When a part of a property is self-occupied and another part is let out, the income from the property is computed separately for each part. The part that is self-occupied is treated as a separate property, and the part that is let out is treated as a separate property.
Self-occupied property
For the part of the property that is self-occupied, the following rules apply:
- The annual value of the property is deemed to be nil. This means that no income is recognized from the self-occupied property.
- Municipal taxes paid on the property are not allowed as a deduction.
- Standard deduction is not allowed.
- Interest on borrowed capital for the purchase or construction of the property is deductible up to Rs. 2,00,000 per annum.
Let-out property
For the part of the property that is let out, the following rules apply:
- The gross rental income from the property is the total rent received from the tenant.
- Deductions are allowed for municipal taxes, repairs, insurance, and interest on borrowed capital.
- The net rental income is the gross rental income minus the deductions.
- The taxable income from the property is the net rental income minus standard deduction.
Standard deduction
The standard deduction for let-out property is 30% of the gross rental income or Rs. 5,000, whichever is lower.
Example
Suppose you own a house that has two units. You occupy one unit and rent out the other unit for Rs. 1,00,000 per annum. You also pay municipal taxes of Rs. 10,000 per annum on the property. Your interest on borrowed capital for the purchase of the property is Rs. 50,000 per annum.
Computation of income from self-occupied property
Annual value: Nil Municipal taxes: Not allowed Standard deduction: Not allowed Interest on borrowed capital: Rs. 50,000 (limited to Rs. 2, 00,000)
Computation of income from let-out property
Gross rental income: Rs. 1, 00,000 Municipal taxes: Rs. 10,000 Repairs: Nil Insurance: Nil Interest on borrowed capital: Rs. 50,000 Net rental income: Rs. 40,000 Standard deduction: Rs. 5,000 (lower of 30% of Rs. 1, 00,000 or Rs. 5,000) Taxable income: Rs. 35,000
Your total taxable income from house property is Rs. 35,000.