If you own more than two house properties and even if one of them is lying vacant, you may have to pay income tax on that house property. The income tax amount will be calculated based on the 'deemed rent' concept if the house is lying vacant.

Read on to know what the deemed rent concept is, when it is applicable, and how to calculate the tax payable.

WHAT IS DEEMED RENT?

The concept of deemed rent comes into effect when an individual taxpayer owns a vacant property during a financial year. The Income-tax Act,1961 states that up to two house properties of a taxpayer can be classified as self-occupied house property. On these self-occupied properties, the concept of deemed rent will not apply as per the income tax laws.

Any house property(s) over these self-occupied properties will be considered as 'deemed to be let out property'. The assumption that the house has been put on rent despite being vacant and earning no income is called the deemed rent concept. This concept of deemed rent only hits if the taxpayer has more than two houses and the subsequent houses are vacant during the financial year.

"For up to two house properties, a person does not have to pay any taxes on the notional rent from such properties, but for any additional property, the same would be assumed to have been let out and he would have to pay taxes on the notional rent reasonably expected to be earned from such property," said Neeraj Agarwala, Partner, Nangia Andersen India, a Business Advisory Company.

Given below are some of the important factors which determine the taxability of a deemed rental property.

CALCULATE THE GROSS ANNUAL VALUE OF THE HOUSE (GAV):

While calculating income from vacant house property (deemed rent), one has to calculate the gross annual value (GAV) of a property. This GAV is the reasonable expected rent that can be earned from a vacant property.

Calculation of GAV is a two-step process. First, calculate the higher of the municipal value or fair rent. Second, from the lower of these two compare it with the standard rent (if the property is covered by the Rent Control Act). The reasonable expected rent value arrived at in the second step will be the GAV. This is because for deemed to be let-out houses there is no actual rental income. Had it been a let-out house, GAV would have been higher than the reasonable expected rent and the actual rent.

"In the calculation for GAV, the lower value of step 1 and standard rent is taken as reasonable expected rent. This feature was incorporated to provide protection to tenants covered under the Rent Control Act, as applicable in various states. This is because as per the Rent Control Act, the standard rent (where applicable) of a particular property is fixed considering its area, locality, and other aspects. For example, in some parts of Mumbai, there are tenants who have been occupying the property for more than 40-50 years. Such real estate properties occupied by such tenants have witnessed significant increases in their value and also may have a higher notional yield. In such cases, where the Rent Control Act is applicable, the owner of the property may have to factor the Standard Rent as well as they cannot practically charge a higher rental premium to such protected properties," said Dr. Suresh Surana, Founder, RSM India, a tax, accounting and consulting company.

Here is an example to understand this.

Suppose house A is situated in a locality where its fair rent is Rs 1,20,000, the municipality rental value is Rs 1,00,000 and the standard rent is Rs 1,30,000. The two-step GAV calculation will be as follows:

STEP 1: The first step is to calculate the higher of municipal value or fair rent. In our example, it is the fair rent, i.e., Rs 1,20,000.

STEP 2: Calculate reasonable expected rent, which is lower of either step 1 value or standard rent.

In our step 1 calculation, the fair rent value is Rs 1,20,000 and the standard rent is Rs 1,30,000. So reasonable expected rent is Rs 1,20,000 (lower of step 1 value or standard rent.). This reasonable rent will be taken as the rent amount on which tax liability will be calculated. This is because there is no actual rent earned from that property.

Do note that had the fair rent or municipal value being higher than the standard rent, then standard rent would be taken as GAV for deemed rent purposes.

Technically, the vacant house is earning nothing, so there won't be any actual income. "Therefore, one has to calculate the expected net realizable value of rent and consider it as deemed rent. Once deemed rent is calculated, it would be taxed as regular income from house property," said Sujit Bangar, Founder, Taxbuddy.com, a tax filing assistance company.

Given below are some of the important factors which determine the taxability of a deemed rental property:

CHOOSE THE CORRECT ITR FORM AND COMPUTE INCOME FROM EACH HOME SEPARATELY:

Owning multiple house properties will make one ineligible for filing their taxes using ITR-1 (Sahaj) or ITR-4 (Sugam) form.

"A taxpayer should select the correct ITR form by taking into consideration the necessary factors like nature/source of income and residential status, among others. Further taxpayers owning multiple properties would be required to compute the income from each house property separately and accordingly claim the necessary deductions," said Surana.

DEEMED RENT WILL NOT APPLY IF THE PROPERTY IS BEING HELD AS STOCK IN TRADE:

It may happen that an individual has multiple vacant house properties. So, in this case, the tax department may classify all of the vacant properties barring two houses as deemed to be on rent, unless the individual maintains proper books of accounts and shows all of these properties as stock in trade inventory and files the correct income tax returns. "The deemed rent provisions, as specified under Section 23(4)(a), will not apply to properties held as stock in trade. The properties are treated as inventory, and any gains or losses arising from their sale would be taxed under the head of 'Profits and Gains from Business or Profession," said Advocate Aashish Sharma, Co-founder & Litigation Head, Lex N Tax, a Delhi based tax and law firm.

CHOOSE THE CORRECT PROPERTY FOR TAGGING AS SELF-OCCUPIED OTHERWISE TAX OUTGO WILL BE HIGHER:

"Typically one should choose the properties with the highest GAV as self-occupied," said S Ravi, founder and managing partner of Ravi Rajan & Company, a Delhi-based CA firm. This is because once the house with the highest value is tagged as self-occupied, the remaining house(s) will have a lower value and hence, the income tax outgo will be lower.

For example: say the GAV of House A is Rs 20 lakh while for House B it is Rs 30 lakh and for House C it is Rs 40 lakh. Here, ideally, House C and B should be declared self-occupied properties.

HOW TO CALCULATE DEEMED RENT

Let us take the example of an individual who has three houses (1, 2, 3) out of which house, 1 and 2 are being used by him and his family. The income tax laws say that a maximum of two houses can be classified as self-occupied and the remaining house(s) will either have to be put on rent or it will be deemed that they were put on rent, even if in reality they were not. So as can be seen in the table below, houses 1 and 2 are self-occupied and house 3 is deemed to be let as it is vacant. Though house 3 is not earning any income, still it is assumed that it is earning and hence, GAV has to be calculated.

Disclaimer: All figures are for illustrative purposes. GAV is calculated for let-out or deemed to let-out properties using a detailed formula and is not an arbitrary figure.

Under the old tax regime, losses on account of house property (which are not classified as self-occupied property) can be set off against income from other heads up to Rs 2 lakh. Any additional losses, exceeding this limit, which cannot be set off in the same year may be carried forward up to eight assessment years immediately succeeding the assessment year for which the loss was first computed.

"However, the losses carried forward can be set off only against income from house property in the future financial years. By carrying forward losses, taxpayers can offset them against future income from the same head, and strategically manage tax liability as it leads to a reduction of overall tax liability. If the taxpayer opts for a new tax regime, losses on account of house property cannot be set off against income from any other head and are also not allowed to be carried forward," said Agarwala.