SYNOPSIS OF LECTURES ON DIRECT TAXES –LECTURE-4 INCOME FROM HOUSE PROPERTY The owner of a house property consisting of any building or land appurtenant thereto is taxed on the income in the form of annual value under the head Income from House Property (Section-22). While income from building and land is taxable under this head, rental income from vacant land or plot is taxable under the head Income from Other Sources. In case of composite rent received for the property as well as services and amenities, the annual value of such property is assessable under this head and the profit arising from services or amenities is chargeable to tax under head Business or Profession or Income from other sources. The legal owner of the house property is chargeable in respect of the income. • • • • In the following cases persons are deemed to be owner of the house property: An individual who transfers house property otherwise than for adequate consideration to his or her spouse or to his minor child is treated as deemed owner of the house property. The holder of impartial estate. A member of a co-operative society to whom a building or part thereof is allotted or leased under house building scheme of the society. A person who comes to have control over the property in the part of performance of a contract or by virtue of transactions under the Transfer of Property Act.
Basis for computing income from let out house property: The income from let out house property is determined as under: Item Amount (Rs.) Gross Annual Value xxxx Less: Municipal Taxes Xxxx Net Annual Value Xxxx Less: Deductions u/s 24 • Standard Deduction xxxx • Interest on borrowed capital xxxx Xxxx Income from house property Xxxx
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Gross Annual Value: Though tax under the head Income from House Property is a tax on income, yet it is not a tax upon rent but upon the inherent capacity of the building to yield income. The standard selected as a measure of income to be taxed is annual value. Gross annual value is determined as follows: • Step No.1 – Reasonable expected rent of a property is gross annual value (Section 23(1)(a)). The gross annual value is deemed to be such sum for which the property might reasonably expected to be let out from year to year. In determining reasonable rent, several factors like location, ratable value fixed by municipal authorities, rent of similar property, cost of construction, nature & history of the property. The major factors are: a. Municipal valuation of property b. Fair rent of the property c. (a) or (b) whichever is higher is generally taken as expected rent. d. If however property is covered by the Rent Control Act, then the amount so computed cannot exceed the standard rent determined under that act.
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Step No.2 –If Rent actually received or receivable is more than what is determined under step No.1, then, rent actually received or receivable is taken as gross annual value (Section 23 (1)(b)). In other words the Gross Annual Value can only be increased and cannot be reduced under step no 2. Further Step 2 is applicable only when the house property is let out. Moreover rent receivable does not include unrealized rent if 1. Tenancy is bona fide 2. Defaulting tenant has vacated/ steps have been taken to compel him to vacate the property 3. He is not in occupation of any other property of assessee
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Step No.3 – If the property remains vacant and because of vacancy the rent actually received or receivable is less than the value determined under step No.1, then, rent actually received/ receivable is taken as a gross annual value.
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Deduction for Municipal Tax: From the gross annual value as computed above, deduction is available for Municipal taxes including service taxes levied by any local authority in respect of house property. Deduction is available only if these taxes are borne by the owner and actually paid by him during the previous year. If the property is situated in a foreign country, the municipal taxes levied by foreign local authority are deductible if borne by the owner. Gross annual value less municipal taxes is net annual value. Deduction under section 24: Following two deductions are available u/s/ 24: • Standard Deduction:- 30% of net annual value is deductible irrespective of any expenditure incurred by the assessee. • Interest on Borrowed Capital: - Interest on borrowed capital is allowable as deduction on accrual basis. The capital must be borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. Following points should be kept in view: ? As deduction is available on accrual basis, it should be claimed on yearly basis even if the interest is not actually paid during the year. ? Deduction is available even if neither the principal nor the interest is a charge on property. Interest on unpaid interest is deductible. ? No deduction is allowed for any brokerage or commission for arranging loan. ? Interest on a fresh loan taken to repay original loan is also allowable as deduction.
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? Interest for pre-construction period: Interest pertaining to period prior to the previous year in which the property has been acquired or constructed will be deducted in 5 equal installments commencing from the previous year in which property or house is acquired or constructed. Basis of computing Taxable Income from Self-occupied Property: • Where an assessee uses his property carrying on any business or profession, no income is chargeable under this head. The assessee in such a case is not entitled to any deduction on account of rent in respect of such house property while computing income from profits of the business or profession. • Where a person has occupied more than one house for his residential purposes, only one house according to the choice of the assessee is to be treated a self-occupied and all the other houses will be deemed to be let out. Computation of annual value of one self-occupied property: Where the property consists of one house in the occupation of the owner for his own residence, the annual value of such house shall be taken as NIL if following conditions are satisfied: • • The property (or a part thereof) is not actually let out during the whole (or any part) of the previous year and No other benefit is derived there from. The income from Self occupied house property(SOP) is determined as under Item Gross Annual Value Less: Municipal Tax Net annual Value Less: Deduction u/s 24: Standard Deduction Interest on borrowed capital: Amount (Rs.) NIL NIL NIL NIL xxxx Xxxx Xxxx
Income from one self-occupied property
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Interest on Borrowed Capital, i.e. for the current year and for the preconstruction period is deductible subject to ceiling given below: Interest on capital borrowed on or after 1st April 1999 is deductible upto Rs.1,50,000/- subject to • Capital is borrowed on or after 1st April 1999 for acquiring or constructing a property , • Acquisition or construction is completed within 3 years from the end of financial year in which capital was borrowed. and • The person extending the loan certifies that the interest is payable for acquisition /construction or refinance of earlier loan for purpose. If the above conditions are not satisfied, maximum deduction on interest on borrowed capital is Rs.30,000/If house property is not actually occupied by the owner owing to employment, business/profession carried on at another place, income from house property shall taken as nil if the following conditions are satisfied: • Taxpayer owns a house property, which is not actually occupied by him by reason of his employment at another place. • He has to reside at another place in a building not owned by him. • The property of the assessee is not let out during whole or any part of the previous year and • No other benefit is derived from the property of the owner. Hints for Tax Planning: • If the person has occupied more than one house for his residence, then care Should be taken while selecting the house to be treated as self occupied to minimize tax liability. • As interest payable out of India is not deductible, if the tax is not deductible at source, it should be ensured that tax is deducted at source in order to avail deduction. • As the amount of municipal tax is deductible on payment basis, it should be ensured that the municipal taxes are paid during the year for claiming the deduction. • As member of co-operative society to whom building is allotted / leased is deemed to be the owner of the property, it should be ensured that the interest payable by the assessee on outstanding installments is claimed as deduction.
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39.3-2a INTEREST OF PRE-CONSTRUCTION PERIOD - Interest payable by an Assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a period prior to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, will be deducted in five equal annual installments, commencing from the previous year in which the house is acquired or constructed. *What is pre construction period- Interest of pre-construction period is deductible in five equal installments. The first installment is deductible in the year in which construction of property is completed or in which property is acquired. For this purpose "pre-construction period" means the period commencing on the date of borrowing and ending March 31 immediately prior to the date of completion of construction/date of acquisition or date of repayment of loan, whichever is earlier. 39.3-2E1 X takes a loan of Rs. 40,000 @ 15 per cent per annum for constructing a house on June 11, 2000. Construction of the house is completed on January 20, 2006. Date of repayment of loan is (a) January 31, 2011, or (b) June 30, 2007, or (c) October 31, 2003. If date of repayment of loan is January 31, 2011 or June 30, 2007, then preconstruction period ends on March 31, 2005 (being March 31 immediately prior to the date of completion of construction/ acquisition). Interest on Rs. 40,000 @ 15 per cent per annum from June 1, 2000 to March 31, 2005 is Rs. 28,997. Amount of installment deductible in first 5 years is Rs. 5,779 (i.e., Rs. 28,997/5). If date of repayment of loan is October 31, 2003, then pre-construction period ends on October 31, 2003 (being March 31, immediately prior to completion of construction or date of repayment of loan, whichever is earlier). Interest on Rs. 40,000 @ 15 per cent per annum from June 1, 2000 to October 31, 2003 comes to Rs. 20,489 (installment deductible in first 5 previous years being Rs. 4,098). The table given below highlights the interest deductible in different previous years:
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Previous Years 'Although the construction of the property is completed on January 20, 2006 (i.e., during 2005-06), the interest of the entire financial year 2005-06 is treated as current year's interest. Interest prior to the year 2005-06 (i.e., the year in which construction is completed) is pre-construction period's interest. The same rule is applicable if the construction is completed on March 31, 2006.
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Basis for computing income from let out house property: The income from let out house property is determined as under: Item Amount (Rs.) Gross Annual Value xxxx Less: Municipal Taxes Xxxx Net Annual Value Xxxx Less: Deductions u/s 24 • Standard Deduction xxxx • Interest on borrowed capital xxxx Xxxx Income from house property Xxxx
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Gross Annual Value: Though tax under the head Income from House Property is a tax on income, yet it is not a tax upon rent but upon the inherent capacity of the building to yield income. The standard selected as a measure of income to be taxed is annual value. Gross annual value is determined as follows: • Step No.1 – Reasonable expected rent of a property is gross annual value (Section 23(1)(a)). The gross annual value is deemed to be such sum for which the property might reasonably expected to be let out from year to year. In determining reasonable rent, several factors like location, ratable value fixed by municipal authorities, rent of similar property, cost of construction, nature & history of the property. The major factors are: a. Municipal valuation of property b. Fair rent of the property c. (a) or (b) whichever is higher is generally taken as expected rent. d. If however property is covered by the Rent Control Act, then the amount so computed cannot exceed the standard rent determined under that act.
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Step No.2 –If Rent actually received or receivable is more than what is determined under step No.1, then, rent actually received or receivable is taken as gross annual value (Section 23 (1)(b)). In other words the Gross Annual Value can only be increased and cannot be reduced under step no 2. Further Step 2 is applicable only when the house property is let out. Moreover rent receivable does not include unrealized rent if 1. Tenancy is bona fide 2. Defaulting tenant has vacated/ steps have been taken to compel him to vacate the property 3. He is not in occupation of any other property of assessee
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Step No.3 – If the property remains vacant and because of vacancy the rent actually received or receivable is less than the value determined under step No.1, then, rent actually received/ receivable is taken as a gross annual value.
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Deduction for Municipal Tax: From the gross annual value as computed above, deduction is available for Municipal taxes including service taxes levied by any local authority in respect of house property. Deduction is available only if these taxes are borne by the owner and actually paid by him during the previous year. If the property is situated in a foreign country, the municipal taxes levied by foreign local authority are deductible if borne by the owner. Gross annual value less municipal taxes is net annual value. Deduction under section 24: Following two deductions are available u/s/ 24: • Standard Deduction:- 30% of net annual value is deductible irrespective of any expenditure incurred by the assessee. • Interest on Borrowed Capital: - Interest on borrowed capital is allowable as deduction on accrual basis. The capital must be borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. Following points should be kept in view: ? As deduction is available on accrual basis, it should be claimed on yearly basis even if the interest is not actually paid during the year. ? Deduction is available even if neither the principal nor the interest is a charge on property. Interest on unpaid interest is deductible. ? No deduction is allowed for any brokerage or commission for arranging loan. ? Interest on a fresh loan taken to repay original loan is also allowable as deduction.
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? Interest for pre-construction period: Interest pertaining to period prior to the previous year in which the property has been acquired or constructed will be deducted in 5 equal installments commencing from the previous year in which property or house is acquired or constructed. Basis of computing Taxable Income from Self-occupied Property: • Where an assessee uses his property carrying on any business or profession, no income is chargeable under this head. The assessee in such a case is not entitled to any deduction on account of rent in respect of such house property while computing income from profits of the business or profession. • Where a person has occupied more than one house for his residential purposes, only one house according to the choice of the assessee is to be treated a self-occupied and all the other houses will be deemed to be let out. Computation of annual value of one self-occupied property: Where the property consists of one house in the occupation of the owner for his own residence, the annual value of such house shall be taken as NIL if following conditions are satisfied: • • The property (or a part thereof) is not actually let out during the whole (or any part) of the previous year and No other benefit is derived there from. The income from Self occupied house property(SOP) is determined as under Item Gross Annual Value Less: Municipal Tax Net annual Value Less: Deduction u/s 24: Standard Deduction Interest on borrowed capital: Amount (Rs.) NIL NIL NIL NIL xxxx Xxxx Xxxx
Income from one self-occupied property
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Interest on Borrowed Capital, i.e. for the current year and for the preconstruction period is deductible subject to ceiling given below: Interest on capital borrowed on or after 1st April 1999 is deductible upto Rs.1,50,000/- subject to • Capital is borrowed on or after 1st April 1999 for acquiring or constructing a property , • Acquisition or construction is completed within 3 years from the end of financial year in which capital was borrowed. and • The person extending the loan certifies that the interest is payable for acquisition /construction or refinance of earlier loan for purpose. If the above conditions are not satisfied, maximum deduction on interest on borrowed capital is Rs.30,000/If house property is not actually occupied by the owner owing to employment, business/profession carried on at another place, income from house property shall taken as nil if the following conditions are satisfied: • Taxpayer owns a house property, which is not actually occupied by him by reason of his employment at another place. • He has to reside at another place in a building not owned by him. • The property of the assessee is not let out during whole or any part of the previous year and • No other benefit is derived from the property of the owner. Hints for Tax Planning: • If the person has occupied more than one house for his residence, then care Should be taken while selecting the house to be treated as self occupied to minimize tax liability. • As interest payable out of India is not deductible, if the tax is not deductible at source, it should be ensured that tax is deducted at source in order to avail deduction. • As the amount of municipal tax is deductible on payment basis, it should be ensured that the municipal taxes are paid during the year for claiming the deduction. • As member of co-operative society to whom building is allotted / leased is deemed to be the owner of the property, it should be ensured that the interest payable by the assessee on outstanding installments is claimed as deduction.
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39.3-2a INTEREST OF PRE-CONSTRUCTION PERIOD - Interest payable by an Assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a period prior to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, will be deducted in five equal annual installments, commencing from the previous year in which the house is acquired or constructed. *What is pre construction period- Interest of pre-construction period is deductible in five equal installments. The first installment is deductible in the year in which construction of property is completed or in which property is acquired. For this purpose "pre-construction period" means the period commencing on the date of borrowing and ending March 31 immediately prior to the date of completion of construction/date of acquisition or date of repayment of loan, whichever is earlier. 39.3-2E1 X takes a loan of Rs. 40,000 @ 15 per cent per annum for constructing a house on June 11, 2000. Construction of the house is completed on January 20, 2006. Date of repayment of loan is (a) January 31, 2011, or (b) June 30, 2007, or (c) October 31, 2003. If date of repayment of loan is January 31, 2011 or June 30, 2007, then preconstruction period ends on March 31, 2005 (being March 31 immediately prior to the date of completion of construction/ acquisition). Interest on Rs. 40,000 @ 15 per cent per annum from June 1, 2000 to March 31, 2005 is Rs. 28,997. Amount of installment deductible in first 5 years is Rs. 5,779 (i.e., Rs. 28,997/5). If date of repayment of loan is October 31, 2003, then pre-construction period ends on October 31, 2003 (being March 31, immediately prior to completion of construction or date of repayment of loan, whichever is earlier). Interest on Rs. 40,000 @ 15 per cent per annum from June 1, 2000 to October 31, 2003 comes to Rs. 20,489 (installment deductible in first 5 previous years being Rs. 4,098). The table given below highlights the interest deductible in different previous years:
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Previous Years 'Although the construction of the property is completed on January 20, 2006 (i.e., during 2005-06), the interest of the entire financial year 2005-06 is treated as current year's interest. Interest prior to the year 2005-06 (i.e., the year in which construction is completed) is pre-construction period's interest. The same rule is applicable if the construction is completed on March 31, 2006.
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