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Investment Guidance |
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Income from property and tax |
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Ashish Gupta
outlines the forms of income possible from property and how they are taxed.
A property owner may earn different types of incomes from his property. This depends on the nature of the property and the purpose of its holding. Broadly, a property may either be residential or commercial.
In case one owns residential property, it may either be self-occupied or rented out. If one rents out his residential property, income as rent can be earned. The income earned as rent is taxable in the hands of the recipient. It is taxable under the head Income from House Property.
The tax liability is calculated according to the provisions of Sections 22 to 27, after allowing for the admissible deductions. No deductions other than those specified under the Income Tax Act are permissible.
What is taxed under the head Income from House Property is the inherent capacity of the property to earn income called the annual value of the property. This is taxed in the hands of the owner of the property. Gross annual value is the higher of rent received or receivable, and fair market value or municipal valuation. If however, the Rent Control Act is applicable, the gross annual value is the standard rent or rent received, whichever is higher.
In case a let-out property was vacant for a whole year or any part of the previous year, and owing to such vacancy the actual rent received or receivable is less than the sums mentioned, the amount actually received or receivable will be taken into account while computing the gross annual value.
Net annual value is the gross annual value minus the municipal taxes paid by the owner. This is provided the taxes were paid during the year. No deductions other than these are available. These include: 30% of the annual value as computed, interest on money borrowed for acquisition, construction, repair, and renovation of property on accrual basis. Interest paid during the pre-construction/acquisition period will be allowed in five successive financial years starting with the financial year in which construction/acquisition is completed. This deduction is also available for a self-occupied property and can be claimed up to maximum of Rs 30,000.
Timeframe for eligibility: The Finance Act 2001 had provided that from the Annual Year 2002-03 the amount of deduction available under this clause would be available up to Rs 1.50 lakhs in case the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition or construction is completed before April 1, 2003. The acquisition or construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed.
Capital gains: In addition to the regular rental income, you can also earn income as capital appreciation. In the present era of increasing property prices, there is always a possibility of capital appreciation. An owner may transfer or dispose of his residential property. In case the price realized is greater than the cost of the house, the owner earns a capital gain. It is taxable under the head capital gains. In case the amount realized is reinvested in property or some specified securities, it is not taxable.
Rent from commercial property: A commercial property may be rented out or given on lease. The owner earns a regular income through lease rent. This income is also taxable. It is taxable under the head Income from Business and Profession.
The lease rent earned through leasing out commercial property constitutes business income for the owner of the property. As such, it is taxed as business income. The usual deductions are available on expenses. The expenses should be related to earning the income from the commercial property.
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THE AFFORDABILITY FACTORS |
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A recent survey tries to explain the drivers of affordable housing
In an extensive research study Knight Frank presents a study on 'Affordable Housing' for middle class households within the income bracket of Rs. 3-10 lakh p.a. in seven cities including Pune.
A number of locations are available for their housing needs and based on their unit size preference, they can afford properties in recently developed locations like Aundh, Baner and Viman Nagar as well as in upcoming locations like Magarpatta, Wakad and Hinjewadi. Key highlights of the report:
Good connectivity to frequently travelled places, primarily to work places, is the most important; next is 'good infrastructure' and 'potential for future development'.
The most preferred amenities are 'uninterrupted water supply', 'power backup' and 'high level security systems'.
Most of the prime residential locations prove to be unaffordable for this group. However, a balance can be achieved with conciliation from developers and buyers.
Unit size preference amongst most households is 550 - 1200 sq.ft.
Housing requirement for this income group across the 7 cities is approximately 2.06 million housing units by 2011.
The primary deterrent in providing affordable housing in cities is the high land cost.
Defining affordable
In the absence of an institutional rental market in India, affordable and low cost housing are often confused.
In India, low cost housing is primarily aimed at Economically Weaker Sections (EWS) and Low Income Groups (LIG), and the intervention and involvement of government authorities is likely to be prominent. As per the latest available literatures, households having an annual income of less than Rs.1.5 lakh are termed as LIG, and hence, households belonging to EWS will be lower down.
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GREEN RATING |
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The Indian Green Building Council lays down certain broad criteria on rating green homes...
There has been much talk on the real estate sector going green. An imminent need exists to introduce green concepts and techniques to aid growth in a sustainable manner.
Green concepts and techniques in the residential sector can help address national issues like handling of consumer waste, water efficiency, reduction in fossil fuel use in commuting, energy efficiency and conserving natural resources. Most importantly, these concepts can enhance occupant health and wellbeing.
Against this background, the Indian Green Building Council (IGBC) has launched the IGBC Green Homes Rating System to address the national priorities. This rating programme is a tool that enables the designer to apply green concepts and criteria so as to reduce the environmental impacts, which are measurable. The programme covers methodologies to cover diverse climatic zones and changing lifestyles.
IGBC Green Homes is the first rating programme developed in India, exclusively for the residential sector. It is based on accepted energy and environmental principles and strikes a balance between known established practices and emerging concepts. The system is designed to be comprehensive in scope, yet simple in operation.
BENEFITS
The immediate tangible benefit is the reduction in water and operating energy costs right from day one, during the entire lifecycle of the building The energy savings could range from 20 to 30 percent and water savings around 30 to 50 percent
PRIORITIES
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VAT in realty |
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Value added tax (VAT) has always been a cause of perplexity to the real estate buyers. While some builders are recovering VAT from the customers, there are others who are not charging their customers at all. This has led to much confusion for the property buyers as to whether VAT needs to be paid and if it does need to be paid, what should be the amount. — Neeti Trivedi
Value added tax
The VAT system replaced the sales tax system with the objective of simplifying the tax regime and to avoid the problem of double taxation. VAT is a multi-stage tax levied at each stage of the value chain with the provision that tax credit will be allowed for the tax paid at an earlier stage.
Under the VAT structure, there are two categories of rates - four percent or 12.5 percent. The idea behind this was to bring about uniformity in the levying of tax by different States and simplify the complex structure under the sales tax system. Different States have enacted the VAT Act for their State along with certain variations.
While some States have moved away from the basic rate structure, some have introduced certain exemptions and concessions for the benefit of specific sectors.
In Karnataka, the real estate developers or builders have an option to charge VAT to the customers under two schemes. The first one is the composition scheme where the builder pays four percent of the construction cost as VAT. In this case, he does not claim anything from the individual owners.
Under the second scheme, the builder can collect 12.5 percent of 70 percent of the cost of construction from the individual owners. This works out to 8.75 percent of the total cost of construction. VAT is applicable only to materials and 70 percent of construction cost is representative of the materials cost in construction. VAT is calculated on the cost of the flat, parking space cost and amenities.
While some may think that it is unfair for buyers where the builder opts for the second scheme, it is not so. In the first case, although the builder is paying VAT himself, the additional burden will be passed on to the owners by way of a higher price. Similarly, where the builder is recovering VAT from the owners, the price of the flat would be lower to that extent since VAT is an additional cost to the buyer. Failure to do so may render him uncompetitive in his overall pricing.
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Buying a Home Early Makes Financial Sense |
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The earlier you buy property in your earning years, the better it is for you financially. Shubha Ganesh lists out some questions you must first address to get the best deal.
The high economic growth in the past five years has brought about a big change in the life of the average person. Many young people are joining work early and earning high salaries. Many of them are either single or newly-married with lower financial commitments. There is higher disposable income in their hands. Home loans are relatively easy to get and mortgage rates are getting cheaper. So, the journey of wealth creation now starts in early 20s.
Property as an asset
Easy availability of home loans, declining loan rates and tax concessions imply that with the right amount of planning you can easily buy that dream home early in life. When you analyze it thoroughly, the first house purchase is not just to fulfil your dreams but also to provide for a secure place to live in through the golden years of your life after retirement.
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Investing In A House |
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Buying a house for the purpose of investment will save more tax than in the one for personal use, says Prabhakar Sinha
Investment in a house could be the best way to save tax. As prices of residential units have gone up in the range of Rs 50 lakh and over, tax experts say buying a second house for investment purpose will save even more tax than that over the first house you bought for personal use. When you buy a house for personal use, you can take the deduction from your taxable income against the interest payment on your loan taken to buy the house up to Rs 1,50,000 only. Besides this, you can also avail the benefit of deduction against the repayment of principal amount under section 80C. However, under 80C, you can avail the deduction up to Rs 1,00,000 - but this is inclusive of all the investments like your contribution in EPF, PPF, tax savings mutual funds and school fees of your children among other things. Therefore, normally, if your taxable income is more than Rs 5 lakh, most of the limit provided under section 80C is exhausted because of the compulsory savings scheme. Still, if you take repayment up to Rs 20,000 against principal under section 80C, your net tax savings every year will be Rs 52,350.
This is mainly because the benefit against interest payment is capped at Rs 1,50,000 even if you have taken a loan of Rs 50 lakh to buy a house at 8%, and your interest outgo in the first year will be Rs 3,96,181. The monthly installment on Rs 50 lakh loan at 8% for 20 years will be Rs 41,822. This works out to an annual payment of Rs 5,01,864. Out of this, Rs 3,96,181 will go against the interest payment in the first year and the rest Rs 1,05,683 will go against the principal repayment.
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