Income from a property or house property or let out property comes when you have a property from which you receive Rental Income. Sometimes Income from let out property is negative because the interest payments on a home loan is greater than the rent received.
The most difficult part is how to calculate the income from let out property. There are some terminologies related to income from let out property.
Let’s assume Shivam(landlord) owns a house and gives it to rent to Mayank(tenant).
Actual rent received: For the leased property, the actual rent agreed between the Shivam and Mayank applies. Mayank pays Shivam a rent of ₹ 6,500 per month for property A
Fair Rents: This means how much rental income a similar property nearby can provide with similar facilities and equipment. Example: the fair rent for object A is ₹7,000 a month
Standard Rent: Rent determined under the Rent Control Act: Some states have a rent control Act that sets the rent. Even if it is a small amount. Example: The standard rent for object A is ₹6,000 a month.
Municipal value: Corresponds to the circular rate or the reference value. The rental value is determined by the local organization or the community committee. Example: the municipal value of property A is ₹ 5,000 per month
After calculating the above values, the notional rental income of the let out property can be calculated using the formula in the Income Tax Act.
A = Higher of Municipal Value or Fair Rent Value. In this scenario, it is higher of ₹7,000 or ₹5,000 = ₹7,000 per month
B = Expected Rent = Lower of A or Standard Rent i.e. Lower of ₹7,000 or ₹6,000 = ₹6,000 per month
Gross Annual Value of Property = Higher of Actual Rent Received or Expected Rent = Higher of B or Actual Rent Received i.e. ₹6,000 or ₹7,000 = ₹7,000 per month or ₹84,000 p.a.
Therefore, in this case, the Actual Rent Received is the Gross Annual Value of let out property. However, this may not always be true.
If a specific value is unavailable or not declared in your area, you can accept it as null.
The annual net value is the annual gross value of less municipal taxes such as property taxes, sewage taxes, etc.
But for the calculation of the annual net worth, municipal taxes on let out property income are considered to be nil if they are not paid by the owner of the house. For example, if the municipal taxes are paid by Mayank, they are classified as "zero" under "rent actually received" and the annual net value is the gross annual value.
Suppose, Shivam pays 5,000 rupees in the form of municipal tax per year in this case. Annual net worth = ₹84,000 - ₹5,000 = ₹79,000.
Before deciding the Total Income from the house, Shivam needs to include some deductions from the net annual value. Mainly these are of two types i.e Standard Deduction @ 30% of Net Annual Value & Interest on Housing Loan. In our scenario, there is no home loan taken by Shivam.
Total Income from house: ₹79,000- ₹23,700(30% of ₹79,000)
Total Income from house: ₹55,300.
However, if the taxpayer uses this property to operate or carry on a business or a business, it will not be taxed as income from house property.
Use the below-mentioned link to calculate your income from the house property. https://www.incometaxindia.gov.in/Pages/tools/income-from-house-property.aspx
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