House Property

1. House Property This is the only head where Income is taxed on Notional Basis. The taxability may not necessarily be of actual rent or income received but the potential income, which the property is capable of yielding. Accordingly, if a person owns a property which is lying vacant, notional income with respect to such property may be liable to tax even though the owner may not have received any income from such property. According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income under head of house property. In every section from 22-27 there are detail specification of house property income. It is defined as income earned by a person through his house or land.

2. Income Comes Under Head of House Property: Annual value of building or land owned by assessee. There is a charge on the potential of property to generate income not on the rent received. But if property is used for making profit in business then it will be taxable not under this head but will be taxable under head of profit in business/ profession.

3. BASIS OF CHARGE For an Income to be assessed under this head following condition need to be fulfilled: • The property should consist of any Buildings or any land attached to such building may be in the form of roads, garden, garage, cattle shed etc. •   The assessee should be owner / deemed owner of the property; wherein Deemed owner includes the following: • Transfer of Property by an Individual to his/ her Spouse/ Minor child without adequate monetary consideration. • Holder of an indivisible estate shall be the owner of properties in that estate.  

4. Property held by a member of Co-operative society/ Company/ Association of Persons.   • Person who has acquired a property under a Power of Attorney Transaction.  •  Person who has acquired a property under a Lease of 12 years or more, (excluding any rights by way of a lease from month to month or for a period not exceeding one year). • The Property is not used for his Business/ Profession the profits whereof are chargeable to Income Tax.

5. Properties chargeable to tax • Rental income from letting out of residential and commercial buildings is covered under this head of income. • Letting out of buildings or land attached thereto covered is taxable under this head; if only land attached to a building is let out then chargeable under Income from Other Sources else under Business Income if it is a regular business of letting out. • Taxability also depends on letting out of equipments along with the House Property, dealt below under Composite Rent.

6. How to calculate annual value of property According to annual value, house property is calculated as • Annual value of a house is zero if property is in the occupation of the owner for his residence for the whole year & if no other benefit is availed by owner from his property. There will be no deductions as given under section 24 except deduction interest on borrowed capital • If the owner lets out the house or a part thereof for any period of time during the previous year the annual value of the property or part has to be calculated for the whole year and the proportionate annual value of the period for which the house or any part thereof was in the occupation of the owner for his own residence shall be deducted from the gross annual value. The assessee in such cases cannot claim deduction under section 24 in excess of the annual value so determined.

7. The assessee occupies more than one house for his residence, the above exemption is applicable only to one such house at the option of the assessee. The annual value of the other house or houses shall be computed as if the house or houses are let • In case where the assessee has only one residential house but it cannot be occupied by the owner by reason of that owing to his employment, business or profession carried out on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house shall be taken to be nil if the house is not actually let and no other benefit is derived by the owner from such house. The assessee cannot claim any deduction in such case as allowable under section 24 of the Act except for interest on borrowed capital subject to a maximum of Rs. 15,000/-

8. HOW COMPUTATION IS MADE?

9.   SELF OCCUPIED PROPERTY Income Tax Act allows an Individual to claim negative House Property income to be set off against other heads of income. This is possible only in cas e of a self occupied property, basic factors affecting it being: • Interest on Borrowed Capital: If Capital is borrowed by an assessee for funds utilization towards Self Occupied Property then following situations come into picture:

11. A House Property owned by the assessee which is neither actually occupied by the assessee nor any benefit is derived from such property owing to employment or Business/ Profession carried on at any other place, wherein the assessee during the previous year stays at any other leased accommodation elsewhere, then in that case the assessee is allowed to claim such property as Self Occupied. • Even if assessee is the owner of two or more House properties, he can claim only one of them as Self Occupied, at his discretion and the rest will be treated as DEEMED TO BE LET OUT PROPERTIES and calculation of Income from House property will be done accordingly. • Any House Property if it is to be claimed as Self Occupied in a Previous year is Let Out for even One day of a year it will be taken as Let Out for the whole of the year and computation will be done accordingly.

12. CAPITAL GAINS

13. INTRODUCTION • CAPITAL GAINS “Any profit or gains arising from the transfer of capital assets is taxable under the head capital gains in the previous year in which the transfer has taken place.”

14. Conditions for Gains to be charged under Capital Gains There should be a capital asset. • The capital asset should be transferred by the assessee. • Such transfer should take place during the previous year. • The profits or gains should arise as a result of this transfer. • Such profit or gain should not be exempted from tax under sections 54, 54B, 54D, 54EC, 54F and 54G & 54GA.

15. DEFINITION OF CAPITAL ASSETS • Capital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.

16. EXCEPTIONS TO CAPITAL ASSETS a)Any stock-in-trade, consumable stores or raw material held for the purposes of business or profession. b) Movable property of the Assessee including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent on him. The exception to this condition is jewellery, which is treated as a capital asset, even though it is meant for personal use.

17. CONTD……. • Agricultural land in India provided it is not situated in urban area. • 6 ½ % Gold Bonds, 7% Gold Bonds or National Defence Gold Bonds, issued by the central government. • Special Bearer Bonds, and • Gold Deposit bonds issued under Gold Deposit Scheme of 1999.

18. SHORT TERM AND LONG TERM CAPITAL ASSETS “Short term capital assets” means a capital asset held by the assessee for not more than 36 months, immediately prior to its date of transfer. However, the following assets are treated as short term assets if they are held for not more than 12 months, they are: • Equity or preference shares in a company • Securities like debentures, government securities listed in a recognized stock exchange in India. • Units of UTI and • Units of mutual funds. • An asset other than a short-term capital asset is regarded as a “long term capital asset”.

19. METHOD OF DETERMINING PERIOD OF HOLDING • In case when the assessee acquires an asset as a gift or by a will, the period for which the previous owner holds the asset is also included.

20. TRANSFER OF CAPITAL ASSET [Sec2(47)] Any transaction involving the allowing of the possession of any movable property to be taken or retained in part of performance of contract of the nature referred to in the sec53a of the transfer of property act,1982 Any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company association of person or by way of agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property

21. WHAT IS INCLUDED IN TRANSFER Transfer Includes Sale Exchange Relinquishment Extinguishment Compulsory Acquisition Conversion of Capital Asset Into Stock in Trade[sec(47)(iv)]

22. WHAT IS NOT INCLUDED IN TRANSFER Distribution of Assets to Its Shareholder on Its Liquidation [Sec46(1)] Distribution of Capital Assets in HUF to Its Member at the Time of Total or Partial Partition [Sec 47(1)] Transfer of a Capital Asset Under a Will or an Irrevocable Trust or a Gift [Sec 47(iii)] Transfer of a Capital Asset by a Company to Its Wholly Owned Indian Subsidiary Company [Sec 47(iv)] Transfer of a Capital Asset by a Wholly Owned Subsidiary Company to Its Indian Holding Company [Sec 47(v)]

23. CONTD…. Transfer in Case of Amalgamation Sec[47(vi)] Transfer in Case of Demerger Sec[47(vi B)] Transfer of Agricultural Land in India Effected Before March 1, 1970 [Sec 47(viii)] Transfer of a Capital Asset , Being Any Work of Art ,Scientific or Art Collection, Book, Drawing, painting, photograph Etc [Sec47(ix)] Transfer by Way of Conversion of Bonds or Debenture of a Company Into Shares or Debenture of That Company [ Sec 47(x)]

24. SHORT TERM CAPITAL GAIN 1)Find full value of consideration  2)Deduct the followings. a)    Expenditure incurred wholly and exclusively in connection with such transfer. b)   Cost of acquisition. c) Cost of improvement  3) From resulting sum deduct exemption provided by u/s54 B, 54 D, 54 G, 54GA 4) The balancing amount is Short Term Capital Gain. 

25. LONG TERM CAPITAL GAIN 1)   Find full value of consideration 2)   Deduct the followings a) Expenditure incurred wholly and exclusively in connection with such transfer. b) Indexed Cost of acquisition. c)  Indexed Cost of improvement. 3)  From resulting sum deduct the exemption provided by section 54, 54 B, 54 D, 54 EC, 54 F, 54 G, 54 GA The balancing amount is Long Term Capital Gain/Loss.

26. FULL VALUE OF CONSIDERATION Full value means whole price without any deduction and consideration in which transferor receives in lieu of asset he parts with.

27. EXPENDITURE ON TRANSFER Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. This means expenditure incurred which is necessary to effect the transfer like brokerage commission, cost of stamp, registration fees and all

28. COST OF ACQUISITION Cost of acquisition of an asset is the value for which it is acquired by the Assessee, expenses of capital nature for acquiring the title are include in cost of acquisition.

29. NOTIONAL COST OF ACQUISITION Cost to previous owner is considered as cost of acquisition to the assessee if that capital asset become property in cases like. a) Distribution of asset on partial or total partition of Hindu Undivided Family. b) Acquisition of property under gift and will. c) Acquisition of property by a HUF where one of its member has converted his self acquired property into joint family property after Dec 31- 1969.

30. COST OF IMPROVEMENT -    It means all expenses of capital nature incurred in making any addition/ alteration to capital asset by assessee. • Expenditure after 31 mar 1981

31. INDEXED COST OF ACQUISITION OR IMPROVEMENT Cost Inflation Index. Cost inflation Index for any year means such index as the central government may , having regard to 75% of average rise in consumer price index for urban non manual employees of the immediate preceding pervious year to such year, by notifying in official gazette

32. COMPUTATION OF INDEXED COST. Case1) Capital asset acquired before 1-4-1981 Cost X Cost Inflation Index in the year of Transfer Or FMV on 01.04.1981 Cost Inflation Index for yr 1981-82 (whichever is high) 2) Capital asset acquired after 1-4-1981 Cost X Cost Inflation Index in the year of Transfer Cost Inflation Index for yr of purchase

33. 3) Capital asset acquired by assesse before 1-4-1981 & originally acquired by previous owner before 1-4-1981. Cost to Previous Owner X Cost Inflation Index in the year of Transfer Or FMV on 01.04.1981 Cost Inflation Index for yr 1981-82 (whichever is high) 4) Capital asset acquired by assesse after 1-4-1981 & originally acquired by previous owner before 1-4-1981. Cost to Previous Owner X Cost Inflation Index in the year of Transfer Or FMV on 01.04.1981 CI Index for yr the asset is first held by assesee (whichever is high) 5) Capital asset acquired by assesse after 1-4-1981 & originally acquired by previous owner after 1-4-1981. Cost to Previous Owner X Cost Inflation Index in the year of Transfer CI Index for yr the asset is first held by assese

34. Indexed Cost of Improvement • 1. Ignore Improvement Before 1.04.1981 • Indexed Cost • =Cost of Improvement X CI Index in Yr of Transfer • CI Index in Yr of Improvement

35. INTRODUCTION OF A CAPITAL ASSET AS CAPITAL CONTRIBUTION Section 45(3) Taxable in the hands of the partner Consideration: Amount recorded in the books of accounts

36. DISTRIBUTION OF CAPITAL ASSETS ON A FIRMS DISSOLUTION Section 45(4) Chargeable in the hands of the firm Consideration : fair market value as on the date of transfer

37. SLUMP SALE SEC 50B Slump sale means transfer of one or more undertakings as a result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales –Section 2(42C).

38. SLUMP SALE • Cost of acquisition : Net worth • No indexation • Short term/long term • Value of assets : Depreciable/non-depreciable • Value in the hands of purchaser.

39. CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO SHARES [SEC 49(2A)]: • 1) Any transfer by way of conversion of debentures, debenture – stock, or deposit certificates in any form, of a Co. into shares or debentures of that co. is not regarded as a transfer giving rise to Capital gains. • 2) Cost of Acquisition will be the cost of debentures, debentures – stock or deposit certificates which has been appropriated towards to shares or debentures in case there is sale of above transferred assets giving rise to capital gains.

40. CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO SHARES [SEC 49(2A)]: In case of conversion of debentures into Shares:  1)  Cost of Debentures will be the Cost of acquisition of shares. 2)  To find out whether or not shares are LTCA or STCA, the period of holding shall be determined from date of allotment of shares. 3)  The indexation will start from the date of conversion of debentures into shares. 4)  Not applicable for preference shares converted into equity shares.

41. CAPITAL GAINS ON TRANSFER OF SECURITY BY DEPOSITORY [ SEC 45(2A) ] 1) Any beneficial will be chargeable to Income tax, if in PY he has had any profits or gains by virtue of transferring of any securities through depository or participant of such beneficial interest. 2) It shall not be income of the depository. 3) Cost of Acquisitions and the period of holding of any securities shall be determined on the basis of the First – In – First – Out (FIFO)

42. Sec 45(2A)(contd.) 4)FIFO shall be applied only in respect of dematerialized holdings, as physical form of shares are still in possession of the investor when there is sale of dematerialized shares. 5) FIFO shall be applied accountwise incase if there are multiple depository accounts, as sale in particular account shall not be construed as sale in other accounts. 6) Date of entry is used for the basis of FIFO.

43. COMPUTATION OF CAPITAL GAINS IN THE CASE OF SELF GENERATED ASSETS.

44. CAPITAL GAINS IN CASE OF BONUS SHARES

45. CAPITAL GAIN ON TRANSFER OF RIGHTS SHARES • For Original Shareholder ( Renouncer ) • Cost of Acquisition : • Cost of acquiring original shares. • Cost of aquiring Rights shares. • Premium Received on renouncement – Short Term Capital Gain. • For the Renouncee • Cost of Acquisition : • Amount paid to Company • Premium paid to the renouncer.

46. CAPITAL GAINS IN CASE OF COMPULSORY ACQUISITION OF AN ASSET [SEC 45(5)] • Applicability : • Transfer of capital asset by way of compulsory acquisition under any law. • Capital asset is transferred (not by way of compulsory acquisition), & consideration is approved or determined by central Gov. or RBI. • Chargeability : • Initial Compensation is full value of consideration. • Charged in the year in which Initial Compensation is received • Enhanced Compensation.

47. OTHER SPECIAL PROVISIONS • Capital Gains in case of Depreciable Assets ( Sec 50 ) • Buy Back of Shares • Transfer of Land & Bldg ( Sec 50 [c])

48. EXEMPTION U/S 54 • Conditions : • Gains are from Transfer of Residential House Property • Applicable only to Individual / HUF • Asset Sold is a Long Term Capital Asset • Assessee should invest in another Residential House Property within the specified time limit. • New asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. • Exemption = Amount Invested OR Capital Gains • whichever is Less.

49. EXEMPTION U/S 54B • Available if agricultural land transferred. The said land should be used by the individual or his parents for agricultural purposes during at least 2 years immediately prior to transfer. • Available only to an individual. • Asset Sold should be Short term / Long term Capital Asset. • Investment in agricultural land (rural or urban) within 2 years. • New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. • Exemption = Amount Invested OR Capital Gains • whichever is Less.

50. EXEMPTION U/S 54D • Available if land or building forming part of an industrial undertaking is compulsorily acquired by the govt and which is used during 2 years for industrial purposes prior to acquisition. • Available to any person. • Asset Sold should be Short term / Long term Capital Asset. • Investment in land or building for industrial purposes within 3 years. • New Asset should not be sold within 3 years of acquisition, otherwise will be treated as a short term capital gain. • Exemption = Amount Invested OR Capital Gains • whichever is Less.