Income from house property

T. Banusekar

I PURCHASED a flat in 1993, for which I took a loan from LIC Housing Finance.

I claimed the interest payment as a deduction under Section 24 in computing income from house property. I also claimed rebate under Section 88 in respect of the principal repayment of the housing loan.

In June 2001, I also took another loan from LIC Housing Finance for this flat's renovation. This flat is let out, and I stay in rented premises. Kindly clarify whether the principal repayment in respect of the second loan taken for renovation of the said flat will qualify for rebate under Section 88, and also whether the interest on the second loan can be claimed as a deduction under Section 24 in computing income from house property?

K. Satyanarayana

Reply

Under Section 24, in computing income from house property, a deduction can be claimed in respect of interest on capital borrowed for purchase, construction, repair, renewal or reconstruction of a house property. Therefore, a deduction can be claimed in respect of the interest on the second loan taken for renovation of the house property by the reader in computing the income under the head, `income', from house property.

Under Section 88, the principal repayment in respect of a loan taken for construction or purchase of residential house property will qualify for rebate. As the second loan is not taken either for construction or purchase of residential house property but for the renovation of the same, the principal repayment will not qualify for rebate under Section 88.

Query

I propose to create a private trust for the benefit of my two daughters. I would like to know if I can create two private trusts in the names of each of my daughters for the benefit of their education and marriage? I would like to know how a trust is to be created? If this is done, will each one of these four private trusts be assessed separately? Can a trust carry on a business and, if so, what will be the taxability in respect of the same?

Jitendra Mehta

Reply

A private trust may be oral or a written one. An oral trust may be treated on par with a written trust, if the trustees set out the purpose, the beneficiaries and trust properties and forward the same to the assessing officer within three months from the date of declaration of the trust. A written trust may be either specific or discretionary.

A specific trust is one where the trust's beneficiaries are specific and their shares in the income and corpus are also specific. A discretionary trust is one where the individual shares in the income and corpus of the beneficiaries is indetermine and unknown. The manner of taxability of the various categories of trusts is as shown in the Table. A trust can carry on a business. On the mode of creating a private trust, the reader is advised to seek professional advice.

Click here for Table

On the question of creating two private trusts in the name of each of the daughters for their marriage and education, aggregating in all to four private trusts, and having it assessed as four entities, the reader will be well-advised to avoid such a risky proposition.

It may also be noted that if the daughters are minors, the income arising from the trust will be clubbed in the hands of the parent in accordance with Section 64(1A), unless the trust is an accumulation trust whereby the benefits from the trust are deferred to the children beyond the age of minority.

Query

I had invested in my minor daughter's name, a sum of Rs 25,000 in Rajalakshmi Unit Scheme, 1992. On premature termination of the scheme on August 30, 2000, Rs 82,712.49 was received from the UTI. Is the difference of Rs 57,712.49 taxable as long-term capital gains, or is the same taxable as interest?

C. K. Nair

Reply

The UTI, on a year-to-year basis, will have declared a dividend under the scheme. This sum will have to be offered as dividend income on a year-to-year basis if the assessee follows the mercantile system of accounting in respect of this source. This, however, will be subject to the deduction that would have been available under Section 80L up to assessment year, 1997-98, and thereafter, will have been exempt under Section 10(33).

In respect of this source of income, if the reader follows the cash system of accounting, the sums declared by the UTI on a year-to-year basis as dividend will be the dividend income of the assessment year 2001-02 (previous year 2000-01) in which case the same would be fully exempt under Section 10(33).

Any sum received in excess of the amount invested as increased by the total amount of dividend, will be taxable as long-term capital gains subject to the benefit of indexation. Likewise, a long-term capital loss may also be computed on the termination of the scheme.

Query

An individual has purchased a vacant land. For registration of the same, stamp duty and registration fee have been paid. No house property has been built on the land. Will the duty and registration fee qualify for rebate under Section 88? If yes, clarify whether this will qualify for rebate in the year in which the land is purchased, or in the year in which the house is constructed on such land if such year is different from the year in which the land is purchased?

R. Srinivasan

Reply

Stamp duty, registration fee and other expenses for the transfer of a house property being purchased, or constructed out of borrowed funds from certain specified institutions or from a bank will qualify for rebate under Section 88. The Section specifies that the stamp duty and registration fee paid by the reader for transfer of a vacant land to the reader will not qualify for rebate under Section 88.

However, in the columnist's view, the same should qualify for rebate, for Section 88 refers to construction out of borrowed funds that should naturally include the charges and fee on the cost of land purchased for in such a case, no stamp duty or registration fee will be paid for the construction, but can only be on the purchase of the land used for constructing the residential house.

It may also be noted that a contrary view in the matter will lead to a situation where registration fee and stamp duty on land will qualify for rebate under Section 88, where a house is purchased while the same will not qualify when a house is constructed, that could not have been the intention. Given this view, the same should qualify for rebate only when the house is constructed.

Business Line invites queries on personal taxation issues to this column. They will be answered in the forthcoming issues of Business Line. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600002, or by e-mail to vaidy@thehindu.co.in. (Readers are requested to mention `Tax Talk' in the subject line of their e-mails.)