“INCOME TAX IMPLICATIONS ON 2nd HOUSE PROPERTY PURCHASED FOR PARENTS”

TAX TALK-04.02.2013-THE HITAVADA

TAX TALK  

BY CA. NARESH JAKHOTIA

Chartered Accountant

“INCOME TAX IMPLICATIONS ON 2^nd HOUSE PROPERTY PURCHASED FOR PARENTS”

Query 1]

I am having one house property which is self occupied by me. I had availed the housing loan earlier at the time of purchasing the first property and the same is repaid back and nothing is outstanding as of now. I have availed the income tax benefit on housing loan repayment on such loan. Now, I want to buy another house property by availing the housing loan in my name only. This property will be used by my father and I will not be letting it out. Whether I will be eligible for the tax benefit in respect of this second house property which will be used for self residence of my father? What will be the tax effect of this property? [J.H.Shorte]

Opinion:

1.             The income from house property is taxable on the basis of its “Annual Value”. The term “Annual value” is elaborated at point No. 6 hereunder.

2.             The tax implication / housing loan benefit for the second house property is not similar/ same as applicable to the first house property. The second house property has a different tax treatment under the Income Tax Act-1961.

3.             One house used by the tax payer for his/her own residence is exempt from tax as its annual value is treated as Nil.

4.             Where the assessee owns only one house property and it cannot actually be occupied by him because it is situated at a place other than a place where he is employed or carries on business or profession, in such a case also the annual value of the property is taken as nil provided the property is not actually let out.

5.             If taxpayers have two or more houses which are used for own use/ purpose, then assessee have the option to choose one of the house (according to his own choice) as self-occupied house, for which an assessee would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether not actually let out].

6.             What is Annual Value of house property and how it is determined?
The annual value means the amount for which the property might reasonably be expected to be let out from year to year. However, if the actual rent received or receivable in respect of any let out property is higher, it shall be treated as its Annual Value. The annual value is always taken to be NIL in case of one self-occupied property.

7.             How to calculate annual value/taxable value of property:
Annual value of property is considered as higher of the following:
(i) Actual rent received a year;
(ii) Reasonable expected rent of the property.
[ The reasonable expected rent is deemed to be the sum for which the property might reasonable be expected to be let out from year to year and is normally higher of  (a) municipal value; (b) fair rent. However, if the property is covered by a Rent Control Act, then the amount so computed cannot exceed the Standard Rent determinable under the Rent Control Act.]
As mentioned earlier, the assessee has the option to choose only one house as self-occupied property. Rest of property is assessable to income tax on the basis of its annual value.

8.             Deductions:
From the annual value the following deductions are available under the Income Tax Act: -
a] Municipal Tax paid.
b] 30% of the net annual value of the house property towards Repair & Maintenance charges (Deduction is fixed @ 30% whether assessee incurs more or less amount on repair and maintenance of the house).
c] Actual Interest paid on housing loan whether house is actually let out or is deemed to be let-out.
d] For self-occupied property, maximum interest on housing loan is restricted to Rs. 1,50,000/- p.a., subject to certain other stipulations.

9.             Effectively, if Assessee owns more than one house property & is kept for own use/ purpose,
a] one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
b] Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above. In respect of such deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit.
However, for the second house property, no deduction is available for repayment towards the
principal portion of housing loan under section 80C as clause ( xviii)
to section 80C of the I T Act reads as under: -
"(xviii) for the purposes of purchase or construction of ‘a’ residential house property the income from ....."

Query 2]

I want to know the following about tax rebate on joint loans for house purchase:

1.      If my brother and I take a joint loan in 50:50 proportions, can we both claim Rs. 1.50 Lacs on interest payment?

2.      What are the documents that would be required from bank to claim the tax rebate?

[neeraj.palparti@gmail.com]

Opinion:

Ownership is a condition precedent for claiming deduction towards Interest u/s 24(b) and towards Principal Repayment u/s 80C. It may be noted that Right to claim deductions originate from ownership. Without ownership, deduction would not be admissible. If both of you are owner in the property and have 50:50 share in the amount borrowed, deduction of Rs. 1.50 Lacs can be claimed individually by both of you. The certificate from the bank about the repayment in the joint name would be sufficient to claim the deduction u/s 24(b) & u/s 80C.

Query 3]

I have some queries regarding the educational institutions. Is it compulsory for all educational institutions to get registered U/s 12A of the Income Tax Act,1961 even if the receipts by them is less than Rs. 1 crore in a year? Whether is it beneficial to get registered?  [J.Agrawal-jyoti_ag@sify.com]

Opinion:

An educational institution established for the purpose of education & eligible for deduction u/s U/s 10 (23C)(iiiab) / 10 (23C) (iiiad) are not compulsorily required to get the registration u/s 12AA for exemption of income as the same is otherwise also eligible under the said section. I am of the view that the institutions in such case should get themselves registered voluntarily u/s 12AA so as to get the benefit even after the receipts crosses Rs. 1 Cr mark.