Magazine Expert Advice Subhash Lakhotia May 2000

Time to make new choices - Subhash Lakhotia

Income Tax has a great bearing on property transac tions. Before investing in property it is, therefore, advis able to review the various provisions in the Income Tax Act which directly affect such investments. To achieve the maximum benefit from your investment in property, especially from the angle of tax planning, you must take into consideration the following important factors :

a. Size of your family
b. Age of your family members
c. The income of all the family members
d. The current Income and Wealth Tax laws
e. Impact of the new investment on your Income Tax and Wealth Tax
f. Time available at your disposal to manage the property

The word property, as used here, denotes immovable property and covers within its framework, land, building, flat, shop, office space, factory shed, agricultural land and farmhouses. Broadly speaking, there are three types of activity for which a property can be used: The self-occupation, rental income, and for use in business or profession.

As far as property used for self-ocupation is concerned, there is no liability of Income Tax. Even the provision of deemed notional income, which was in existence earlier, has been dropped. Thus, there is no liability to pay any Income Tax in respect of property which is self-occupied. However, this benefit is restricted to one house only. About the various expenses relating to self-occupied property, no benefit of these is available in computering the taxable income of the assessee. But interest on the loan for construction of house for self-occupation, the maximum amount that is allowed as a deduction is restricted to Rs. 75,000 p.a. if the loan is taken after April 1, 1999 and the house is constructed by 2003. If the loan is taken prior to April 1, 1999 then the deduction in respect of interest would be limited to Rs. 30,000 p.a. The employer can also grant benefit of this interest while deducting TDS.

In case the property, commercial or residential, is let out, various deductions are allowed in computing the income from such a house property. The following formula for computation of income from let out house property should act as a guide in preparing your own statement for house property income :

Rent received
Less : Amenities provided to tenants
Less : Annual Corporation Tax (actually paid)
Less : 1. Repairs and collection charges at the rate of one- fourth of the annual value
         2. Insurance premium
         3. Interest on loan
         4. Annual charges and/for land revenue
         5. Vacancy allowance
         = Net taxable income from house property.

The most important point to be borne in mind while computing income from the let out house property is that deduction for payment of municipal corporation tax or house property tax is allowed only to the extent of the actual payment of corporation tax. Thus, where the assessee has filed an objection against the House Tax Bill, deduction would not be available in respect of corporation tax which has not actually been paid. For computation of income from house property which is used for business, no amount of tax income is to be included for this purpose in Income Tax computation. Expenses on repairs and collection charges get tax deduction equal to ªth of the annual value even if the expenses are not actually incurred, or are incurred at a higher amount.

However, it may be remembered that in case of a single property, which is used partly for self-occupation and partly for let out purposes, the total deduction should not exceed the annual value.

With reference to the property which is let out, if the net rental income is not sufficient to meet the allowable deductions, i.e., where the various deductions including repairs and interest payment exceed the rent received, the resultant loss is allowed to be set off against any other income of the assessee for the year.

Immovable property in the form of agricultural land is completely tax free and not liable to any Income Tax. However, in case of tax payers have taxable income and agricultural income, the agricultural income is aggregated with the taxable non-agricultural income only for calculating rates. However, for people whose non-agricultural income is below the taxable income there is no aggregation, and consequently no tax liability.

When you sell your property, you are liable to Income Tax on the profit you make on the sale of the property. There are various exemptions and deductions, relating to capital gains, depending on the sale of different types of property. There are two types of capital gains for immovable property. In case the property is sold after three or more years of its purchase, it becomes long-term capital gain which is subject to heavy deductions, and even complete exemption. In case the property is retained for less than three years, the capital gain is treated as a short-term capital gain which is liable to tax like normal income without any deduction or exemption, except the deduction for the cost of the property.

By taking advantage of Sections 54, 54EA, 54EB and 54F of the Income-Tax Act, the capital gains on property sale can be saved.

Those who want to plan the tax on their property properly should ensure that the number of property holders in the family should be more so that each family member has separate property in his or her name, and thus separate taxable income from property if given on rent. Joint purchase of the property is possible but each co-owner must invest in the immovable property from his own funds or borrowings in the ratio of his ownership of the property. Subhash Lakhotia is a finance and taxation expert for over three decades and author of several books on the subject. Correspondence with him can be directed through Bajaj Capital Investors India.