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Tuesday, October 21, 2014

What is Notional Rent for your rented house?

If you are someone who has rented out your house, you need to show this rent as an income along with your other sources of income. The taxation of your rental income depends on whether you have a loan running against this rented house or you own it fully. The amount that is considered for taxation could either be the Notional Rental for that house or your Actual Rent whichever is higher. Let us understand more...

Case I : You have a fully owned house that you have rented out
In this case, if you receive some rent from your house, 70% of the rent must be shown as income in your records. 
As an example:
If the monthly rent you receive is Rs.15,000/- you can deduct 30% of it as expenses incurred in maintaining the house & other charges. The remaining Rs. 10,000/- needs to be shown as your income. So, if your annual salary is INR 10 lac, then your total taxable salary will become Rs. 11,20,000/- (After including Rs. 1,20,000 of your rental Income) 

Case II : You have a rented out house for which you have a Home Loan running 
In this case where you have a home loan running for your house, the interest component of your loan is "completely" deductible from the rent you receive. The term "completely" means that there is no limit to the deduction of interest from your taxable income.
Considering the same example as above:
Rent Received (post 30% deduction) : INR 1.2 Lac
In case a home loan is running for this house where the "interest portion of your EMI" you paid in the said financial year was INR 1.0 Lac, you can deduct this from the rental income and show only Rs. 20,000/- (INR 1.2 Lac - INR 1.0 Lac) as the net income because you are offsetting the interest & your rent. If you are not aware of the interest component of your EMI, you can ask your bank to issue you a statement of principle and interest for the home loan for a specified financial year.
So far so good, but where does Notional Rent come into picture?

What if you decide "not" to rent out your house?
In such a case, the government assumes a certain "notional rent" as your income from the house that could have been potentially rented out (not self occupied). Notional Rent is, therefore, the guideline rental price that the government will consider for all its calculations. Technically this is the minimum price at which you are expected to rent out your house. 

What if the Notional Rent is higher than the Actual Rent?  
The rent considered for taxation purposes is always the higher of the two : actual or notional rent. Therefore, in the rare case that the actual rent you get is lower than the Notional Rent, you still need to consider the notional value for tax purposes.

How is the Notional Rent calculated for your house?
There is no clear or strict provision that has been provided in the income tax act to calculate the notional rental income. In the current scenario, most of the tax payers may use the neighbor’s rental amount as the notional value. Some tax payers may take this as an advantage because it gives extra freedom to the tax payers to manipulate the notional rent. However, in case you are caught in a tax audit, you may find it difficult to prove the intent behind this manipulation.

What if you have two houses that are rented out?
If you have two homes, the calculation of income from house property has to be done separately for each home owned by you. The rent you earn is the income from house property and the interest you pay on your home loan is negative income from house property. What actually happens is that a calculation of income from house property is made for each property you  own. If such a calculation results in a loss, it is allowed to be set off against your income from other heads.

What if you own 2 houses - one of which is self occupied?
The tax department requires you pay tax on the notional rent on at least one of the houses. Which house to choose from among the two (to be taxed on the basis of notional rent) is left entirely to you. You can consider one of the houses as "self occupied" - perhaps where you get lesser rent or you have a lower home loan interest component. You are also allowed to change your choice from year to year.  



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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.


Cheers

Manoj Arora
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More on "From the Rat Race to Financial Freedom"

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From the Rat Race to Financial Freedom | Happiness Unlimited | Dream On

What is Notional Rental Income?

In this case, a notional rental income has to be calculated and added to the total income. This will be shown under the head of other income. The question here is how this notional income is calculated. But, there is no clear or strict provision is provided in the income tax act to calculate the notional rental income. In the current scenario, most of the tax payers uses the neighbor’s rental amount as the notional value. Also this advantage gives extra freedom to the tax payers to manipulate the notional rental.
- See more at: http://www.thinkplaninvest.com/notional-rental-income/#sthash.jFygSNqM.dpuf

What is Notional Rental Income?

In this case, a notional rental income has to be calculated and added to the total income. This will be shown under the head of other income. The question here is how this notional income is calculated. But, there is no clear or strict provision is provided in the income tax act to calculate the notional rental income. In the current scenario, most of the tax payers uses the neighbor’s rental amount as the notional value. Also this advantage gives extra freedom to the tax payers to manipulate the notional rental.
- See more at: http://www.thinkplaninvest.com/notional-rental-income/#sthash.jFygSNqM.dpuf

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