Not actual rent, House property is taxable on the basis of its Annual Value

TAX TALK-22.02.2016-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

Not actual rent,  House property is taxable on the basis of its Annual Value

Query]

1.      If I purchase the second house property for my own use, still whether I would be required to pay the tax? I don’t wish to let out the second house but want to purchase it for investment purpose. [K.T.Jannawar, Chandrapur]

2.      From your articles in newspaper-The Hitavada, I came to know that if a person having more than one HP, the second property onwards to be shown on rent or deemed to be let out. I understood that while filing return, in the HP schedule from rent received, first taxes paid to local authorities (NMC/Grampanchayat etc) to be deducted, then on balance 30% to be deducted for maintenance, followed by interest payable on borrowed capital/loan. The remaining amount is income from house property.
My queries are:-

i.       For IT exemption what documents/papers required if property given on rent and what documents required if deemed to be let out?

ii.    Please highlight the importance of standard rent/ area wise rent for NMC and Grampanchayat for income tax purpose?

iii. What proofs regarding rent received to be kept. Example: Proofs of rent – direct transfer net banking or cheque or cash deposit in owner account or hand receipt etc. If owner staying at a place other than the HP, can the agreements and rent received be executed on behalf of owner by a relative/ caretaker. Can he collect rent and deposit cash in owner account or it should be only through net banking or cheque transfer.

iv.   Is rent agreement must for getting IT exemption? Can agreement be on plain paper or it should be on stamp paper? If on stamp paper, is it to be notarized?  I observed house owners taking rent agreements for 11 months. What is the logic of rent agreement for 11 months? If same tenant continuing, again rent agreement for 11 months is must. In such case, there should be one month gap between the agreements.

v.      Sir, I also read that second property onwards if they are let out for more than 300 days in a year there is no wealth tax on such properties. Is it correct?  [suryajeet.614@rediffmail.com]

Opinion:

1.      Tax Treatment of second house property:
Tax treatment of the second house property is not same or similar to that applicable to first house property. If taxpayers have two or more houses which are used for own residence, then they have an option to choose any one of the house (according to their own choice) as self-occupied house, for which they 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 or not actually let out] & would be taxable on the basis of its annual value. In short, if taxpayer owns more than one house property then even if the house properties are not let out,
a) One house property can be treated as self occupied house property and nothing would be taxable from such house property.
b] Other house properties shall be deemed to have been let out and its income shall be taxable on notional basis considering its annual value.

2.      Computing Income from House Property:
As mentioned above, Income from house property is not taxable on the basis of actual rental income alone but is taxable on the basis of its annual value. Annual Value is the sum for which the property might reasonably be expected to be let out from year to year.
To determine Annual Value of the property, one has to get familiar with four terms i.e., Municipal Value, Fair Rental Value, Standard Rent and Actual Rent. The same is discussed hereunder:

i.        Municipal Value: For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property.  Normally municipal authorities charge house tax on property based on various factors like type of residential, floor, facilities available in the premises etc.

ii.     Fair Rental Value: The rent which a similar property in the same or similar locality would have fetched is the fair rental value of the property. This is nothing but notional rent a property can get if it has been let out for a year. e.g. In case of flat, one can assume approx rent of other similar flat which is already let out with some addition or reduction in rent with reference to facilities of both flats.

iii.   Standard Rent: It is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.

iv.   Actual Rent: For any let out property, Actual rent received or receivable is important for annual value. Actual rent received or receivable is always subject to agreement entered by owner and tenant or matter of negotiable between them whereby if tenant agree to pay for municipal taxes on behalf of owner then these taxes should be added in actual rent received/receivable to derive annual value. There could be vice versa case, where owner has agreed to pay some obligation of tenant, in that case rent will be reduced by that amount.

With above brief idea of the relevant terminology, it may be noted that for any house property, Gross Annual Value is higher of Actual Rent Received or Expected Rent. Expected Rent is nothing but higher of Municipal Value or Fair Rental Value but restricted to the Standard Rent. From the amount of gross annual value, municipal taxes would be deducted to arrive at the net annual value. There are only two types of tax deductions which can be claimed from net annual value, as under:
a] First is standard fixed ad-hoc deduction of 30% towards repairs & maintenance. This means 30% of the net annual value can be reduced towards repairs, maintenance etc. The deduction is available irrespective of the amount actually spent or not.
b] The second deduction is of interest if the property is purchased/ constructed with borrowed fund up to a maximum of Rs. 2 Lacs p.a. from the FY 2014-15.  The ceiling of Rs. 2 Lacs is not applicable in case of let out or deemed to have been let out house property.

3.      Rent Agreement, receiving rental income, Wealth Tax etc:
Signing rent agreement is a considered as the cautious & best approach to let out the property, as it preserves the interest of both the parties: a tenant and a landlord. From the landlord perspective, Rent agreement is all the more important, as in case the tenant refuses to vacate the leased property even after the expiry of the lease, the rent agreement will be sacrosanct. Additionally, Rent agreement would serve the purpose of proving (a) that the property is let out (2) the amount of actual rental income & (3) name and address of the tenant from whom the rent is received. Though cheque is a better option, it won’t be harmful even if the rent is accepted in cash. The concept of 11 months is very important. The rent agreement/ lease deed of more than 12 months is to be registered under the Registration Act, 1908. In order to avoid registration, people resort to a period less than 12 months. This is the significance of 11 months. As far as Income Tax law alone is considered, even agreement on plain papers, whether registered/notarized or not, would serve the purpose of offering rental income. Wealth tax liability doesn’t arise in respect of property which is let out for a minimum period of 300 days in a year. One more good news; Wealth tax has been abolished from the FY 2015-16 & there is no liability towards wealth tax from FY 2015-16. If the landlord is staying at any place other than the place where the let out property is located, he can authorize/appoint any other person on his behalf to do the needful for letting out of the property and collecting the rent.

Query 2]

I am a teacher.  I build wall compound of my home by borrowing money from
friends. How to get rebate? What are the documents required for claiming rebate? [Sanjay Muppawar-smuppawar@gmail.com]

Opinion:

No direct tax rebate/ deduction against the regular income is available towards the amount incurred or borrowed for construction of compound wall of the house property. However, the deduction would be admissible only when the property is sold subsequently. For this, the bills/vouchers/payee details should be kept properly, along with the sources of funds, so as to justify the deduction claims.

Clarification:

With reference to Tax Talk Dated 15.02.2016, it may be noted that the carried forward short term capital loss can be set off against capital gain (long term or short term) of the immediately succeeding 8 assessment years.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at

SSRPN & Co

10, Laxmi Vyankatesh Apartment

C.A. Road, Telephone Exch. Square

Nagpur-440008

or email it at nareshjakhotia@ssrpn.com.]