BankBazaar.com CEO Adhil Shetty explains how to avail advantages of the increase in house value
Timing is significant in financial planning especially when you are looking to earn a profit as you need to know when to take advantage of the increase in value. However, it’s equally important to be careful to avoid paying a huge amount as tax. Amit learned this lesson when he sold his house in Delhi in 2012 within 2 years of purchasing. According to him the property was raking him 60% profits, an offer he could not resist. However, he wasn’t aware of the tax implications of his rushed decision. Not only he had to pay a considerable amount of tax on the profit, but also had to let go of the tax exemptions he was availing on his home loan.
If you sell your house within three years of purchase, the tax benefits you are enjoying on your home loan get reversed and are included in your income when you file your income return. After presenting its compassionate side, the Income Tax Act eyes all properties owned by you for taxation. This includes property from which you are earning that is let out property as well as any other property which it is vacant and not rented out (known as Deemed to be Let Out Property or DLOP) as the annual value of the property after standard deductions is taxable under Sec 24B under the head income from house property. However, if you own a farm house, it is considered an agriculture income and does not fall under the tax net.
Let out property (LOP)
A scenario where an individual enjoys a fixed income from a property in the form of rent, it is known as let out property. The annual value of the property is calculated through the following steps:
* Find out the expected rent from the property by comparing the rents of similar kinds of property in different areas and use whichever is higher
* Calculate the actual rent received in a year
* Take the amount which is higher (from steps 1 & 2)
* Calculate the amount lost while the place is vacant in a financial year
* The difference between 3 & 4 is the annual value of the property, known as the Gross Annual Value (GAV)
* The net annual value of the property can be calculated by subtracting municipal tax from the