Notional income refers to income that is assumed to be earned—even when you haven’t actually received any money in hand. It’s a concept used in taxation to ensure fair assessment of income from assets or properties that have potential to generate earnings, even if they don’t currently do so.
For example, if you own a house but don’t rent it out, the government may calculate a notional rent based on its fair rental value. Similarly, if the value of your investments or property rises but you haven’t sold them yet, the appreciation may be treated as notional income for tax purposes.
This system ensures that people who hold valuable assets still contribute fairly to the tax pool, even if they’re not earning actual income from those assets.
Looking for stable, tax-efficient growth? Earn assured returns with a Bajaj Finance Fixed Deposit—rated AAA by CRISIL and ICRA for highest safety. Open FD.
Notional income and its impact on Indian taxation
In India, notional income has a significant impact on the taxation of assets that have increased in value but have not generated any realised income. Tax laws require individuals and businesses to report notional income from specific assets, such as self-occupied properties or unrealised capital gains, to ensure a fair distribution of tax obligations.
For instance, if you own a second property and do not receive rent for it, the government may still consider an amount as notional rental income, assuming a fair rental value for the property. Under Indian tax laws, the Income Tax Department treats a self-occupied property as though it generates rental income, even when the property is not being rented out. This principle ensures that individuals with unutilised assets are still taxed based on the potential economic benefits of those assets.
The notional income model is also applied to capital gains tax when individuals or businesses hold onto assets like land, stocks, or bonds, which appreciate over time. Even though these assets have not been sold, the increase in value is considered taxable. This helps maintain equity within the taxation system, preventing wealth accumulation without paying due taxes. It encourages tax compliance, contributing to the overall health of the economy.
Even as you plan your taxes, balance risk and reward by investing in a Bajaj Finance FD. With flexible tenures and competitive rates up to 7.30% p.a., it’s an excellent choice for consistent returns. Book FD.
