Monday, February 22, 2016

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




Chartered Accountant

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

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?  []
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-]
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.

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
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at]

Taxpayer may find it surprising but its the fact, without actual rent also, tax liability could arise... Tax Talk- My weekly column. Readable format accessible at

Sunday, February 7, 2016

Readable format accessible at




Chartered Accountant

Beware, there is a penalty for property transactions in cash

Query 1]
1.      I am to get some amount in March 2016 on redemption of ELSS MF done in March-2013 for tax savings. Whether I shall have to pay IT on LTCG or otherwise? Kindly enlighten me in this matter. []
2.      Is it better to invest in Equity linked saving scheme to save tax? Isn’t PPF a better option as compares to ELSS? My agent has advised me to go for ELSS and not PPF. Please advise.  [ amitr******]
There are lot many taxpayers who are not well aware of the Equity-linked saving schemes (ELSS) as a tax cum financial planning tool. ELSS is one of the types of mutual funds with tax benefits. It is one of the most preferred tax saving option for the young taxpayers as it has the potential to yield robust tax free returns in addition to offering tax benefit. The return from ELSS are tax free and have a smaller lock in period of merely 3 years as compared to other tax saving options which offers nominal fixed returns or have longer lock in period. Since the amount is indirectly invested in the equity shares of listed companies in the stock exchanges, the risk of negative return in ELSS cannot be ruled out. There are three options available in the ELSS, as under:
1.      Growth option – In growth option income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the Net Annual Value (NAV) of the fund and vice versa. Whenever the investor sells its holdings he will realize long term capital gain/loss. 
2.      Dividend option – In this option the fund distributes income earned by the fund to the investors as dividends. The date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any dividend received by the investor is not liable for tax in the hands of investors.
3.      Dividend reinvestments option – If the investors choose this option the dividends declared by the fund are reinvested. For example an investor is holding 1000 units of a fund and the fund declares dividend @ 2 per unit, the total dividend of 2000 (1000*2) will be reinvested on behalf of the investor as a fresh purchase.

Since both the investment operates on EEE (Exempt-Exempt-Exempt) model, one needs to know difference between the two so as to arrive at a better decision. ELSS is an equity product while PPF is a debt product.  With PPF, returns are guaranteed while with ELSS, the returns are market-linked and there is no such guarantee. ELSS investments have lock-in of 3 years while PPF matures in 15 years.

Tax Implication on redemption of ELSS:
Planning for taxes is an integral part of your financial planning. Amount invested in ELSS cannot be redeemed before the end of three years from the date of investment. The fact remains even if the taxpayer has not claimed any tax benefits under Section 80C of the Income-tax Act.  Amount withdrawn from ELSS would be totally tax free. There are lot many taxpayers who makes investment in ELSS through the route of Systematic Investment Plan (SIP). At the time of redemption of such ELSS, each SIP installment is treated as a separate investment and the installment must complete three years of holding for it to be redeemed. Redemption is on a first-in first-out basis since the units allotted first will be redeemed first. Whatever may be the amount of redemption, it would be totally tax free.

Query 2]
I have two queries:
1. A, B and C are joint owners of a land in the ratio 40:40:20. B and C are father and son while A is a relative of B. Now B wants to construct on the land to which A and C have no objection and A will be pay annual rents for allowing the use of land while the ownership of building will belong to B only. What are the tax law requirements to put in practice the above arrangement? Whether I would get the tax benefit if I avail the bank loan for above construction purpose? And will Income Tax authorities accept such an arrangement?
2. I have entered into an agreement for sale of rural agricultural land at a price of Rs. 21 Lacs. I am going to receive Rs. 5 Lacs as advance. However the value adopted for stamp duty purpose will be quite less i.e., apporx. Rs. 7 to 9 Lacs. Please guide me how to account for this transaction and for the advance I am going to receive. Also, the whole transaction will be in cash as the buyer is a local farmer. Please guide on above as soon as possible. []
1.      The first part of the question is a very unique & often asked by the taxpayers on various occasion. Taxpayer need to understand that ownership in a house property is one of the first & foremost vital pre-condition  for claiming deduction towards Interest on housing loan u/s 24(b) & towards Principal repayment u/s 80C of the Income Tax Act -1961. Without ownership in the house property, no right would emanate for deduction. The second pre-condition is the availment of loan towards the house property.
Income Tax Law recognizes the concept of dual ownership in respect of immovable property i.e., the ownership of plot/ Land by one person and building by another. However, proper documentations / records are to be kept to prove the separate ownership of the assets. In your case, land is owned by A, B & C whereas construction is proposed to be done by B alone. It appears that you would be entering in to some sort of documentary arrangement through Memorandum of Understanding (MOU) or Lease agreement whereby (a) you would be paying some annual value/ rent to A & C for using their share of land (b) the fact of construction or proposed construction by you would be mentioned therein. If it so & if you are properly documenting the transactions and routing the payment of construction through your account, you can claim deduction u/s 24(b) & u/s 80C towards housing loan repayment without any limitations. Ensure the proper documentation to prove that construction is done by you, loan is primarily your individual liability, and entire loan repayment is done by you.
2.      In your case, the actual sale price (Rs. 21 Lacs) is higher than the prevailing stamp duty valuation (i.e. ready reckoner value or guidance value) of Rs. 7 to 9 Lacs. In your case, there would not be any tax liability on notional basis. Even, since the agricultural land is a rural agricultural land (i.e., land beyond certain specified area of Municipal Corporation), entire receipt would be tax free. However, there is one important default that you would be committing under the Income Tax Act-1961. The default is acceptance of cash against sale of immoveable property. Beware, there is a penalty for property transactions in cash. In order to curb generation of black money in the property transactions, Section 269SS was amended by the Finance Act-2015 so as to provide that no person shall accept from any person any amount as advance or otherwise against sale/transfer of an immovable property otherwise than by an account payee cheque or bank draft or by ECS, if the amount is Rs. 20,000/- or more. It may be noted that penalty is there on the seller against accepting the amount in cash. Similarly section 269T prohibits the repayment of such money otherwise than by an A/c payee cheque/draft or ECS, if the amount is Rs. 20,000/- or more. Here again, the penalty is on seller against the repayment of the amount in cash. V
iolation of the provision of section 269SS & 269T attracts penalty u/s 271D & U/s 271E respectively which shall be a sum equal to the amount of the amount accepted /repaid in such violation.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at