Financial Daily from THE HINDU group of publications
Sunday, Nov 13, 2005
Financial Daily from THE HINDU group of publications Sunday, Nov 13, 2005 |
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Industry & Economy
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Real Estate & Construction Cuts and the tax cut M. V. Kali Prasad
In many cities, a property deal must necessarily go through a real estate agent (broker). This business is largely disorganised. So how does one account for commissions paid to and earned by real estate agents? The commission is paid for purchase/sale or rent/lease of property. When paid for buying a property, the commission forms part of the historic cost of an asset held by an entity. Both AS6 as well as S32 of the Income-tax Act permit this. Consequently, during the sale, the commission can be included while indexing the cost of acquisition. Commission paid for sale of property is deductible from the consideration received for the property. Net realisable value is arrived at only after deducting the commission payable. Commission paid for letting out property cannot be claimed as a deduction from "income from house property". However, commission paid for securing properties on rent for business is deductible under S37. The commission paid is subject to the provisions of S40A(3); therefore it is always advisable to pay through a crossed cheque or demand draft.
How much commission?
A 2 per cent commission is generally considered the benchmark, although there is no specific ruling to this effect. Any reasonable amount of commission, supported by an agreement, is allowable.
Is commission subject to TDS?
Yes, TDS provisions do apply for real estate agency commission. However, an individual paying commission for buying or selling a property or for hiring a property need not deduct tax at source. It is always advisable to retain the receipts obtained from the agents. It is also important to secure the proper identity, Permanent Account Number and address of the agent. One may be required to file reasonable evidence to claim deduction of such expenses.
Tax on commission earned
If the income is fairly regular as to constitute a business, the income is chargeable under profits & gains of business. But when it is a stray transaction, it is more logical to treat it as income from other sources. In the case of business, the agent can choose between cash basis and accrual basis of accounting, while for income from other sources, there is no need to maintain books of account. In either case, the agent can claim his expenditure as a deduction from the commission received. In the case of a business, the agent may have to maintain an office, pay salaries, advertise, spend on conveyance, site visits, and so on. All such expenditure is allowable as deduction. The author is a Hyderabad-based Chartered Accountant
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