Property and Co-Owned Property Will Be Taxed
Property and Co-Owned Property Will Be Taxed The Income Tax Bill 2025, recently introduced in the Lok Sabha by Union Finance Minister Nirmala Sitharaman, aims to simplify and streamline taxation laws. Spanning 620 pages, the bill is nearly 50% shorter than the existing Income Tax Act. Among the key changes, the bill proposes a new approach to taxing property income, including updated rules for co-owned properties, revised capital gains exemptions, and limitations on set-off and carry forward of losses.
Let’s break down how these changes will impact property owners:
Annual Value Calculation: Revised Method for Let-Out and Vacant Properties
The bill proposes a revised method for calculating the annual value of properties, making it fairer for landlords, especially those with vacant properties.
Key Provisions:
- Let-Out Properties: The annual value will be determined as the higher of:
- The reasonable expected rent (market rate), or
- The actual rent received.
- Vacant Properties: If the property remains vacant for part of the year, the annual value will only be calculated based on the rent received during the occupied period. This provides relief to landlords struggling with prolonged vacancies.
Impact:
This change reduces the tax burden on property owners with vacant units, as they won’t have to pay tax on notional rent for unoccupied periods.
Standard Deduction and Interest on Borrowed Capital
The 30% standard deduction on annual value continues under the new bill. However, new rules have been introduced for the deduction of interest on borrowed capital.
For Self-Occupied Properties:
- Interest Deduction Cap: The maximum deduction is limited to ₹2 lakh per year.
- Completion Timeline: Property and Co-Owned Property Will Be Taxed To claim this deduction, the property must be constructed or acquired within five years from the date of borrowing.
- Pre-Construction Interest: Property and Co-Owned Property Will Be Taxed Any interest paid before completion can be claimed in five equal installments starting from the year of completion.
For Let-Out (Rented) Properties:
- No Interest Deduction Limit: There is no cap on the interest deduction for rented properties, which is a significant advantage for landlords.
Taxation of Rent Arrears:
- Rent arrears or unrealized rent will be taxed in the year it is received, regardless of the property’s status (self-occupied or rented).
https://www.incometax.gov.in/iec/foportal/
Tax Relief for Developers
Builders and developers will receive tax relief on unsold properties:
- Two-Year Tax Exemption: Unsold flats or commercial units will be exempt from taxation for up to two years after receiving the completion certificate.
Impact:
This move provides developers with time to sell their inventory without the immediate tax burden, helping improve cash flow in the real estate sector.
Taxation of Co-Owned Properties
For properties jointly owned by multiple individuals, the new bill lays out clear guidelines to determine tax liability.
Key Provisions:
- Identifiable Ownership Shares: If the ownership percentage is clearly mentioned in the property documents, each co-owner will be taxed based on their respective share of the income.
- Unspecified Ownership Shares: If no ownership percentage is specified, the property income will be taxed collectively as an Association of Persons (AOP).
Impact:
This ensures fair and transparent taxation for co-owned properties, especially in family-owned real estate or joint investments.
Set-Off and Carry Forward of Losses
The new bill introduces restrictions on how much loss from house property income can be set off against other income heads.
Key Provisions:
- Set-Off Limit: Losses from house property can be set off against other income heads (like salary, business, or capital gains) up to a maximum of ₹2 lakh per year. Property and Co-Owned Property Will Be Taxed
- Carry Forward Rule: Property and Co-Owned Property Will Be Taxed Any unabsorbed loss can be carried forward for up to eight years but can only be adjusted against future income from house property.
Impact:
This change will affect taxpayers who previously used large losses from house property to reduce their overall tax liability. Property and Co-Owned Property Will Be Taxed Careful planning will be required to optimize tax benefits under the new rules.
Revised Capital Gains Exemptions on Property Sales
The bill introduces new rules for claiming capital gains exemptions under Section 67.
Key Provisions:
- Reinvestment Timeline:
- Taxpayers can claim an exemption on capital gains if a new residential property is purchased within two years or constructed within three years.
- Sale of New Property:
- If the newly acquired property is sold within three years, the previously exempted gain will become taxable as long-term capital gains in the year of sale.
- Reinvestment Cap: The amount of capital gains eligible for exemption is capped at ₹10 crore.
Impact:
The ₹10 crore cap is aimed at curbing excessive tax planning strategies while still offering relief to genuine taxpayers.
Practical Example: How These Changes Affect You
Case 1: Let-Out Property with Vacant Period
Amit owns a property in Mumbai and receives rent for only six months of the year due to tenant turnover. Property and Co-Owned Property Will Be Taxed Under the new rules, Amit will only pay tax on the rent received during the six months, reducing his overall tax burden compared to the earlier notional rent method.
Case 2: Co-Owned Property
Sneha and Raj own a property jointly, with Sneha holding 60% and Raj holding 40% ownership. They will be taxed on their respective shares of the property’s income. Property and Co-Owned Property Will Be Taxed If their ownership percentages were not specified, the income would be taxed collectively as an AOP.
Conclusion
The Income Tax Bill 2025 introduces significant changes in how property income is taxed. While these reforms aim to simplify tax provisions and reduce ambiguities, they also impose stricter limits on deductions and set-offs. Property and Co-Owned Property Will Be Taxed Property owners, especially those with multiple or co-owned properties, should carefully review these changes and plan their tax strategy accordingly.
For personalized advice and to understand how these updates affect your tax liabilities, consult a tax professional or stay tuned for our detailed tax-saving strategies in upcoming blogs.
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