The Hindu Business Line : Building blocks of computing taxable house property income

The annual value of self-occupied house property is always taken as ‘nil’ and any interest due on monies borrowed for acquisition, construction, repair, renewal or reconstruction is eligible for deduction.

Multiple windows of opportunities.

V. K. Subramani

Income from letting out buildings or land appurtenant to building is chargeable to tax as income from house property. Rental income is taxable on accrual basis except the unrealised rent, if the non-realisation satisfies the conditions contained in Rule 4 of the Income-tax Rules.

Income from house property combines both accrual and cash basis of determination. The rental income is computed on accrual basis and the expenditure towards municipal tax is deducted on cash basis and the deduction towards interest on monies borrowed is on accrual basis.

Property used for business or profession carried on by the taxpayer is not assessable under the head ‘house property’ and the assessee can claim depreciation on such building while computing the income from business or profession.

The following are some of the typical issues in taxation of property income.

Interest on monies borrowed

If the date of completion of the construction of property falls in the previous year, it is chargeable to tax under the head ‘house property’.

Even if the property is completed, say, on March 20 of the previous year, the property is includible while computing the total income of the assessee.

The annual value of self-occupied house property always would be taken as ‘nil’ and any interest due on monies borrowed for acquisition, construction, repair, renewal or reconstruction is eligible for deduction.

Where the loan is borrowed after April 1, 1999, and the acquisition or completion of construction is made within three years from the end of the financial year of borrowing, the maximum deduction in respect of interest permissible is Rs 1,50,000. In respect of other borrowings, the ceiling permitted towards interest is Rs 30,000 for self-occupied property.

In respect of let-out property, there is no monetary ceiling in respect of interest on monies borrowed for acquisition, construction, repair, renewal or reconstruction.

Pre-construction interest on monies borrowed is deductible in five equal annual instalments commencing from the year of completion of construction. For example, if the construction has commenced on April 1, 2006, and completed on December 31, 2007, interest for the period from April 1, 2006 to March 31, 2007, would be taken as pre-construction interest eligible for deduction in five equal annual instalments. Interest for the period from April 1, 2007, to December 31, 2007, would be eligible for deduction along with post-completion interest of the period from January 1, 2008 to March 31, 2008. The entire interest relating to the year of completion of construction is eligible for deduction and no fraction thereof need to be taken for amortisation as pre-construction interest.

Repayment of principal amount of loan for buildings is eligible for deduction under Section 80C. However, the loan must be for purchase or construction of residential house and must be from notified sources. To be eligible for Section 80C deduction, the property must be chargeable to tax under the head ‘income from house property’ and used for residential purpose by the assessee or let out for residential use. The maximum deduction permissible towards repayment of principal amount is Rs 1 lakh.

Annual value

Where the property is used by the firm in which the owner is a partner, the annual value of the property shall be taken as ‘nil’ (CIT vs Rasiklal Balabhai (1979 119 ITR 303 Gujarat); see contra in CIT vs K. N. Gurusamy (1984 146 ITR 34 Karnataka)).

Even where the karta of the HUF is a partner in a firm, the property is not chargeable to tax on notional basis and the annual value shall be ‘nil’ (CIT vs H. S. Singhal & Sons — 253 ITR 653 Delhi ).

Where the assessee occupies more than one house for self-occupation, then he can opt one house as self-occupied and other property/properties would be taken as deemed ‘let out’. ‘Self- occupation’ would mean use for own residential purpose and not usage for business or profession.

Where the property is vacant for part of the year and let out for part of the year and if the actual rent is less than the fair rent, the actual rent shall be taken as the annual value. Where the property is vacant for part of the year and self-occupied for the rest, the annual value would be ‘nil’.

Where the property is self-occupied for part of the year and let out for rest of the year, the property shall be deemed as let out and accordingly the annual value shall be determined by taking the fair rent of the whole year or the actual rent, whichever is higher.
Deductions

Any tax levied by any local authority in respect of the property is deductible on actual payment basis. Hence, the gross annual value could be a negative figure if the tax dues of earlier years are paid in one go and exceed the gross annual value.

Deduction under Section 24 at 30 per cent of the annual value is allowable irrespective of the actual amount of expenditure incurred by the assessee towards maintenance of the property. This deduction is applicable only where the assessee derives rental income from the property or it is treated as deemed let-out property.
Arrears and unrealised rent

Any unrealised rent received by the assessee shall be chargeable to tax without any deduction thereof. Such unrealised rent is taxable whether or not the assessee continues to be the owner of that property in the year of actual receipt.

Rent arrears realised by the assessee are also taxable in the year of receipt and after deducting 30 per cent of the amount so realised, the balance is chargeable to tax as income under the head ‘house property’.

Where the property is owned by two or more persons, each of them shall be chargeable to tax in respect of his share in such property. Property owned by co-owners cannot be subjected to tax in the status of ‘Association of Persons’.
Deemed ownership

Property transferred to spouse in the absence of adequate consideration would be chargeable to tax in the hands of the transferor. Also, transfer of property to minor child is taxable in the hands of the transferor. However, if the minor child is a married daughter, then it is not taxable in the hands of transferor but in such a case, Section 64(1A) would apply independently.

Any person who is allowed to take or retain possession of property in pursuance of an agreement contained in Section 53 A of the Transfer of Property Act, 1882 shall be deemed to be the owner of that building and accordingly chargeable to tax in respect of such property.
(The author is an Erode-based chartered accountant.)

More Stories on : Real Estate & Construction | Taxation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Money supply versus prices

Building blocks of computing taxable house property income