For the past few weeks this column has been running a series of articles on the direct tax code (DTC) which is due to replace the current Income-Tax Act (ITA) from April 1, 2011.

So far, apart from a general overview, provisions under the DTC relating to tax deduction at source and capital gains have been examined. This week, we shall see what the DTC has in store as far as income from house property is concerned.

Readers would know that currently under the ITA, one self-occupied property is free of tax. The second property onwards is taxed on the actual rent received. Even if the same is not rented out, tax is payable on the notional rent (known as 'deemed let out property' under ITA).

Interest payable on housing loans is deductible with a ceiling of Rs 1.50 lakh for self-occupied properties. There is no ceiling applicable in the case of let out or deemed let out properties.

Now, under the DTC, one self-occupied property continues to be tax-free. However, what will come as a blow to most taxpayers is the fact that the interest deduction of Rs 1.5 lakh will no longer be applicable. Even the Section 80C deduction on the principal portion of the EMI stands cancelled under the DTC.

Even for let out or deemed let out properties, tax will be payable on the higher of the actual or 'presumptive rent'. This presumptive rent is a new concept under the DTC. Presumptive rent is fixed at 6% of the ratable value fixed by the local authority. Where no ratable value has been fixed, 6% shall be calculated with reference to the cost of construction or acquisition of the property.

The above provision has the potential to increase rentals across the board. In the current environment, property yields are in the range of 3-4% if not lower. Take the case of a tenant who is paying a rent of Rs 25,000 per month on a property that costs say, Rs 1 crore. Rs 25,000 per month translates into an annual rent of Rs 3 lakh or 3% of the property cost.

Now, under the DTC, irrespective of the fact that the landlord is receiving Rs 3 lakh as rent, he will have to pay tax as if he is receiving Rs 6 lakh (6% of Rs 1 crore). So he may as well start charging Rs 6 lakh as rent. If not, the least he would do is to pass on the burden of the extra tax to the tenant - on the lines of what employers were doing by passing on the fringe benefit tax (FBT) to employees during the FBT regime.

The other change under the DTC is that there is no relief even if the property lies vacant. This lack of 'vacancy allowance' which is currently available under the ITA may actually work in the interest of a potential home owner, since it will deter so-called 'investors' in property.

Since investing and sitting on the property for the capital appreciation will become expensive, actual consumers who intend to use the property as a roof over their head can look forward to some dip in prices on the back of a reduced demand.

Apart from the interest (covered above), taxes levied by a local authority and tax on services - if actually paid - will be allowed as a deduction. Secondly, 20% (as against the present 30%) of the gross rent will be allowed as a standard deduction towards repairs and maintenance.

Wealth tax will not be payable on any one house or part of a house or a plot of land belonging to an individual or a HUF which is acquired or constructed before April 1, 2000. In other words, no house acquired after April 1, 2000, is free from wealth tax.

Currently, one house is free from wealth tax in all cases, irrespective of when it was acquired. Thankfully, since wealth tax (@0.25%) is payable only on net wealth in excess of Rs 50 crore, this provision will bother, if at all, only the super-rich.

Lastly, as covered in detail under capital gains, home owners will not be offered the facility of saving tax on their capital gains by reinvesting the capital gain/ sale proceeds in another property as is applicable under Section 54/ Section 54F currently under ITA.

Clearly, the above provisions of the DTC will have a substantial impact on the property market. The elimination of tax deductions will adversely impact potential single property owners.

However, since ownership of more than one property (or investment properties) will become significantly more expensive, it is hoped that this will indirectly benefit real consumers by driving down prices.