In the changed scenario it is high time that almost all investors, and more particularly high net-worth investors, shifted their investment pattern from movable assets to immovable assets in the form of commercial building or residential building. While planning your rental housing income do not forget to take into consideration of service tax as per Finance Act 2007 (as amended by the Finance Act, 2008) on commercial use of property.
An investment in real estate, especially for the purpose of renting out such real estate, has manifold advantages. Firstly, an investment in real estate will typically result in appreciation of the real estate asset over the years. Secondly, rental income derived from investment in real estate will be subjected to income tax at a lower rate of tax
This is because several deductions are available in respect of income from house property. The first most important deduction permissible is in respect of house tax payment for the property which has been given on rent. In such cases, the entire house tax payment is allowed as a deduction from the rental income of the tax payer, provided the actual payment of house tax is made by the assessee. In a situation where the assessee does not make payment of house tax, then the deduction for house tax payment would not be allowed. It, therefore, implies that in case house tax bill is received by the owner of the house property and he does not deposit the said bill but files an appeal to the concerned authority raising objection to the house tax bill, in such circumstances no deduction in respect of house tax bill would be permissible from the rental income so derived by him.
- After deducting the payment of actual House Tax paid from the gross amount of rent, the resultant figure is known as Annual Value.
- From this annual value, a standard deduction is available equal to 30% of the annual value to the tax payer for various expenses like, repairs, collection charges, etc. This special 30% deduction from the gross rental income brings down the marginal income tax rate to just 21% only plus surcharge thereon in respect of rental income from house property.
Thus, for all individuals and Hindu Undivided Families who are required to make income tax payment @ 30% (on income in excess of Rs. 5,00,000 p.a.) the effective rate of income-tax payable by a person for rental income would be only 21% (maximum marginal rate less 30% standard deduction from rental income = 21%).
Thus, rental housing happens to be the modern mantra for investment planning and tax saving. With the initial exemption limit becoming higher, the investment in house property to receive rental income would be a preferred investment.
Thirdly, interest on loan is allowed as a deduction while computing the rental income of the assessee. The rate of interest is immaterial. However, what is important is that the loan should have been taken and utilised for the house property from which such rental income is derived. Thus, whatever quantum of rent is paid by a person either to a bank, to a financial institution, or to a relative or
to any other person from whom such loan is taken, the entire interest on loan will get deducted while calculating the assessee’s taxable income from “house property.”
No separate deduction these days is permissible in respect of insurance premium paid for the house property. Finally only such rent from house property is subjected to tax which is actually received by a person. Thus, investment in house property for generating rental income is a worthwhile proposition from a tax payer’s point of view.