[sbinews] Home Truths - II by Vinod Gupta (Business World)

  • From: rspai@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Tue, 18 Nov 2003 20:22:57 +0500

Dear Colleagues, 

The article below is the second part of the highly informative series of 
articles published in Businessworld on Housing Finance. It is very well-written 
and will help increase our awareness on Housing Finance and Taxation matters. 
The first part was circulated through this mailing list earlier. All the 
earlier messages circulated through this mailing list are available at its 
archives located at:
http://www.freelists.org/archives/sbinews
After logging on to the archives website click on the month-year link at the 
left hand lower corner to locate all posted messages for that month. 

Regards, 
R.S.Pai
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TAXONOMICS 
Home Truths - II 
VINOD GUPTA  
 
In our last article we discussed the various provisions and technical terms 
relating to taxation of house property (See 'Home Truths-I', BW, 27 October). 
This week, we look into some of your queries to bring out a few of the more 
important points to keep in mind while calculating house property tax.

Query: Can a taxpayer get the benefit of tax exemption on interest for two 
housing loans provided the total is below the overall limit? For example, a 
husband has taken a loan for House A and he purchases House B by availing 
another loan, where his wife is the first applicant and he a co-applicant. Can 
the husband get the exemption from tax on interest payment for both the houses 
and the wife get the benefit of tax exemption towards House B?

It is possible to take two or more loans for purchasing/constructing one house 
and the interest on all these loans will qualify for deduction from income 
under the head 'Income from House Property'. In the case of a self-occupied 
house, the limit of Rs 1.5 lakh applies to collective interest on all the 
loans. This means that the total deduction of interest on a self-occupied house 
cannot exceed Rs 1.5 lakh.

In your example, consider that the assessee takes a loan for buying House A. He 
takes another loan for buying House B in which his wife is the first applicant 
and the assessee the co-applicant. It is presumed that the assessee is also 
joint owner of House B. Now, for the assessee, one of the houses will be 
self-occupied and the other house will be deemed to be let out. Assuming that 
House A is considered as self-occupied by the assessee, the interest on the 
housing loan taken for House A is deductible to the extent of Rs 1.5 lakh. Now, 
part of House B, of which the assessee is a joint owner, will be deemed to be 
let out, and the interest that the assessee pays on the housing loan on House B 
shall be fully deductible.

As for the wife of the assessee, part of House B will be considered as 
self-occupied and she can claim deduction of interest up to Rs 1.5 lakh.

Query: If I take a housing loan now to renovate and/or extend an existing, 
two-decade old, self-occupied house, how will it be treated in terms of 
taxation?

The interest payable on a loan for purchase, construction, repair or 
reconstruction of a house can be deducted while computing 'Income from House 
Property'. In case of a self-occupied property, interest payments amounting to 
a total of Rs 1.5 lakh can be deducted from the taxable income if the house is 
purchased or constructed with a loan taken on or after 1 April 1999, and this 
purchase or construction is completed within three years from the end of the 
financial year in which the loan is taken. 
 
Interest deduction for repairs is up to Rs 30,000 even if a loan is taken after 
1.4.1999 
 
For a loan taken before 1 April 1999, the total interest available for tax 
deduction is limited to Rs 30,000. Now the benefit of Rs 1.5 lakh is available 
only for a purchased house or construction and not for renovation or 
reconstruction or repairs. Therefore, even if the loan is taken on or after 1 
April 1999 for renovation/reconstruction or repair of a self-occupied house, 
the limit of Rs 30,000 shall apply. 

Now suppose a new floor is added to the house for which you have received a 
completion certificate from the concerned authority. In such a situation, it 
will amount to construction and the deduction of interest shall move up to Rs 
1.5 lakh.

Query: How much tax deduction is allowed on rental income for expenditure 
related to repairs to the house?

In case of self-occupied house property no deduction is allowed on account of 
repairs. In case a property is let out or deemed to be let out, an ad hoc 
deduction of 30% is allowed. Actual expenditure on repairs is irrelevant. After 
reducing the municipal taxes from the annual value, you are allowed an ad hoc 
deduction of 30% of the reduced amount (annual value minus municipal taxes) 
while computing 'Income from House Property'. But if the municipal taxes you 
pay are greater than the annual value, you cannot avail of any deduction due to 
repairs. That's because there cannot be a loss under 'Income from House 
Property' on account of deduction for repairs.

Query: I am posted in Kochi, Kerala, where I have rented a house and am 
availing house rent allowance (HRA) from the company. I have also recently 
purchased a flat in Chennai by taking a housing loan for Rs 4.5 lakh from ICICI 
Bank. I have not given the house for rent. My parents (both are dependents) are 
staying there. Can I can get income tax exemption for the interest paid on the 
housing loan as well as HRA exemption for the house taken on rent in Kerala?

To claim exemption on HRA, the Income Tax Department has not made any condition 
that the employee should not own any other house in the city of employment or 
elsewhere. Therefore, exemption on HRA to the extent specified below shall be 
available to you in respect of a rental house in Kochi. 

According to the Income Tax Act, HRA is exempt from tax to the extent of the 
least of the following:

(i) HRA received 
(ii) Rent paid in excess of 10% of the salary
(iii) 50% of salary

As per section 23(2)(b) of the Income Tax Act, provided certain conditions are 
satisfied, the house property is deemed to be self-occupied and deduction of 
interest up to Rs 1.5 lakh is allowed. The conditions are as follows:

(a) The taxpayer owns a house property which cannot actually be occupied by him 
because his employment, business or profession is carried on at another place; 
(b) He has to reside at that other place in a building not owned by him; 
(c) The property mentioned at (a) (or part thereof) is not actually let out 
during whole (or any part of the previous year); and 
(d) No other benefit is derived from the above property by the owner. 

In your case, all the above conditions are satisfied, so the annual value of 
house property at Chennai shall be taken to be NIL and you shall be eligible to 
claim deduction of interest up to Rs 1.5 lakh.

Query: We have three properties (all bought with loans from banks) and kept for 
the purpose of renting out. At present, one of the properties has been vacant 
for a full year. The rent from the two properties is sufficient to cover taxes 
and interest on borrowings for all the three properties. We are offering the 
net rental income after rental deduction under 'Income from House Property' in 
our returns. Can the department turn around and disallow taxes and interest on 
borrowings paid for the purpose of the temporarily vacant property? 

Also, if two properties were to become vacant and the net result is loss under 
'Income from House Property', can the income tax department disallow carry 
forward of loss to the extent of taxes and interest on the borrowings paid for 
the vacant properties?

It is presumed that the property was kept ready to be let out and could not be 
actually let out as no tenant could be found. Thus the annual value of such 
property lying vacant throughout the year shall be taken to be NIL. 

In such a case, deduction shall be allowed for municipal taxes actually paid 
and interest on borrowings paid for the purpose of a temporarily vacant 
property. This loss can be set off against income from other house properties. 
Therefore, in your case, your stand is perfectly valid and the income tax 
department cannot question it. 

In case two properties become vacant, then the loss under the head 'Income from 
House Property' shall be carried forward. 

Query: My tenant occupied my property for an entire year but paid rent only for 
nine months. Do I have to include the rent for the entire 12 months in my 
income, or can I claim deduction for the unrealised rent?

Actual rent received/receivable for the purposes of computation of annual value 
of the property shall not include the amount of rent which the owner cannot 
realise. The amount of rent which the owner cannot realise shall be equal to 
the amount of the rent payable but not paid by a tenant of the assessee and so 
proved to be lost and irrecoverable provided:

(i) The tenancy is bona fide;
(ii) The defaulting tenant has vacated, or steps have been taken to compel him 
to vacate the property;
(iii) The defaulting tenant is not occupying any other property owned by the 
assessee;
(iv) The assessee has taken all reasonable steps to institute legal proceedings 
for the recovery of the unpaid rent or satisfies the assessing officer that any 
legal proceedings would be useless.

If a person has a house property ready to be let out, but is still to find any 
tenant for it, the annual value of such property will be considered as NIL. 
 
Query: I have rented out my house in Delhi. Recently I earned Rs 60,000 by 
putting up a display of an advertisement hoarding of a multinational company on 
the roof of my house. Kindly explain the tax treatment.

The Calcutta High Court, in the case of Mukherjee Estate (P) Ltd. v. CIT [2000] 
113 Taxman 313, held that the hoardings let out by the assessee were neither a 
part of the building nor the land appurtenant (attached) thereto. Therefore, 
permitting some companies to display their boards on hoardings could not be 
taken as income from house property as hoardings could not be treated as part 
of the building. 

However, since you earn income on the hoardings, your income of Rs 60,000 would 
be chargeable for tax purposes. It would come under the category 'Income from 
Other Sources'
 


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