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Homing-in on taxing house property
February, 24th 2007
There is bound to be a time gap between a loan getting sanctioned and the final amount getting disbursed, and tax laws should not utilise this gap to their advantage.

Thanks to generous tax breaks and our inherent tradition of owning houses, the housing industry has boomed to mammoth proportions. It is not only commercial concrete structures that have taken away much of the greenery in cities but also gigantic residential complexes. Tax laws in India have been quick to spot an opportunity and tax the income received.

Clause needing rethink

At present, deductions from house property are a sum equal to 30 per cent of the annual value for repairs and a deduction of Rs 1,50,000 for interest on borrowed funds used for the construction of the property. The principal portion of a house loan repayment has been added to the investment limit of Rs 1,00,000 stipulated under Section 88. Actual municipal taxes are deductible too.

In case the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed (called pre-EMI in banking terminology), deduction of such interest is spread over a period of five years.

This clause needs a rethink, as the focus of the deduction has been to permit a tax-break to the employee and not to specify periods in which loans should be taken or property constructed.

There is bound to be a time-gap between a loan getting sanctioned and the final amount getting disbursed, and tax laws should not utilise this gap to their advantage.

Mixed effect

Morphing the principal payment with Section 88 is having a mixed effect. While the advantage is that one need invest that much lesser in other specified modes of investment, the flip side is that it is common that one exhausts the limit under Section 88 due to Provident Fund and the ubiquitous life insurance premium and does not have a fallback to claim the deduction.

The Finance Minister could probably add a monetary limit to the principal repayment and provide a swap option between Section 88 and Section 24. This would satiate those salaried employees who feel that the HRA allowances work better than the interest deduction, and skyrocketing salaries have ensured that HRA too keeps pace.

Property maintenance

It is rather unfortunate that tax laws have encouraged purchase of a house property but are a bit stiff when it comes to maintaining the property in good condition. In a couple of one-off cases, electricity charges borne by the landlord were treated as deductible from gross annual value where the income is computed on the basis of rent received (ITO vs Smt Durga Devi Bawri 1984 19 TTJ Gau 386) and expenditure on security of premises for the benefit of tenants was held to be deductible (1990 37 TTJ Del 297). While the tax break could be a token amount, it would be worth considering permitting a deduction for genuine maintenance expenses. This would ensure that the taxpayer gets a complete tax solution, as repairs and interest paid are deductible.

Municipal valuation

Wealth tax and gift tax laws suit a self-occupied property owner. The valuation in these cases is on the basis of capitalisation of the annual value for which the benchmark is the municipal valuation. Municipal valuations are way behind present-day market values, which enables one to show a negligible value in the wealth tax return although there is a cap of Rs 50 lakh in the four metros and Rs 25 lakh in other places.

The adherence to municipal valuation would also have to be altered since it could give rise to some rare situations as Ramesan found himself in by letting his property to a company and the company sub-letting it out to a third party which ended up with him having to reflect what the company, and not he, received as income (CIT vs G. Ramesan 1999 151 CTR Ker 70).

While fictional or notional taxation could be expected for uncommon incomes, common income streams such as that from house property should be taxed on actuals.

One cannot fault the Finance Minister for not fixing property income norms when they are not broken, but it remains one of the generous tax breaks in India and one should ensure that this generosity is maintained in days of inflation and unrealistic pricing when it comes to property.

Mohan R. Lavi
(The author is a Hyderabad-based chartered accountant.)

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