It is proposed that the Direct Taxes Code, 2010 (‘DTC') will be introduced from April 1, 2012. It is an attempt to simplify the overall tax structure and lay-out of the tax provisions in a manner that these are better understood by the common tax payer. In this context, significant changes have been proposed in respect of taxability of house property income, which are worth noting.
LET-OUT HOUSE PROPERTY
The income from letting of any house property owned by a person shall be computed under the head “Income from House Property”. The income from any house property (subject to certain exceptions) shall be computed under this head, regardless of the fact that the letting, if any, of the property is in the nature of trade, commerce or business. It has been clarified that provisions of taxability of income from house property shall not be applicable to the house property which is not ready for use during the financial year.
The income from house property is to be computed as gross rent less the aggregate amount of deductions specified below. Gross rent shall be the amount of rent received or receivable for the financial year or part thereof for which such property or any part of the property is let-out. A person shall be eligible to claim the following deductions from his gross rent.
First, the amount of tax actually paid to the local/municipal authority during the financial year.
Second, a sum equal to 20 per cent of the gross rent in respect of repair and maintenance of such property. Under the existing provisions of Income-tax Act, a deduction of 30 per cent is allowed towards repair and maintenance.
The reduction in rate for repairs and maintenance from 30 per cent to 20 per cent will result in higher tax outflow for the property owners.
Third, the amount of any interest on loan taken for the purposes of acquisition, construction, repair or renovation of the property or on loan taken for the purposes of repayment of the aforesaid loan. It is important to note that there is no restriction on the amount of interest that could be claimed as deduction in case of a let-out property.
Further, any interest in respect of the period prior to the financial year in which the house property has been acquired or constructed shall be allowed as deduction in five equal instalments, beginning from the financial year in which the property has been acquired or constructed. The said provisions are similar to the existing tax regime.
In case any house property is owned by two or more persons having definite and ascertainable shares, then their income shall be computed separately in accordance with respective shares. It has been clarified that in case the shares are not definite and ascertainable, then such income shall be assessed as an Association of Persons (AOPs) in respect of such property and thus may be taxed at higher applicable rate.
In case of a self-occupied property, a deduction can be claimed up to Rs1.5 lakhs (as allowed currently) for the interest paid on loan taken for the purposes of acquisition, construction, repair or renovation of a house property in the year which such property is acquired or constructed provided the following conditions are satisfied:
the house property is owned by the person and not let-out during the financial year.
the acquisition or construction of the property is completed within a period of three years from the end of the financial year in which the loan was taken.
the person obtains a certificate from the financial institution to whom interest is paid.
DEEMED TO BE LET-OUT PROPERTY
The concept of deemed to be let-out property under the existing provisions has been done away with under DTC.
Therefore, if an individual owns more than one house property, then no income in respect of the same would be subject to tax unlike as at present wherein only one house property at the option of the tax payer is considered to be self-occupied and others are deemed to be let-out and taxed accordingly. As no income would be subject to tax, any interest paid on housing loan taken for that property would also not be eligible for the deduction, as permissible under existing provisions.
REPAYMENT OF PRINCIPAL AMOUNT
No deduction shall be allowed in respect of the repayment of the principal amount of housing loan availed of against the property, unlike as at present under the current tax provisions, wherein deduction under an overall limit of Rs 1 lakh under Section 80C could be claimed. Besides, one should also take note of the provisions of the wealth tax and, accordingly, plan his investments in house property to avail of maximum tax benefits once the DTC comes into force in the present proposed form.
(The author is Partner, Tax — KPMG in India.)