By :Balwant Jain
Significant appreciation in the prices of commercial properties in recent times in the newly developed residential areas has attracted many investors into this segment. Many people are buying commercial properties for the purpose of investment with the help of loans. In this article I will discuss various aspects of taxation of commercial property including tax treatment of loan taken for the purpose of commercial property.
Taxation of commercial property
Income from house property in general is taxable under the head “Income from House property” in the hands of the owner. This applies to both residential as well as commercial property. The amount of rent received or reasonably expected to be received from such property which is known as “annual value” is taxable under this head after deduction of certain expenses.
In case you are not the owner and sublet the commercial property, your income from such sub-letting shall however be taxable under the head “Income from other Sources”. In case you are running a proper business centre and amount in respect of provision of other services along with letting out of the space constitute significant portion, the same can be treated as business income, depending on facts of the case. Except in cases stated above, all the incomes derived in respect of commercial property by whatever names called is taxable under this head. Since all such incomes are taxable under this head no deductions other than being discussed hereunder are available against the rentals. So please do not show your genuine rental income as business income in order to claim other expenses.
Deductions from Annual Value
For calculating the income taxable under the house property head, the taxation laws allow you two deductions. The first deduction is standard deduction in respect of repairs etc. at the flat rate of 30% of the annual value calculated as above. The deduction in respect of a let out commercial property or a residential property which is deemed to have been let out is available whether you have actually incurred any expenditure on repairs or not.
The other deduction available is in respect of interest on loan taken to purchase or construct a house property, or even for repair or reconstruction of your existing property. This benefit of interest deduction is available for all properties whether residential or commercial. Please note that even processing fee or prepayment fee paid in respect of any loan taken for the commercial property is also treated as interest and is thus eligible for deduction. This deduction in respect of interest is available for money borrowed from anybody including your friends and relatives.
You can claim full interest in respect of money borrowed for purchase, construction, repair, renovation of the commercial property without any limit whether the same is let-out or used for the purpose of your own business or profession. Please note that the deduction for interest in respect of an under-construction property is available only from the year in which the construction is complete and possession is taken.
For interest paid prior to the year in which the possession is taken for an under construction property, you can claim aggregate of such interest in five equal instalments starting from the year in which construction is completed.
It is important to note that you are not allowed any deduction for repayment of loan taken for commercial property under Section 80 C.
Tax treatment of commercial property used for own business or profession
In case you are using the commercial property partly or fully for your own business or profession, the proportionate share is not taxable under this head and nor are you allowed to claim any notional rent in respect of such property while calculating your profits in business.
However in case you are using your commercial property for your business or profession, you are allowed to claim any actual expenses incurred for the repairs and maintenance of the same. Likewise you are allowed to claim depreciation also on the same commercial property along with the interest which you are paying on the loan taken to buy the property.
From the above discussion I am sure you have become aware about taxation of commercial property.
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(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)By Balwant Jain (CA, CS and CFP)The author is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal., He can be reached at firstname.lastname@example.org and @jainbalwant