The Hindu Business Line : Income from house property

Para 8.2 of Chapter VIII of the Discussion Paper on the new Direct Taxes Code (DTC) states that with a view to simplifying the determination of taxable income and eliminating any scope for litigation, the Code will have a new scheme for computation of income from house property (IHP)

The following are the salient features of the new scheme of taxation of IHP. As advised in Chapter I of the Discussion Paper, effort has been made to analyse the new provisions without comparing them to the corresponding provisions of the Income-Tax Act, 1961.

What are the Sections dealing with IHP under the new tax Code?

Section 23 is the charging section; Section 24, the computation section; Section 25, gross rent; Section 26, deductions; and Section 27, advance rent.

What are the salient features of the charging Section?

Income from house property will be computed in the hands of the owner.

Even if the property is let out for business, etc., it will be taxable only under IHP.

If the property is owned by more than one owner and if the share of each company owner is definite and ascertainable, then IHP will be computed separately for each co-owner.

The property will not be taxable under this head of income. If the property is used for own business or profession or if it is not ready for use,

How to compute income from house property under the DTC?

Gross rent less deduction specified in Section 26 will be the income from house property.

Computation of gross rent is provided in Section 25 of the Code.

Gross rent shall be calculated as follows:

Step 1: Contractual rent

Step 2: Presumptive rent which will be 6 per cent of municipal valuation; if no such value is fixed, 6 per cent of the cost of construction.

Step 3: Step 1 or Step 2, whichever is higher

What are the deductions available from the gross rent?

Section 26 provides for deduction from the gross rent, the following:

Property taxes actually paid during the previous year;

Service tax on rent actually paid during the previous year;

20 per cent of gross rent towards repair and maintenance;

Interest on capital borrowed for purchase/construction/repairs/ renewal.

Interest on loan taken to repay the loan borrowed for the purpose specified above.

Is there any change in the computation of income from self-occupied property?

As per Section 25(4) gross rent of such property will be taken as nil. Further, Section 26(2) specifically provides that the aggregate of deductions specified in Section 26 will be nil for such houses. It is important to note that the deduction for interest on capital borrowed which is currently available for self-occupied property is not available under the DTC.

What will happen if the assessee has more than one house for self-occupation?

The benefit of nil gross rent will apply only for one self-occupied house at the option of the assessee.

How will the advance rent be treated under the DTC?

The advance rent will be taxable only in the respective financial year by virtue of Section 27.

There is no specific provision to deal with unrealised rent. Therefore it may be possible to contend that the assessee is liable to pay tax on the rent which he could not realise.

There is no specific provision to deal with increase in rent with retrospective effect. On a combined reading of Sections 23, 25 and 27 it appears that rent of the respective financial year alone is intended to be taxed.

Hence, the assessing officer (AO) may have to reopen the assessment and include the rent only in respective financial year(s).

If the assessee has more than one house for self-occupation then the gross rent of only one house will be taken as nil. The computation of remaining houses will be made as if such properties are let out.

Section 25(1) defines gross rent as higher of the amount of contractual rent and presumptive rent. Since the contractual rent is not applicable for such houses, the assessee may contend that is not possible to arrive at the contractual rent and hence income will not be taxable at all.

If the property is acquired during the financial year, then the Discussion Paper provides that the presumptive rent will be also calculated on a proportionate basis. However, there is no such provision in Section 25 of the DTC. To reduce litigation, the proportionate reduction in presumptive rent can be provided in the Section itself.

At present, standard deduction at the rate of 30 per cent is provided for repairs, etc., of house property. However, under the DTC it is proposed to reduce the same to 20 per cent. With rising prices it is surprising that instead of increasing the standard deduction a steep reduction has been made.

As per the present provisions of the Income-Tax Act, letting of inseparable building along with plant and machinery will be taxable under ‘business income’ or ‘other sources’. However, the Discussion Paper suggests that the same will be taxable under IHP. However, there is no specific provision in Sections 23 to 27 to tax the same under IHP. Hence to reduce litigation the same can be specifically provided in the section itself.

(The author is a Chennai-based chartered accountant.)

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