Tax is a financial burden on any person. One cannot do financial planning without considering the tax liability. Every person devotes his time and energy to plan his tax liability but still he doesn’t able to save much as he like’s too. The main reason is because mostly financial planning is done conventionally.
Further, in case of salaried employee, his main income is generally from salary and house property on which he only gets limited tax deductions. To break this anomaly, we present a Tax Planning Tip for those Earning Rental Income from House Property so that tax liability can be minimised.
Here are innovate ways to save your tax!
Consider the example, suppose Mr A rents his house property to Mr B for Rs.10,000/- per month. Mr A being the owner incurred by following expenditure: Depreciation on house property Rs.1,50,000 (assume cost of house Rs.30 lakhs rate of depreciation @ 5%), insurance Rs.5,000, Repairs and other related expenditure Rs. 20,000 etc. (let us ignore interest on borrowing for this example)
Now, let us calculate income as per section 22 for the above transaction
Rent income :- Rs.1,20,000
Less: Standard Deduction @ 30% :- Rs.36,000
Income from House Property :- Rs.84,000/-
All the expenses incurred above are not allowed as deduction when income is computed under the head ‘House Property’
Let us do some tax planning!
The agreement between the lessor and lessee should be drafted in such a way to include a condition. The condition is that “the owner will rent the property to the tenant along with certain facilities like furniture and fixtures, air conditioner etc. and the charges the single rent for the above facilities.”
The reason to include the above condition is to beat the section 22. When the letting of building and letting of furniture and fixture is inseparable then rental income is to be assessed under section 56 i.e. income from other sources and not under section 22. This has been decided by Delhi High court in case of Garg Dyeing & Processing Industries v ACIT (2013) 212 taxmann 160 (Del)
Now, suppose in our example, the agreement is revised to include the above condition and rental income is increased from Rs.10,000 to Rs.12,000.
Let us now calculate the income u/s 56
| Rental income | Rs.1,44,000 | |
| Less: Deduction allowed u/s 57 | ||
| -Depreciation | Rs.1,50,000 | |
| -Repairs | Rs.20,000 | |
| -Insurance | Rs.5,000 | Rs. 1,75,000 |
| Income from Other sources (Loss) | (Rs.31,000) |
This loss can even be set off against salary income.
Therefore, with this simple tax planning, you can curb your tax liability drastically.
(For any feedback, Comment or suggestion author may be reached at paras.mehra18@gmail.com or at +919654622792, Authotr is Co-founder of www.Quickcompany.in)
Read Other Articles from CA Paras Mehra
(Republished With Amendments)
isn’t there should be section 24 instead of 22 written?
tenant required to deduct TDS-
what is the Rate and section,if any mismatch with 26AS,then it may select to Scrutiny
Wow sir, great planing
Dear Mr. Mehra,
Good tax planning but needs following clarifications.
1. If we claim depreciation on House, then while selling house, cost of the house got reduced (because we are claiming Depreciation) and further no indexation benefit will be available becuase no it will be treated as STCG.
sir,
In legal term, which I cannot do directly, I never can do indirectly also. I do not think that the plan would work before the eyes of law.
Sir,
This is not good Tax Planning for Individual Assessees. As the Property will be automatically considered as short term Capital assets. Indexation and Exemption U/s.54 & 54F will not be applicable at the time of Sale. For Corporates, Exemption is not available. However Indexation and Lower Rate of Tax i.e. 20% will be available for Coporates in case of LTG. We have to weigh the pros & Cons of the situation of Assessee on case to case basis.
Regards
SSK.
Dear Sir,
Great planning.
Sir
No doubt this is really a good idea. However is it practically applied by any of the assessee? Will the officer accept this method solely relying upon the single judgement quoted above?
dear sir,
well informed article is it applicable to the warehouse given for rent?and it could be more better is u answer above 2 queries. thanks keep writing.
regards,
tejash
Dear Sanjay Patni: Very good query. If we take market value, then every year the depreciation increases with the way market prices are going up. If we take the cost of purchase the depreciation may work out to be less than 30% allowed u/s 24! However we can go for the indexation cost. I wish the author will through more light on this aspect.
One more thing,
By Claiming Depreciation, the house will be valued on WDV basis
In Future when we sell this house property for say 45 Lakhs
then no indexation on Cost of Acquision, whole Gain will be treated as Short Term and charged to tax as per the Slabs
Sir, i think its not a proper Tax Planning
Regards
Hitesh Sanghvi
Mr. CA Paras Mehra,
This is astonishing! As you are putting it on a widely and well known website TaxGuru, please let us know a single judgement can be basis for an assesse showing the rental income under section 56? Please reconfirm.
Dear Parasji, Is price of the house is today’s market value or the cost at which one had bought? Who Decides the depreciation percentage? What is the max amount one can show as annual repair charges?
Is this law being exercised by people and is it better than claiming Loss on House Property?
Regards
Sanjay Patni