Get tax relief on second house if not on rent

Though final decision rests with the assessing officer, keeping the proof that those efforts to get a tenant went in vain can help

Many people with a second non-rented property resign themselves to the fact that they have to pay income tax on the amount they have supposedly received. This amount is the higher of the municipal rates and the market rate of a similar property in the same locality.

There is a way out. According to tax experts, if you have not rented out the property and can provide sufficient proof that you tried but did not get a tenant, the taxman may give you relief.

If a person has tried to let out the house but failed to do so despite genuine efforts, he or she can claim deduction as vacancy allowance under Section 23(1)(c) of the Income Tax Act. “To ensure that such claims are accepted, a person needs to preserve the proof of efforts made. For example, a clipping of an advertisement in a newspaper, listing details of the house on property websites, and pictures of signboard that was used to advertise,” says Vishvajit Sonagara, founder, Quicko.com, a website that offers Income Tax return filing services.

Tax experts say that income tax (I-T) department is stringent about this deduction which has led to several litigations. Instead of claiming the entire amount, chartered accountants suggest claiming part deduction, so that the assessing officer sees it kindly.

Divakar Vijayasarathy, co-founder of MeetUrPro.com, says calculating the deduction is complicated. A person needs to compute rent under various conditions to arrive at an 'annual value', which is the inherent capacity of the property to earn income. The taxpayer needs to calculate ‘municipal value’. This is 12.5 times the annual property tax. The owner also needs to get the ongoing rents for the similar property in the area from brokers and arrive at ‘fair rent’. Then, there’s actual rent received. In some cases, property is governed by Rent Control Act and for this the I-T department has a ‘standard rent’ value.

For example, a person had let out a property for four months at a monthly rent of Rs 50,000. The fair rent is Rs 40,000. The municipal value is Rs 35,000 and standard value is Rs 30,000.

To calculate the annual value, he will need to follow three steps. In step one, he will first take the higher of municipal value and fair rent. In the example, it will be Rs 4.8 lakh (Rs 40,000×12). In step two, he will need to compare this with the standard rent and take the lower of the two, which will be Rs 3.6 lakh (Rs 30,000×12).

Finally, he will need to check the higher of step two figure and the actual rent, which is Rs 6 lakh (Rs 50,000 X 12). This is the annual value of the property. Based on this, the income tax department gives specific formula to calculate the deduction a person can claim and arrive at the income from house property.

To arrive at the tax liability, the owner can deduct municipal taxes and 30 per cent standard deduction (money spent on repair and upkeep) from the income from house property.