Name: Francis Monteiro

Roll No.: 15

Subject: Taxation

Class: Exe. MBA (2008-11) 4th Sem.

Assignment No.: 1

Date of Submission: 17/03/2010

College: SIMS, PUNE.

Income From House Property

Chargeability (U/S Sec.22)

1. Annual value of the house property constitutes the bases of the charge.

2. The property consists of any building or land adjacent thereto.

3. The assessee shall be the owner of such property.

4. The property shall not be used for the purposes of assessees own business or profession

Different situations under which income arises

1. Let Out Property (LOP)2. Self-occupied property(SOP)

– Annual value of one self occupied property is completely exempt from tax (Sec. 23(2))

3. Deemed to be letout property.– If the assessee has occupied more than one house

property for his residential purpose, only one house property according to assessee’s choice shall be treated as SOP

4. Partly Self occupied and partly let out

Computation of income from LOPComputation of income from let out property

Particulars Rs. Rs.GROSS ANNUAL VALUE (GAV) xxxLess: Municipal taxes paid by the assessee xxxNET ANNUAL VALUE (NAV) xxxLess: Deductions U/S 24: a) Standard deduction @ 30% of NAV xxx b) Interest on Borrowed capital xxx xxxINCOME FROM LET OUT PROPERTY xxx

Computation of Gross Annual Value (GAV)Particulars Rs. Rs.Municipal Rental Value (MRV) xxx fair Rental Value (FRV) xxx MRV or FRV which ever is higher (WIH) xxx Standard Rent (SR) xxx EXPECTED RENT (Which ever is lower) WIL xxx (Annual Rent - Unrealised rent) xxx ANNUAL RENTAL VALUE (ARV) (Which ever is Higher) WIH xxx Less: Vacancy period loss (Vacancy period *actual rent for the vacancy period) xxx GROSS ANNUAL VALUE (GAV) xxx

DEDUCTION u/s 24a. Standard Deduction [U/S 24(a)]

30% of net Annual Value (NAV) shall be allowed as standard deduction irrespective of expenditures incurred by the assessee. No deduction shall be separately allowed for repairs, ground rent, insurance or any other expenses incurred by the assee since the above slab of 30% includes for the same.

b. Interest Borrowed Capital [u/s 24(b)]

Interest on Borrowed capital

interest for current previous year (2009- 10) Interest on Pre construction periodInterest on borrowed capital for the period 1.4.09 to 1.4.2010 is fully allowed

Interest calculated on pre-construction period is allowed in 5 equal annual installments starting from the previous year in which house was acquired or construction was complete

Computation of income from SOP

Computation of income from Self occupied property

Particulars Rs. Rs.

GROSS ANNUAL VALUE (GAV) NIL

Less: Municipal taxes paid by the assessee NIL

NET ANNUAL VALUE (NAV) NIL

Less: Deductions U/S 24:

a) Standard deduction @ 30% of NAV NIL

b) Interest on Borrowed capital xxx xxx

INCOME FROM SELF OCCUPIED PROPERTY xxx

Computation of income from SOP• Below ceiling applies only to SOP and not to let out properties.a. Max ceiling of interest on borrowed capital allowable u/s 24(b) is Rs 150000

if all the following conditions are satisfied.1. Capital borrowed on or after 1.4.19992. Purpose of loan shall be for acquisition or construction.3. The acquisition or construction shall be completed withing 3 years from the

end of the previous year in which capital was borrowed.4. Certificate of interest payable from lenders of the loan shall be furnished.5. If any one of the conditions mentioned are not satisfied then the ceiling is

reduced to a max of Rs 30,000

b. Mac ceiling of interest on borrowed capital allowable u/s 24(b0 is RS 30000 if :6. Capital is borrowed before 1.4.1999 or7. Purpose of loan shall be repair, reconstruction or renewal of house property.

Computation of income from Deemed to be let out Property(DLOP)

• If an assessee occupies more than one self occupied property, then according to the assessee’s choice only one house shall be treated as self occupied (SOP) and all other shall be deemed as let out properties (LOP) and its income shall be computed as if it were to be a letout property.

Note: The option of selecting one house as self occupied property shall be in such a way that the net income of assessee is as minimum as possible(it shall not be based on GAV or NAV)

Computation of income from Partly self occupied and partly let out propertya) Period letout & Period self occupied

Where a house is self occupied for a part of the year and let out for the remaining part of the year, the benefit of SOP shall not be available for such property and the whole property shall be treated as completely let out through out the year. However while calculating actual rent for such property, it shall be considered for the let out period alone whereas all other details like Municipal value, FRV and SR are considered p.a.

Note: To get the benefit of SOP, the property shall be self occupied throughout the year and it should not have been let out nor put to any other use even for a single day throughout the previous year

b) Portion letout and portion self occupiedWhere a house property consists of two or more independent residential units of which one of them is self occupied for own residence throughout the year and remaining units are let out, the SOP portion or unit shall be treated as SOP and the remaining portions shall be proportionately treated as LOP

Example considering all the different situations

ExampleSri Kishore is the owner of 3 houses. Following are the particulars for the year ending 31.3.2008

Particulars 1 House 2 House 3 House

Year of construction 1996 2000 2002

Purpose of use LetoutSelf occupied

Let out to residence

Actual rent received(p.a) 30000 24000

Municipal valuation 32000 28000 30000

Municipal tax paid by Kishore 1200 1000 3000

Municipal tax paid by tenant 2000 1800

Total municipal tax 3200 2800 3000

Fire insurance premium (%) 2 20 2

Interest on loan taken for renual of the house 7000 5000

Compute taxable income from the house property of Sri Kishore for the AY 2008-09

House 1House 1: (LOP)

Particulars Rs. Rs.

Municipal Rental Value (MRV) 32000

fair Rental Value (FRV) x

MRV or FRV which ever is higher (WIH) 32000

Standard Rent (SR) x

EXPECTED RENT (Which ever is lower) WIL 32000

Actual Rent 30000

GROSS ANNUAL VALUE (GAV) 32000 Less: Municipal taxes paid by the assessee during the previous year 1200

NET ANNUAL VALUE (NAV) 30800

Less: Deductions U/S 24:

a) Standard deduction @ 30% of NAV( 30800 * 30%) 9240

b) Interest on Borrowed capital x 9240

INCOME FROM House 1 21560

House 2

House 2: (SOP)

Particulars Rs. Rs.

GROSS ANNUAL VALUE (GAV) NIL

Less: Municipal taxes NIL

NET ANNUAL VALUE (NAV) NIL

Less: Deductions U/S 24:

a) Standard deduction @ 30% of NAV NIL

b) Interest on Borrowed capital(ceiling limit of RS. 30000) 7000 -7000

INCOME FROM House 2 -7000

House 3House 3: (LOP)

Particulars Rs. Rs.

Municipal Rental Value (MRV) 30000

fair Rental Value (FRV) x

MRV or FRV which ever is higher (WIH) 30000

Standard Rent (SR) x

EXPECTED RENT (Which ever is lower) WIL 30000

Actual Rent 24000

GROSS ANNUAL VALUE (GAV) WIH 30000 Less: Municipal taxes paid by the assessee during the previous year 3000

NET ANNUAL VALUE (NAV) 27000

Less: Deductions U/S 24:

a) Standard deduction @ 30% of NAV( 37000 * 30%) 8100

b) Interest on Borrowed capital ( no ceiling since it is an LOP) 5000 13100

INCOME FROM House 3 13900

Net Income from all 3 houses

Computation of Net Income Rs.

House 1 21560

House 2 -7000

House 3 13900

Net Income 28460

Income From Capital Gain

• Types of Capital Assets– SHORT TERM• If the asset is held for Less than 36 Months then they are

Short Term capital assets.• In case of Equity/Preference Shares in a Company,

Securities such as Debentures/Government Securities and Units of UTI and Units of Mutual funds and Zero Coupon bonds the term is 12 instead of 36 months.

– LONG TERM• If the asset is held for More than 36 Months then they

are Long Term Capital Assets.

TAX LIABILITY• SHORT TERM CAPITAL GAINS

– To determine the Value of Consideration– To deduct expenditure incurred for the transfer– To deduct the cost of acquisition.– To deduct cost of improvement.– The balance amount is Short Term Capital Gains.– Short Term Capital Gains are chargeable to Tax based on SLAB RATES.

• LONG TERM CAPITAL GAINS– To determine the Value of Consideration– To deduct expenditure incurred for the transfer– To deduct indexed cost of acquisition– To deduct indexed cost of improvement.– To avail exemption u/s 54, 54 B,54 D, 54 EC, 54F, 54 G, 54 GA,– The balance amount is Long Term Capital Gains.– Long Term Capital Gains are chargeable to Tax on Flat Rate i.e 20%

INDEXATION BENEFIT

• Indexation is nothing but working out the value of asset based on cost inflation index.

• Cost inflation index for the year 1981-82 is 100 Cost inflation index for the year 2007-08 is 551.

• If an assesse had purchased an asset during the year 81-82 for a sum of Rs.100.00. The same asset’s value will be 551 if purchased during the year 2007-08 based on cost inflation index.

• Therefore the assesse gets additional benefit by deducting 551 instead of 100.

gains theoryComputation from short term capital gains theory

• Step 1– Find out the full value of consideration

• Step 2– Expenditure incurred wholly and exclusively in connection with such a transfer – Cost of acquisition – Cost of improvement

• Step 3– From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G and 54H

• Step 4– The balance amount is short-term capital gain

The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for, nor has it any reference to the market value of the capital asset, which is subject matter of the transfer. The consideration for the transfer of the capital asset is what the transferor receives in lieu of the asset he parts with, namely money or money's worth.

• short-term capital

Example computation for short term capital gain

• Ajay (HUF) is a Hindu undivided family. The family acquires a residential house at Delhi for Rs. 5,10,000 on April 1, 2001. The family undergoes complete partition on Nov 1, 2001 and the residential house is allotted to Rahul, a member of the family (fair market value on Nov 1, 2001 is Rs. 6,00,000). Rahul sells the house on March 15, 2004 for Rs. 6,90,000. Determine the amount of chargeable capital gains in the case of Ajay (HUF) and Rahul.

Ajay (HUF) - Ajay (HUF) has transferred a house property to Rahul at the time of partition. Since the transaction is not treated as transfer under section 47(i), surplus arising thereon is not taxable.

Rahul – Since Rahul has transferred a house property, he is chargeable to tax as follows:

Sales consideration Rs. 6,90,000

Less: Cost of acquisition (since capital asset is acquired in one of circumstances mentioned in section 49 (1), cost to the previous owner is taken as cost of acquisition)

Rs. 5,10,000

Short-term capital gain Rs. 1,80,000

Computation of tax

gains theoryComputation from Long term capital gains theory

• Step 1– Find out the full value of consideration

• Step 2– Expenditure incurred wholly and exclusively in connection with such a transfer – Indexed Cost of acquisition – Indexed Cost of improvement

• Step 3– From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EA, 54EB, 54F and 54G

• Step 4– The balance amount is Long-term capital gain

In case long term capital gains is covered by section 115AB, 115AC or 115AD, it is taxable at the rate of 10%.

Deductions under section 80CCC to 80U and rebate under section 88 is not available in respect of long term capital gains

• short-term capital

Example computation for long term capital gain

Rs. Rs.Sales Consideration 58,00,000Less:Expenses on transfer 50,000Indexed cost of acquisition (Note 1)

30,09,500

Indexed cost of improvement (Note 2)

26,49,631

Long-term capital gain 90,869

Ajay purchases a house property for Rs. 76,000 on June 30, 1967. The following expenses are incurred by him for making/addition alteration to the house property:

Cost of construction of first floor in 1975-76 1,10,000

Cost of construction of the second floor in 1982-83 4,40,000

Alteration / reconstruction of the property in 1989-90 2,90,000

Fair market value of the property on April 1, 1981 is Rs. 6,50,000. The house property is sold by Ajay on June 15, 2003 for Rs. 58,00,0000 (expenses incurred on transfer: Rs.50,000).

Cont…Notes:1. Indexed cost of acquisition is computed as follows:

Rs.6,50,000 / 100** X 463*** = Rs. 30,09,500*Fair market value on April 1, 1981 (actual cost of acquisition is ignored as it is lower than fair market value on

April 1, 1981).**Cost inflation index for 1981-82**Cost inflation index for 2003-04, i.e. the year in which asset is transferred.2. Indexed cost of improvement is determined as under:

Construction of first floor in 1975-76 (expenses incurred prior to April 1, 1981 are not considered)

NIL

Construction of second floor(i.e. Rs. 4,40,000* X 463** / 109***)

18,68,991

Alteration / reconstruction in 1989-90 (i.e. Rs. 2,90,000* X 463** / 172***)

7,80,640

26,49,631

Indexed cost of improvement *Cost of improvement**Cost inflation index for 2003-04***Cost inflation index for 1982-83****Cost inflation index for 1989-90

Thank You