Real Estate Counsel on Taxation Matters

By IndiaRealEstate * The income from various sources like Salaries, Income from House Property, Profits and Gains of Business or Profession, Capital earnings and Income from Other Sources are originally ascertained and then amassed as entire income which is subject to tax at specified rates. * The basis for reckoning is the "Annual Value", that is, the inherent capacity of the property to earn income. The legal owner of the house property is taxed on the income determined in terms of its Annual Value. * Annual Value is the sum for which the property might convincingly be expected to be let out. Realistic rent could be the bona fide rent paid by the tenant, or annual rate able worth as fixed by the municipality, or rent for similar property in the neighborhood, etc whichever is higher. * When a house is self-occupied and no other benefit there from is derived by owner, the Annual Value is taken as nil. However, when a person is in occupation of more than one house for his own residential purposes, only one house according to his option would be treated as self-occupied. All other houses shall be considered as let-out and income thereon shall be taxable. * Very frequently individuals to possess a house property, let's say, in Chennai and work at another place where they live in a rental lodging. In such a case, the Annual Value of his own property will be treated as nil, on condition that the house is not in point of fact let out and no other advantage thereby is derived by the owner. In case of possession: If the house property has been built after 1st April, 1999 after taking a loan for the purpose and such acquisition or construction is finished within 3 years from the end of the financial year in which Capital was borrowed, interest payable on loan taken for this purpose is permissible up to Rs 1,50,000 in a single fiscal year. In case of Rented premises: The following deductions are tolerable: 1. Municipal Taxes paid: 2. Standard deduction @ 30% of Net Annual Value (i.e. Annual Value minus Municipal tax) allowed on notional basis, whether incurred or not. 3. Interest: Where capital is taken on loan and the property in question is being acquired or constructed or repaired or rebuilt with such borrowed funds, interest payable is allowed. There is no cap on the deduction for interest as in the case of self occupied property as stated above. * It might occur that money is borrowed earlier and acquisition or construction may commence later in any subsequent year. In such cases, interest paid/payable prior to the ultimate completion of building or possession of the property will be aggregated and permissible in equal installments for five successive financial years opening with the year in which the acquisition or construction is completed. This facility is, though, not allowed for repairs, renewal or reconstruction of the subject property . * The subsequent expenses are additionally eligible for subtraction from overall taxable returns under section 80C as proposed in Finance Bill 2005, up to a maximum of Rs 1, 00,000 per annum. A reimbursement of the principal sum taken on loan by the assessee from: i. The Central Government or any State Government, or ii. Any bank, or iii. The Life Insurance Corporation of India, or iv. The National Housing Bank v. Any public company duly recognized by the concerned authorities carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purpose, or vi. Any co-operative society occupied with the business of financing the construction of house or vii. The assessee's employer, where such employer is a public company or public sector company, or a university established by law or a college affiliated to such university or local authority or co-operative society. b. stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee. * With reference to self-occupied property as the annual value is taken as nil, deduction allowed on interest on borrowed capital upto a maximum of Rs 1,50,000 will be the loss under the head "Income" from house property. Regarding let out property, there are no restrictions on deducting the full interest payable on borrowed capital and so there can be loss under this head if net income from house property before adjusting interest is lower than interest payable on loan, taken for such house property. Further, loss from one house property can be set-off against income from any other house property.This loss can additionally be set off alongside proceeds under any other head such as salaries, etc. in the same year. Moreover, wherever the loss cannot be fully attuned against other heads of income in the same year, then the balance loss can be carried forward and set-off in subsequent years, subject to a limit of 8 years. Nevertheless, such loss can be set off only beside income from house property. * Capital gain emanating from the transfer of a house property is not liable for tax (on condition that the following conditions are satisfied) : A Capital gain arising from the transfer of a house property is exempt from tax provided the following conditions are satisfied: a. The house property is a residential house and is transferred by an individual or a Hindu Undivided Family. b. The house property whether self-occupied or let-out is a long-term capital asset (i.e. it must be held for a period of more than 36 months before sale or transfer). c. The assessee has purchased a residential house within one year before or 2 years after the transfer or has completed construction of a residential house property within 3 years from date of transfer. d. If the investment is not made before the due date for furnishing the return of income of the relevant year, then the unutilized amount of Capital Gain must be deposited in a special bank account in accordance with the Capital Gains Account Scheme 1998. e. The new house should not be transferred within 3 years of its purchase or construction. If the new house property is transferred, within a period of 3 years from the date of its purchase or construction, the amount of capital gains arising from it, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new house property. It may be noted that for computing long term capital gain on the House Property, the assessee shall have the benefit of cost indexation. Further, capital gains tax liability arising on the transfer of any long-term capital asset i.e. an asset held for more than 3 years (1 year in case of shares, debentures, mutual fund and UTI units), can also be long term capital assets other than a house property is invested in a house property within the stipulated time. (as specified in point c). However, if the assessee claims deduction under section 80C in respect of repayment of loan, and if he transfers the house property before the expiry of five year from the end of the financial year in which possession of such property is obtained then, the aggregate amount of the deduction of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year. * One house or a part of a house belonging to an individual or a Hindu Undivided Family is not chargeable to wealth tax. However, do imbibe that the above note is in the character of a broad instruction and you are, consequently, advised to seek advice from your tax consultant/auditor for specific necessities and their relevance to the particular state of affairs of your case. Courtesy: www.realestatencr.com