The Hindu Business Line : Tax effect of dealing in flats

Will I be assessed in respect of the rental income for the entire year 2003-04, or will the rent be assessed only in respect of the amount that is receivable up to August 2003.

As I am unable to find a reliable tenant I am likely to keep the flat vacant. What will be the tax implication for the next year?

If I sell a flat and invest the entire proceeds in a new flat, will I be eligible for a full exemption from capital gains?

If I purchase a flat jointly in my name along with my sons who are majors sharing the flat equally, can each of us (joint owners) claim the deduction under Section 24 and the rebate under Section 88 independently and if so up to what limit?

If I take a loan for repairing certain leakage defects and also the doors and windows of an existing flat, will the interest on loan qualify for deduction under Section 24 and the principal repayment for rebate under Section 88?

R. Doraiswamy

Reply

The annual value of a property shall be computed on the following basis:

Property let throughout the previous year: Rent received or receivable or the sum for which the property can be reasonably be expected to let whichever is higher less municipal taxes paid.

Let out for the part of the year and vacant for the part of the year or the property is vacant throughout the year: The actual rent received or receivable if the same is lesser than the sum for which the property can be reasonably expected to let because of the vacancy else the sum for which the property can be reasonably be expected to let, less municipal taxes paid.

In respect of one self occupied property at the option of the assessee: Nil.

In respect of other properties which are self occupied: The sum for which the property might reasonably be expected to let less municipal taxes paid.

In the above cases where the property is let and where any part of the rent cannot be realised by the owner from the tenant in determining the rent received or receivable the unrealisable rent should be reduced in arriving at the annual value subject to the rules made in this behalf.

In the reader's case, therefore, if the rent that is receivable up to August 31 is lesser than the sum for which the property can reasonably be expected to let for the full year because of the vacancy the same, as reduced by the municipal taxes may be taken as the annual value and deductions in respect of interest and a further deduction of 30 per cent of the annual value may be claimed as a deduction.

If the property is fully vacant throughout the previous year, the annual value will be taken as NIL for the sum received or receivable by way of rent will be NIL which will be lesser than the sum for which the property can reasonably be expected to let.

Therefore, if the reader keeps the property vacant throughout the previous year, there will be no income from the property, which will be taxable.

On sale of a residential house and reinvestment in another residential house an exemption under Section 54 can be claimed.

This exemption is available subject to the following conditions:

The assessee is an individual or HUF.

The gain arises from the transfer of a residential house being a long-term capital asset.

The income from such asset is chargeable to tax under the head income from house property.

The exemption would be available to the following extent:

If the amount invested is more than or equal to the capital gain, the whole of the capital gain.

If the amount invested is less than the capital gain then to the extent invested.

Thus, if the reader invests the entire proceeds in a new flat there will be no liability to capital gains tax.

If a property is co-owned, each of the co-owners can claim the deduction under Section 24 in respect of their share of interest and also the rebate under Section 88 in respect of their share of the principal repayment.

Each co-owner can claim the maximum eligible deduction and rebate. The maximum eligible deduction in respect of interest if the property is self-occupied will be

If the property is purchased or constructed with capital borrowed on or after 01.04.1999 and if the purchase or construction is completed within three years from the end of the year:

in which the capital is borrowed - up to Rs 1,50,000 and

in every other case — up to Rs 30,000.

If the property is let, the interest can be claimed without any ceiling limit.

The maximum amount that will be eligible for rebate in respect of the principal repayment will be Rs 20,000 subject to an overall limit under Section 88 of Rs 1,00,000. The rebate will be available at a percentage, which will depend on the gross total income of the reader.

Interest on any loan taken for purchase, construction, repairs, renewals or reconstruction will qualify for deduction under Section 24.

In respect of rebate under Section 88, the same is available only for the principal repayment of loan taken for purchase or construction and not for a loan taken for repairs of a house property.

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