Your Guide to Taxes on Vacant Properties

While we can say that real estate is one of the best asset classes for investment, we have to bear in mind that ownership comes at a cost. If you are someone who owns more than one property, there is a likelihood that you might attract various taxes and levies. Apart from the property tax and wealth tax that you pay on your real estate assets, you also have to pay tax on the rental income if you let out your property. However, did you know that you also have to pay income tax on a property if it is left vacant? Here is a demystifier.

Why pay taxes on a vacant property?

Though the tax under the head “income from house property” is supposed to be on income, it is a tax levied not on rent but on the basic capacity of a building to yield income. Termed the “annual value” this is the sum for which the property might reasonably be expected to be rented out a year to year basis. The tax, here is calculated on a notional basis. To put it otherwise, the annual value of the property is the amount that a property can earn when it is rented out in a year.

What are the deductions?

You can claim deductions like municipal taxes that are to be borne by the landlord and not the tenant. The standard permissible deduction limit is set at 30% of the annual value of the property for repairs and maintenance.

Calculating tax on vacant property

Step 1: There are four factors considered for calculating the gross annual value of the property.

These include:

The actual rent received on the property (not applicable if the property remains vacant throughout the year).

The municipal value of the property as determined by the local civic body.

The fair rent of the property, which is similar to what other properties are fetching in the same locality.

The standard rent if the property in question falls under the purview of the Rent Control Act.

Step 2: Deduct municipal taxes

Step 3: You get net annual value, also known as NAV

Step 4: Deduct standard deductions from the net annual value

Step 5: Include the result under income from house property

What should you do?

Remember that you are free to specify any one of the properties that you own to be self-occupied, you should first calculate the annual value of each property and then choose the one with the highest annual value as self-occupied. You can claim all the deductions while calculating the annual value.

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