Taxability of Income from Real Estate

CMA Arif Farooqui

Real Estate is an ever green investment option in India and it has always given good returns. It can be a residential or commercial property. Real Estate gives recurring income in form of rent and appreciation in value in case of re-sale. As it gives good return, so taxability of income earned from real estate too arise. Taxability of income from real estate can be explained as below.

Taxability of Income from Real Estate under Income Tax

a. Taxability of Income from Real Estate as Income from House Property –

Rental income from property is taxable under the head Income from House Property. The following three conditions must be satisfied before income from a property can be taxed under this head

1. The property should consist of any building or lands appurtenant thereto.
2. Assessee should be owner of property
3. The property should not be used by owner for purpose of any business or profession carried on by him, profit of which is chargeable to tax.

Notes-

(i) Income from subletting of property and vacant land is not taxable here.

(ii) Ownership includes both free-hold and lease-hold right as well as deemed ownership.

(iii) House property in foreign country is taxable to Assessee as per his residential status u/s 6.

When property income is not chargeable to tax

(a) Income from Farm House, (b) One place of an ex- ruler of India, (c) Property income of a local authority or trade Union, (d) Property held for charitable purpose, (e) Property used for own business or profession, (f) One self occupied property of an individual / HUF

Computing income from house property

Gross Annual Value	****
Less: Municipal Taxes (if paid by owner)	****
Net Annual Value	****
Less:Deduction under Sec.24 1. Standard Deduction @ 30% of NAV 2. Interest on Loan	****
Income from house property	****

Expected rent: Municipal value or fair rent whichever is higher but higher value cannot exceed Standard Rent, if SR is not applicable than M.V or FRV which is higher.

Actual Rent: Rent received or receivable from let out property during previous years.

Determination of Gross Annual Value

A. House property which is let out throughout previous year- Gross Annual Value would be higher of Expected Rent and Actual Rent.

B. House property which is let out and was vacant during the whole or part of the previous year-There may be two situation in this type of house property
1. Actual rent received/receivable is more than Expected rent in spite of vacant period- in this situation Gross Annual Value would be actual rent received/ receivable.

2. Actual rent received/receivable is less than Expected rent owing to such vacancy-in this situation Gross Annual Value would be Actual rent received/ receivable.

C. House property which is part of year let and part of the year occupied for own residence- Gross Annual Value would be higher of Expected rent and Actual rent.

Deduction from income from house property (Sec. 24)

a) Statutory Deduction Sec 24 (a) – 30 % of Net Annual Value (NAV). No deduction is provided if Net Annual Value is NIL or having negative balance.

b) Deduction of Interest on borrowed capital. (Based on following conditions)

• Borrowed money must be utilized for purchase, construction, repair or renovation of HP.
• The borrowed must be interest bearing. Although it is immaterial whether interest has been actually paid or not paid during the previous year.
• Brokerage or commission paid for arrangement of loan is not deductable.

Notes-

1. Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed, can be claimed as deduction over a period of 5 year in equal annual installment coming from the year of acquisition, completion of construction.

Example – loan was taken on 1-5-14 and construction was completed on 7-8-18, then A/Y is 2019-20 and P/Y is 2018-19. Accumulated interest would be from 1-5-14 to 31-3-18 means till last day of P/Y 2017-18. 1/5 of such accumulated interest would be allowed for 5 successive F/Y starting from the year in which acquisition/construction was completed.

2. Interest on unpaid interest is not deductable.

Example – Assessee had not paid loan EMI on time and interest was charged for late payment. Such interest will not be allowed as deduction u/s 24 of Income Tax Act 1961

b. Income From Capital Gain –

When one sold his Real Estate Property and earned profit, it will be taxable under Capital Gain.

Any profits arising on the Transfer of any Capital Asset shall be chargeable to tax under the head Capital Gains in the year of transfer.

House Property is a Capital Asset if before transfer, it was owned by assessee except as Stock in Trade. Capital Gain can be Long Term or Short Term. If holding period of property before transfer was more than 24 months(wef 01.04.2017), then it is long term otherwise it will be short term.

WHAT IS A TRANSFER? It includes:

a) Sale, Exchange (Must be of two capital assets). Relinquishment of Asset.
b) Extinguishment of an Asset.
c) Compulsory acquisition by Government.
d) Conversion of an asset into Stock-in-trade.
e) Any transfer covered by Sec.53 A of the transfer of Property Act.

f) the maturity or redemption of a zero coupon bond

g) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property

Calculation of Long Term Capital Gain

Particulars	Amount
Sale Consideration	****
Less: Expenses on Transfer	****
Less: Index Cost of Acquisition	****
Less: Index Cost of Improvement	****
Long Term Capital Gain	****

Note: In computing Short term Capital Gain, indexation is not allowed.

Exemption of Capital Gain from Real estate

An assessee can claim exemption from Capital Gain under Section 54 and Section 54EC but it must be noted that exemption is available only for Long term Capital Gain. A brief of these exemptions is given below in a tabular form which is easy to understand.

Particulars	Section 54	Section 54EC
Assets Transferred	Residential House (Self -Occupied or Let out)	Any asset( wef A.y 2019-20 ,the asset should be land or building or both)
Entitled	Individual or HUF	All Assessee
Type of Capital Asset	Long Term Capital Asset	Long Term Capital Asset
Investment in New Assets	One Residential House in India	Long term specified assets.Ex. NHAI, REC Bond
Prescribed Period for Investment	Purchased within one year before or two years after date of transfer, OR completed construction within 3 years, after the date of transfer	Six months from date of transfer
Exemption	Amount invested or Capital gain whichever is lower	Amount invested or Capital gain whichever is lower. But maximum amount is Rs. 50 Lakhs
Treatment of Unutilized Amount	Deposit in Capital Gains A/c Scheme upto due date of return u/s 139 (1) and must be fully utilized for investment with in stipulated period otherwise unutilized amount will be treated as LTCG	Not Applicable
Holding Period of investment	3 years from the date of investment	3 years from the date of investment
Sale of investment before end of holding period	If sold within 3 years from the date of investment then capital gains claimed as exempt under this section, shall be reduced from cost of acquisition of investment while calculating STCG on it.	If sold within 3 years from the date of investment then capital gains claimed as exempt under this section, shall be treated as income by way of LTCG of the previous year in which the asset is transferred.

(Author CMA. Arif Farooqui is a Practicing Cost Accountant and can be reached at Cell: +91-9919831357, Email – arif_cwa@yahoo.co.in)

(Republished With Amendments)