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Tax computation on leased housed property

Lakshmi Devanand, FCA (Proprietor -Lakshmi Devananda & Associates) (106 Points)

07 December 2011

Dear All,

One of my client has let his property on lease. Clarification sought for are:

1. How the income for the above is taxed under house property income. Since, no rents are received, i feel we need to take either munical valuation/fair rental income and tax the same under house property income (as if it has been let out for a monthly rent). I need any circular/guidelines issued if any, on this treatment.

2. If the Lease amount has been invested in shares/made an FD, I feel the same should be taxed under respective head of income say capital gains/income from other sources.

Please confirm the above treatement and kindly give section/any circular/guidelines issues on the above treatment.

Thanks & Regards

Lakshmi Devanand, ACA

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4 Replies

Subramanya (in practice) (109 Points)
Replied 07 December 2011

i dont think d treatment is technically correct...

coz, u r increasing the taxable inc of ua client by taking 2 incomes from same source..

1stly by taking a fair rent as inc from HP which is probably calculated as a % on lease amount..

2ndly by taking the inc derived by investing (the same lease amt) in shares or FD under capital gains/income from other sources ..

so i think initial amt shud b treated as a capital receipt n giv d normal treatment in b/s..n inc derived by investing in shares or FD under their respective head while computing thr inc...

Correct me if i ve gone wrong..

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Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 08 December 2011

1). Please clarify why rent is not received when the client has let his property on lease. Only is there is more than one SOP then one them should be and deemed to be let out property.

2). Please note that the monthly lease rent which is received shall only be chargeable u/s 22 of the I-T Act as Income from House property. Now coming to the point of investing the lease rent in FD’s/shares, then the interest/dividend income would also be separately taxable under Income from other sources. Dividend would be tax free u/s 10(34).

Please note that the income which you received initially should be taxed under that head only. Suppose if you are doing business then all the income which you get primarily from your business is taxable under PGBP head. Now suppose if some of your business income you invest elsewhere, then the income from such investments would be taxable under Income from Other Sources also.

So Lease rent would initially be taxable under House property & the investments made from such income would be taxable under Other Sources.

Lakshmi Devanand, FCA (Proprietor -Lakshmi Devananda & Associates) (106 Points)
Replied 08 December 2011

Dear Mr.Girdhar

Thanks for your valuable inputs.

When a person give the house on lease (owner will get a lumpsum amount say for 3 or 5 years which becomes payable then) and will not receive any rent month on month. Hence, here my question was, Is there any provision to take notional income under the head "income from house property". Because, the section says, rental income will be higher of Standar rent, annual value, municipal valuation or actual rent received.

Here, the assessee is an individual having salaried income and has let one of his flat on lease and not on monthly rent.

Kindly clarify me, if there is any provision/circular/guideline under income tax act for the above treatment.

Thanks & Regards

Lakshmi Devanand, ACA

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 09 December 2011

Unlike Sec15 of the IT Act, which says salary is taxable on due or receipt basis whichever is earlier, there’s no such provision u/s 22 of the act, that the rental income received will be taxable in that way.

So what you can do is show the rental income for the respective year, for each of the year & calculate the Income for HP after availing the deductions for municipal taxes & Std Ded.

I don’t think that it would be correct to show the leased income by way notional income, as the money is already being received & that will be offered for taxation year after year.