Even vacant house has tax implications

India is a country where people consider real estate as a lucrative yet expensive investment option. The rising property prices may be a testimony to the same. However, one also needs to evaluate the tax implications for houses purchased as investment and lying vacant.

The current provisions under the Income Tax Act, 1961 classify properties into three categories – one self occupied property (SOP), let out property and deemed to be let out property (DLOP). While, the tax implication for the let out property category is relatively straight forward, there is always an area of consideration in respect of the other two categories.

The Act classifies a property as SOP only in two situations. First when the owner actually uses the house for the purpose of his own residence. Second when he is unable to occupy his property which is situated in one location and on account of his employment/business/profession carried out at any other place he stays in a rented premise in such other place. The benefit of classifying a property as an SOP is that the gross taxable value of such property is considered as NIL and a deduction of interest on housing loan for acquisition is allowed deduction up to Rs 1,50,000.

However, if you own more than one such SOP, you have a choice to treat any one of the properties as SOP. The other such property (ies) which lies vacant will be treated as DLOP under the Act. So, if you were under the impression that if no rent is earned there is no tax on any of your properties, you may want to re-look at your year’s tax returns.

If a property is treated as a DLOP, it is effectively put at par with a let out property as far as taxation is concerned. Hence, a notional rental value (method to calculate such value prescribed under the Act) is considered as the gross taxable rent for such property. You are allowed to claim a flat deduction of 30% for repairs and maintenance charges.

At first this concept of taxing notional rent may appear very discouraging. However, one should not lose sight of the deduction for interest on amount borrowed to buy/construct this property. In case of a DLOP this interest is fully allowed as a deduction from the notional rental income, as compared to a deduction of only up to Rs 1,50,000 for a SOP. This additional deduction may result in a loss from house property which can be set off against your other taxable income.

Also, any such second or subsequent vacant property has the same implications, as far as capital gains is concerned as let out properties would have. In addition to the income tax implications, if you own more than one house which is neither rented by you nor used for the purpose of business/profession, you would also be liable to pay wealth tax on the same. On the Direct Tax Code, the concept of DLOP has been done away with. Capital gains and wealth tax implications remain the same.

Source: Indian Express