/month)

Municipal value of the property: Rs 90,000

Fair rent: Rs 1,40,000

Standard rent: Rs 1,20,000

Municipal taxes paid: Rs 20,000

Calculations

Gross annual value: Rs 1,20,000 (Higher of a or b)

Higher of municipal value or fair rent but limited to standard rent – Rs. 1,20,000

Actual rent received – Rs 36,000

Municipal taxes: Rs 20,000

Net annual value: Rs 1,00,000 (Rs 1,20,000-Rs 20,000)

Standard deductions: Rs 30,000 (30% of net annual value)

Net income under the head: Income from house and property: Rs 70,000

To book your villas in Thrissur, contact us at Asset Homes, one of the best builders in Kerala to deliver 58 residential projects in just 12 years.