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Taxability of income from house property set to change
July, 22nd 2010

The revised discussion paper on Direct Tax Code (DTC) has addressed some of the key concerns raised by various stakeholders on the DTC Bill, 2009.

One of the key concerns from the common tax payer was in respect of the taxability of income from house property under DTC vis-a-vis the Income Tax Act, 1961.

In this context, some important concerns have been considered by the government and changes proposed accordingly.

Self-occupied property

Under the current provisions of the Act, a deduction can be claimed for interest paid on the housing loan for a self-occupied house property of up to Rs 1.5 lakh in a financial year subject to the fulfilment of the prescribed conditions.

Under the DTC Bill, the deduction for interest on housing loan for self-occupied house property was not specified and hence, it was proposed to be withdrawn. Based on the representations made to the government, the revised discussion paper on DTC proposes to re-instate the deduction of Rs 1.5 lakh in respect of one self-occupied property.

Taxability of rental income

A significant change was proposed under the DTC in respect of taxability of the income from house property. It was proposed that income from house property shall be the gross rent less specified deductions. Furthermore, the gross rent was to be higher than (a) the amount of contractual rent for the financial year; and (b) the presumptive rent calculated @ 6% p.a. of the rateable value fixed by the local authority. However, in a case where no rateable value has been fixed, 6% was to be calculated with reference to the cost of construction or acquisition of the property.

Concerns were also raised in respect of determination of notional rent on presumptive basis with reference to the cost of construction/acquisition. It was argued that this could result in an inequitable situation as it may discriminate against tax payers who have acquired the house property recently vis-??-vis tax payers who have acquired it much earlier on the ground that cost of the property is also a function of inflation.

Furthermore, the determination of notional rent for computing income from house property could result in unnecessary litigation, which DTC aims to avoid.

Issues related to rental income

The revised discussion paper on DTC has taken note of these issues. Accordingly, it has been proposed that gross rent will not be computed at a presumptive rate. In the case of a let-out house property, gross rent will be the amount of rent received or receivable for the financial year. In respect of the deductions to be allowed from the gross rent, the details are awaited in the revised DTC Bill to be released by the government.

As for the house property which is not let out, the gross rent will be nil. As the gross rent will be taken as nil, no deduction for taxes or interest etc will be allowed. However, only exception is in the case of one-house property which is self-occupied wherein an interest deduction of up to Rs 1.5 lakh is proposed to be allowed as discussed above.

Caution point

Currently, if a tax payer has more than one house property which are not let out, then his option of one-house property is considered as self-occupied while other house properties are subject to tax as deemed to be let out and that he can claim deduction for the actual amount of interest paid on housing loan without any limits. However, now the concept of deemed to be let out is proposed to be done away with.

Therefore, unlike as at present, the taxpayer would not be eligible to claim deduction for interest paid on house loan for his house properties that are not let out except for one self-occupied house property and that too, up to the specified limits as mentioned above.

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