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Wednesday, 28 September 2016

Income from House Property: Tax Implications


Any Income earned in form of rent through a property like land, house, apartment, building, etc by the owner is chargeable to tax under “Income from House Property”. Income earned from such properties cannot be included under any other “heads” of Income.

Types of Income falling under the heads “Income from House Property”

Income earned in form of rent by the owner is only chargeable to tax under the head “Income from House Property”. It includes any rental income arising out of land/building being let out for residence or shop, commercial purpose of which the tax payer is the legal owner.

Income not considered under the heads “Income from House Property”

Rental Income received by a tenant on sub letting cannot be charged to tax under the head, “Income from House Property” as he/she is not the registered owner of the property. For such cases, rent earned from sub letting is charged under “Income from Other Sources”.

Applicability on Deemed Owner

In certain cases, a person may not be registered as the owner of the property but will be considered as the owner of the property. Thereby the rental income will be charged to tax in his/her hands.

The following cases fall under the deemed owner concept:

1.) Any Individual transferring his/her property to the spouse (expect in case of separation) without any consideration, the transferor will be considered as the deemed owner.
2.) Any transfer made to one’s own offspring (expect for married daughter) without any consideration, the transferor is considered the deemed owner of the property.
3.) Stakeholder in impartible estate is the deemed owner of the property.
4.) Any member of co-operative society, company or other association of persons to whom a building or portion of it is allotted or leased under house building scheme of the society, company or association, as the case may be, is the deemed owner of the property.
5.) Any Individual acquiring property which satisfies the conditions laid out in the Section 53A of Transfer of Property Act, will be treated as deemed owner. The condition laid out is:
        Written Agreement of the Transfer
        Purchase Consideration
        Purchaser acquires in pursuance to the Agreement.
6.) In case of Lease of a property for a period not less than 12 years (whether fixed or with provision to extend), lessee is the deemed owner.

Composite Rent

Owner apart from receiving rent for space, may also charge for providing furnishing and other services. Thus, such type of charges is known as “Composite Rent”.
Tax treatment for Composite Rent:
In case the letting out of space and letting out of other assets is inseparable (interior decoration, immovable equipments), then entire rent will be charged to tax under “ Income from Business or Profession” or “Income from Other Sources”, depending on the case.
In case the letting out of space and letting out of other assets is separable (e.g- Furniture, Moveable items), then the rent of the space will be charged under “Income from House Property” and rent of other assets will be charged to “Income from Business or Profession” or “Income from Other Sources” as the case may be.

Computation of Income from House Property

“Income from House Property” in case of let out is calculated in following manner:

 Computation of Gross Annual Value (GAV) of Let Out Property
1.) Compute Reasonable Expected Rent of Property
2.) Compute Actual Rent of Property
3.) Compute Gross Annual Value

Reasonable Expected Rent will be higher than Municipal Value or Fair Rent of the Property. Provided the Property is not covered under Rent Control Act, in such a case Reasonable Expected Rent cannot exceed Standard Rent.

Actual Rent of Property is the rent for which a property was let out. Rent pertaining to vacancy is not deducted, however, unrealized rent is to be deducted from the actual rent if the specified conditions are satisfied.

Gross Annual Value (GAV) will be higher of Reasonable Expected Rent or Actual Rent received.

Deductions from GAV: Municipal Taxes paid and Deductions U/S 24 (a) and (b) are to be deducted.

Deduction under section 24(b) is applicable on interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property. In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b). However, in case of a self occupied property, limit is Rs. 2,00,000 or Rs. 30,000, as the case may be.

Interest is divided in 2 parts, Pre Construction and Post Construction Period.

Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following: 
Date of repayment of loan; or 
31st March immediately prior to the date of completion of the construction/acquisition of the property. 

Pre Construction period interest is allowed as deduction in five equal annual installments, commencing from the year in which the house property is acquired or constructed.  Thus, total deduction available to the taxpayer under section 24(b) on account of interest will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post construction period (if any).
Post-construction period interest is the interest pertaining to the relevant year (i.e., the year for which income is being computed).

Computation of Self Occupied Property

A Self Occupied House is kept away from the purview of the “Income from House Property” as it is being occupied by the owner. However, the deduction U/S 24 (b) may be availed on the interest on loan taken for building, buying, repairing of the house.
In case, a person owns more than one house, then benefit of Self Occupied House is granted to only one house. Whereas, the other house/s will be treated as “deemed to be let out” and tax is applicable similar to let out properties. However, the owner has the option to select any property as Self Occupied.
In case of partial portion of house is let out, the portion let out will considered to calculate “Income from House Property”.

Deductions in respect of Interest on Housing Loans

The deduction is restricted to Rs 30,000/- or Rs 2,00,000/- depending on the scenario.
Deduction of Rs 2,00,000/- is available only if following conditions are satisfied;
1.) Capital is borrowed on or after 01/04/1999
2.) Capital is borrowed for Construction or Acquisition
3.) Acquisition or Construction should be completed within 5 years from the financial year, capital was borrowed.
4.) Person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for acquisition or construction of the property.

Deductions in respect of Loans taken against House Property

As per Section 80 EE of Income Tax Act, deduction is available on loans taken for acquiring a house, subject to fulfillment of following conditions;
1.) Loan amount should be sanctioned in the FY 2016-17 by Financial Institution.
2.) Amount of Loan should not exceed Rs 35 lakh.
3.) Value of Residential Property should not exceed Rs 50 lakh.
4.) Individual should not own any residential property at the time of sanction of Loan.

Saturday, 17 September 2016

Wholesale and Retail Inflation Go Inverse, Industry Output Falls


WHOLESALE PRICE INDEX (WPI)

Wholesale Price Index (WPI) for the month of August, 2016 rose marginally to 3.74% as compared to 3.55% in the previous month. Inflation is on the rise for past five months and it is the highest recorded in last 24 months. The rise is mainly attributed to steep rise in the manufactured products. However, the moderation in food inflation has shielded against steeper rise in inflation rates. The food inflation fell sharply to 8.23% as compared to 11.82% in the previous month. The price of potato continued to rise. In fuel and power segment, inflation rose by 1.62% as compared to (-)1.0% in the previous month, it is after a quite sometime that we see a rise in Crude Inflation. Wholesale Inflation takes into account the prices paid by the manufacturers on the goods imported and used as inputs. However, any further rise in Food Inflation may become a cause of concern keeping in mind the projected inflationary targets. The fall in food prices is a welcome relief as we had decent rains this year. On month to month basis Primary articles fell to 7.47% as compared to 9.38% in the previous month while Manufactured products rose to 2.42% from 1.83%. The index provides Primary Articles with 20.11% weightage, 64.97% for manufactured products and power & fuel with 14.91%.
Wholesale Price Inflation for the month of June,’16 has been revised to 2.12% from 1.62%.

CONSUMER PRICE INDEX (CPI)

Consumer Price Index (CPI) fell to a five month low in the month of August, ‘16 as it stood at 5.05% as compared to 6.07% in the previous month. As Food Inflation fell to 5.91% from 8.35% recorded in the previous month. Fall in prices of Vegetables is largely responsible for the slide. Consumer Food Inflation has 47% weightage in CPI Index. The downtrend shows that monsoon has been good for crops and resulted in prices being under control.
With Inflation in check, RBI will be encouraged to lower the lending rates immediately. Industrial Output is also pretty choppy as of now.
CPI falling, which is attributed to higher weightage being given to retail inflation, reflects the true impact of inflation on Common People. Going forward, stability in CPI will lead to strengthening of the economy and would call for changes in the monetary policy.

INDEX OF INDUSTRIAL PRODUCTION (IIP)

Index of Industrial Production (IIP) contracted by 2.4% in the month of July,’16 as compared to rise of 2.1% witnessed in June,2016. IIP figures have been fluctuating for quite some time now as they have failed to gain any momentum.
The fall is mainly contributed due to slowness in Manufacturing Sector. As manufacturing sector fell by 3.4%, whereas Mining sector grew by 0.8%, while the Power Sector grew by 1.6%. The Capital Goods fell steeply for the ninth month in a row by (-)29.6% while Consumer Durables Sector fell by 5.9 %.  
The growth of factory output is essential for the economy. Industrial growth is mandatory for creation of jobs, however the turbulent European market and China slowing down is a cause of concern and one needs to be cautious going forward.
As I had mentioned previously, growth in Manufacturing Sector is the only way forward for the economy. Thus the rise in the core sectors along with few others will definitely help the Economy to move forward. Manufacturing Output also constitutes 75% of IIP data.

OUTLOOK

RBI has set a target of achieving CPI below 5% by March,2017 and seems on course to achieve it. The inflationary pressure is expected to ease in the coming months.  
RBI wants to ease Consumer Inflation to 4% which for the time being it seems to be an ambitious target, which will be tough to meet. However, if retail inflation remains within 5%-6%, RBI should be fairly satisfied.
RBI will look to revise Repo rates as the Industry outlook is weak and requires major boost.
The Wholesale inflation in positive may be good, as it indicates raise in demand, which in turn will lead to increase in productivity thereby leading to better wages and more job creation. However, the rise in food prices will negatively impact the consumers.
Exports have been decline for quite some time now which is impacting India’s inflow. The fall is mainly contributed to poor global demand and softening of crude prices. Global Economic slowdown has not helped India’s cause either. Exports are on decline for past 20 months. 
Global Sentiments are pretty reserved at this point of time with China slowing down. The major challenge at this point of time is to ensure economic stability and safeguard the Interests of developed and developing economies of the world.
India is emerging as the most preferred destination for the Investors and promises to bring in more and more investments which augurs well for the economy as well the as the population.