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Income from property ch4 - Google Docs

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9 views

Income from property ch4 - Google Docs

Law and taxation notes

Uploaded by

hmmm23
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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‭Chapter 4: Income from Property‬

T‭ axation‬
‭From the desk of‬‭M. Khalid Petiwala‬

‭Chapter 4‬
‭INCOME FROM PROPERTY‬
‭1.‬ ‭Rent for the tax year is chargeable on accrual basis under ‘income from property’.‬

‭ efinition of rent‬
D
‭Rent‬‭means‬‭a‬‭consideration‬‭received‬‭or‬‭receivable‬‭for‬‭a‬‭tax‬‭year‬‭by‬‭the‬‭owner‬‭of‬‭any‬
‭land‬‭or‬‭building‬‭for‬‭the‬‭use‬‭or‬‭occupation‬‭and‬‭includes‬‭any‬‭forfeited‬‭deposit‬‭under‬‭a‬
‭contract for the sale of land or building.‬

‭Actual rent or fair market rent whichever is higher is taxable.‬

‭2.‬ ‭The following are taxable under the head ‘income from other sources’:‬

‭‬ R
o ‭ ent in respect of a building together with plant and machinery‬
o‬ ‭Any‬ ‭amount‬ ‭in‬ ‭respect‬ ‭of‬ ‭utilities‬‭or‬‭other‬‭service‬‭charges‬‭in‬‭respect‬‭of‬‭land‬‭or‬
‭
‭building.‬

‭3.‬ D
‭ eposit received in respect of Building‬
‭Where‬ ‭the‬ ‭owner‬ ‭of‬ ‭a‬ ‭building‬ ‭receives‬ ‭any‬ ‭deposit‬ ‭the‬ ‭same‬ ‭is‬ ‭treated‬ ‭as‬
‭chargeable rent in 10 years in equal proportion.‬

‭ owever,‬ ‭if‬ ‭the‬ ‭deposit‬ ‭is‬ ‭refunded‬ ‭by‬ ‭the‬ ‭owner‬‭then‬‭no‬‭portion‬‭of‬‭the‬‭deposit‬‭is‬


H
‭taxable in the year in which it is refunded.‬

I‭ f‬ ‭the‬ ‭owner‬ ‭lets‬‭out‬‭the‬‭same‬‭building‬‭to‬‭another‬‭tenant‬‭and‬‭receives‬‭any‬‭deposit‬


‭then‬ ‭the‬ ‭amount‬ ‭already‬ ‭taxed‬ ‭in‬ ‭this‬ ‭respect‬ ‭shall‬ ‭be‬ ‭deducted‬ ‭and‬ ‭the‬ ‭balance‬
‭shall be treated as rent chargeable in 10 years in equal proportion.‬

‭ otes:‬
N
‭a.‬ ‭Deposit‬ ‭received‬ ‭in‬ ‭respect‬ ‭of‬ ‭open‬ ‭plot‬ ‭of‬ ‭land‬ ‭is‬ ‭not‬ ‭treated‬ ‭as‬ ‭chargeable‬
‭rent.‬

‭b.‬ I‭ f‬‭deposit‬‭is‬‭refunded‬‭in‬‭the‬‭same‬‭tax‬‭year‬‭then‬‭there‬‭will‬‭be‬‭no‬‭tax‬‭treatment‬
‭in respect of the deposit.‬
‭1‬
‭Chapter 4: Income from Property‬

‭ omponents of chargeable rent‬


C
‭Chargeable rent consists of the following:‬

‭a.‬ ‭Rent of land or building (Actual rent or fair market rent whichever is higher)‬

‭b.‬ ‭Forfeited deposit under a contract for the sale of land or building‬

‭c.‬ ‭10% of deposit from the tenant (not in the case of open plot of land)‬

‭ xample‬
E
‭Mr.‬ ‭A‬ ‭rented‬ ‭his‬ ‭house‬ ‭on‬ ‭1.9.20X4‬ ‭to‬ ‭Mr.‬ ‭K‬ ‭at‬ ‭a‬ ‭monthly‬ ‭rent‬ ‭of‬ ‭Rs.200,000‬ ‭and‬
‭received a deposit of Rs.500,000‬

‭ revious‬ ‭tenant‬ ‭was‬ ‭Mr.‬ ‭Z‬ ‭@‬ ‭Rs.180,000‬ ‭per‬ ‭month‬ ‭who‬ ‭vacated‬ ‭the‬ ‭house‬ ‭on‬
P
‭31.7.20X4‬ ‭and‬ ‭the‬ ‭deposit‬ ‭of‬ ‭Rs.300,000‬ ‭was‬ ‭refunded‬ ‭to‬ ‭Mr.‬ ‭Z‬ ‭that‬ ‭was‬ ‭received‬‭on‬
‭1.8.20X1‬

‭Calculate the amount of chargeable rent for the tax year 20X5.‬

‭Answer‬

‭2‬
‭ hapter 4: Income from Property‬
C
‭ .‬ T
4 ‭ axability of property income‬

I‭ ncome‬ ‭from‬ ‭property‬ ‭is‬ ‭taxable‬ ‭under‬ ‭normal‬ ‭tax‬ ‭regime‬ ‭at‬ ‭chargeable‬ ‭rent‬ ‭minus‬
‭allowable deductions.‬

‭Allowable deductions from chargeable rent are as under:‬

‭a)‬ R
‭ epairs allowance: 1/5‬‭th‬ ‭of chargeable rent of building.‬
‭[This allowance is irrespective of actual expense on repairs of building.]‬

‭b)‬ ‭Insurance in respect of building.‬

‭c)‬ ‭Property related taxes to government authorities.‬

‭d)‬ ‭Interest, mark up, share of rental income etc. on loan utilized for property‬

‭e)‬ L‭ egal‬ ‭charges‬ ‭to‬ ‭defend‬ ‭title‬ ‭of‬ ‭the‬ ‭property‬ ‭or‬ ‭any‬ ‭suit‬ ‭connected‬ ‭with‬ ‭the‬
‭property in a court.‬

‭f )‬ A‭ ny‬‭other‬‭expense‬‭(not‬‭exceeding‬‭4%‬‭of‬‭chargeable‬‭rent)‬‭paid‬‭or‬‭payable‬‭wholly‬
‭and‬ ‭exclusively‬ ‭for‬ ‭the‬ ‭purpose‬ ‭of‬ ‭rental‬ ‭income‬ ‭including‬ ‭administration‬ ‭and‬
‭collection charges and charges for drafting rent agreement.‬

‭Question 1:‬
‭ ‬ ‭Ltd‬ ‭rented‬ ‭out‬ ‭its‬ ‭building‬ ‭on‬ ‭1.7.20X7‬ ‭@‬ ‭Rs.80,000‬ ‭per‬ ‭month.‬ ‭The‬ ‭company‬ ‭also‬
A
‭received Rs.800,000 as deposit that is not adjustable against rent payable.‬

‭Other information relevant to property income is as under:‬

‭a)‬ ‭Actual repairs and maintenance Rs.65,000‬


‭b)‬ ‭Insurance premium Rs.28,000‬
‭c)‬ ‭Property tax Rs.25,000‬
‭d)‬ T‭ otal‬ ‭interest‬ ‭expense‬ ‭charged‬ ‭by‬ ‭the‬ ‭bank‬ ‭Rs.108,000.‬ ‭Loan‬ ‭was‬ ‭utilized‬ ‭to‬
‭acquire the building.‬
‭e)‬ O‭ ther‬‭charges‬‭include‬‭collection‬‭charges‬‭Rs.36,000‬‭and‬‭charges‬‭of‬‭Rs.45,000‬‭for‬
‭drafting the rent agreement.‬

‭Business income of A Ltd is Rs.1,128,000 net of business expenditures.‬

‭3‬
‭ hapter 4: Income from Property‬
C
‭Advance tax already paid by the company is Rs.400,000‬

‭ equired‬
R
‭Calculate‬ ‭taxable‬ ‭income‬‭and‬‭tax‬‭liability‬‭of‬‭A‬‭Ltd‬‭for‬‭the‬‭tax‬‭year‬‭20X8.‬‭Applicable‬‭tax‬
‭rate is 29%.‬

‭Question 2:‬
‭ r.‬ ‭B‬ ‭rented‬ ‭out‬ ‭his‬ ‭shop‬ ‭to‬ ‭Mr.‬‭Z‬‭@‬‭Rs.150,000‬‭per‬‭month‬‭with‬‭effect‬‭from‬‭1.1.20X8‬
M
‭and received Rs.2,000,000 as deposit not adjustable against rent payable.‬

‭ reviously‬ ‭the‬ ‭shop‬ ‭was‬‭given‬‭on‬‭rent‬‭to‬‭Mr.‬‭Y‬‭in‬‭the‬‭tax‬‭year‬‭20X5‬‭@‬‭Rs.100,000‬‭per‬


P
‭month‬ ‭and‬ ‭received‬ ‭deposit‬ ‭of‬ ‭Rs.1,400,000‬ ‭from‬ ‭Mr.‬ ‭Y‬ ‭who‬ ‭vacated‬ ‭the‬ ‭shop‬ ‭on‬
‭30.9.20X7 and the deposit of Rs.1,400,000 was duly refunded to him.‬

I‭ n‬‭the‬‭month‬‭of‬‭November‬‭20X7‬‭Mr.‬‭B‬‭entered‬‭into‬‭an‬‭agreement‬‭to‬‭sell‬‭the‬‭shop‬‭with‬
‭Mr.‬‭X‬‭and‬‭received‬‭Rs.200,000‬‭as‬‭token‬‭money‬‭(Biyana).‬‭Mr.‬‭X‬‭backed‬‭out‬‭resulting‬‭into‬
‭forfeiture of the said token money.‬

‭Property related expenses were:‬

-‭ ‬ R‭ epairs and maintenance Rs.80,000; and‬


‭-‬ ‭Interest expense Rs.300,000.‬

‭ equired‬
R
‭Calculate‬‭property‬‭income‬‭of‬‭Mr.‬‭B‬‭for‬‭the‬‭year‬‭ended‬‭30.6.20X8‬‭(tax‬‭year‬‭20X8)‬‭and‬‭tax‬
‭liability thereon, if any.‬

‭4‬
‭Chapter 4: Income from Property‬

‭Answer to Question 1:‬


‭ Ltd‬
A
‭Tax Year 20X8‬
‭ omputation of taxable income and tax liability‬
C

‭Income from property‬


‭Rent of building 80,000 x 12‬ ‭960,000‬
‭10% of deposit from the tenant‬ ‭80,000‬
‭Chargeable rent‬ ‭1,040,000‬
‭Less:‬‭Admissible deductions‬
‭1/5‬‭th‬ ‭repairs allowance‬ ‭208,000‬
‭Insurance premium‬ ‭28,000‬
‭Property tax‬ ‭25,000‬
‭Interest expense‬ ‭108,000‬
‭Other expenses‬
‭Collection charges‬ ‭ 6,000‬
3
‭Legal charges for rent agreement‬ ‭45,000‬
‭81,000‬
‭Restricted to 4% of chargeable rent‬ ‭41,600‬ ‭ 10,600‬
4
‭629,400‬
‭ usiness income‬
B
‭Business income‬ ‭ ,128,000‬
1
‭Taxable income‬ ‭1,757,400‬

‭ ax liability‬
T
‭Income tax on Rs.1,757,400 @ 29%‬ ‭ 09,646‬
5
‭Less: Advance Tax paid‬ ‭400,000‬
‭Tax payable with the return of income‬ ‭109,646‬

‭5‬
‭Chapter 4: Income from Property‬

‭ nswer to Question 2:‬


A
‭Rent of shop‬
‭1.7.20X7 – 30.9.20X7 @ Rs.100,000 per month‬ ‭ 00,000‬
3
‭1.1.20X8 – 30.6.20X8 @ Rs.150,000 per month‬ ‭900,000‬ ‭1,200,000‬

‭ orfeited deposit / token money under an agreement to sell‬


F ‭200,000‬
‭Unadjustable advance‬
‭Amount received from the new tenant‬ ‭ ,000,000‬
2
‭Less: Amount already taxed:‬
‭In the tax year 20X5 Rs.140,000‬
‭In the tax year 20X6 Rs.140,000‬
‭In the tax year 20X7 Rs.140,000‬ ‭ 20,000‬
4
‭1,580,000‬
‭10% of Rs.1,580,000 is included in the chargeable rent.‬ ‭158,000‬
‭Total chargeable rent‬ ‭ ,558,000‬
1
‭Less: Repairs allowance 1/5‬‭th‬ ‭of chargeable rent‬ ‭311,600‬
‭Interest expense‬ ‭300,000‬ 6 ‭ 11,600‬
‭Taxable property income‬ ‭946,400‬

‭ ax liability (Non-salaried case)‬


T
‭Income tax on Rs.800,000‬ ‭ 5,000‬
1
‭Income tax on Rs.146,400 @ 15%‬ ‭21,960‬
‭Tax liability‬ ‭36,960‬

‭6‬

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