Sub-letting a pagdi property

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Priyanka Agarwal

Chartered Accountant

40 Points Joined February 2011

I'm a tenant of a Pagdi Property in Mumbai which I have sub-let. Please suggest what will be the tax treatment of the rent I received from this property? Can I consider myself to be the "deemed owner" of the Property and accordingly treat the rental income under "Income from House Property"? For those who are not familiar with the Pagdi System prevalent in Mumbai: In Mumbai, landlords invented the Pagdi system whereby cash was used as an inducement for the tenants to vacate the premises. The new tenant would pay a Pagdi equalling a substantial percentage of the market value (85 to 90%) of the premises. This was divided between the old tenant and landlord mostly in the ratio of 65:35 landlord to tenant. In this manner, the landlord could make some money off his asset and also avoid paying taxes. The old tenant benefited, the new tenant rented a premises with low rent but by paying the Pagdi.

Replies (4)

Vishal Goel

Chartered Accountant

1693 Points Joined April 2014

Hello,

Rental income in the hands of owner is charged to tax under the head “Income from house property”. Rental income of a person other than the owner cannot be charged to tax under the head “Income from house property”.

Hence, rental income received by a tenant from sub-letting cannot be charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources.

Priyanka Agarwal

Chartered Accountant

40 Points Joined February 2011

Thanks for your reply Vishal! I'm refering to Sec 27 whereby if you have a lease of more than 12 years, you are considered "Deemed Owner" of that House Property and accordingly Income from that House is chargeable under "Income from House Property".

Vishal Goel

Chartered Accountant

1693 Points Joined April 2014

Hello Priya

Yes in ur case, that person will be treated as deemed owner and is liable to income tax for house rent in the same manner as a real owner.

Manoj Jonam

2 Points Joined April 2024

Vishal ji we are the first tenent of a pagadi gala in a industrial estate for last 60 years, if i sublet it on rent then shall this income from rent be treated under income form house property, pls guide