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

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House property

Query]

  1. If I purchase the second house property for my own use, still whether I would be require to pay the tax? I don’t wish to let out the second house but want to purchase it for investment purpose. [T.Jannawar, Chandrapur]
  2. From your article in newspaper -The Hitavada, I come to know that if a person having more than one HP, the second property onwards to be show on rent or deem to be le out. I understand that while filing return, in the HP schedule from rent receive, first taxes paid to local authorities (NMC/Grampanchayat etc) to be deduct, then on balance 30% to be deduct for maintenance, follow by interest payable on borrow capital/loan. The remaining amount is income from house property.
    My queries are:-
  3. For IT exemption what documents/papers require if property given on rent and what documents require if deem to be le out?
  4. Please highlight the importance of standard rent/ area wise rent for NMC and Grampanchayat for income tax purpose?
  • What proofs regarding rent receive to be keep. 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 receive be execute 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.
  1. 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 notariz?  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.
  2. 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? [614@rediffmail.com]

Opinion:

  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 use 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 considere as Nil. The second house (or other houses) shall be deem to be have to be 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 treat as self occupied house property and nothing would be taxable from such house property.
    b] Other house properties shall be deem to have be 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 expect 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 discuss hereunder:
  3. Municipal Value:For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determine by the municipal authorities in respect of a property, is call as municipal value of the property.  Normally municipal authorities charge house tax on property base on various factors like type of residential, floor, facilities available in the premises etc.
  4. Fair Rental Value:The rent which a similar property in the same or similar locality would have fetch is the fair rental value of the property. This is nothing but notion rent a property can get if it is be 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.
  • 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 cover under Rent Control Act.
  1. 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 add in actual rent receiv/receivable to derive annual value. There could be vice versa case, where owner has agree to pay some obligation of tenant. In that case rent will be reduce by that amount.With above brief idea of the relevant terminology, it may be note that for any house property, Gross Annual Value is higher of Actual Rent Receive or Expect Rent. Expect Rent is nothing but higher of Municipal Value or Fair Rental Value but restrict to the Standard Rent. From the amount of gross annual value, municipal taxes would be deduct to arrive at the net annual value. There are only two types of tax deductions which can be claim 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 reduce towards repairs, maintenance etc. The deduction is available irrespective of the amount actually spend or not.
    b] The second deduction is of interest if the property is purchase/ construct with borrow 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 deem to have been permit out house property.
  1. 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,
  2. 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 best  option, it won’t be harmful even if the rent is accept in cash. The concept of 11 months is very important. The rent agreement/ lease deed of more than 12 months is to be register under the Registration Act, 1908
  3. .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 consider, even agreement on plain papers, whether register/notarize or not, would serve the purpose of offering rental income. Wealth tax liability don’t come in respect of property which is out for a minimum period of 300 days in a year.
  4. One more good news; Wealth tax has be abolish 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 locate, he can authorize/appoint any other person. On his behalf to do the needful for letting out of the property and collecting the rent.

House property

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 require for claiming rebate? [Sanjay Muppawar-
smuppawar@gmail.com]

Opinion:

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 sell subsequently. For this, the bills/vouchers/payee details should be keep properly. Along with the sources of funds, so as to justify the deduction claims

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