What is the tax of treatment of unrealised rent which is subsequently realised?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 rohith asked almost 3 years ago

Hi Can I know, What is the tax of treatment of unrealised rent which is subsequently realised?

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 veeru answered over 2 years ago

Tax treatment of arrears of rent. What are the basic conditions as provided in section 22 of the Act to tax any income under the head “Income from house property”? Charging section Section 22 of the Act is the charging section for taxing any income under the head “Income from house property”. The charging section reads as follows : The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head “Income from house property”.

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Open uri20170510 32134 1c996lj?1494421732 Anil answered almost 3 years ago

1. Discussion on charging section i.e. section 22 with focus on meaning of various terms viz: Building Land appurtenant to a building Owner Deemed owner Property used for the purpose of business or profession 2. Tax treatment of composite rent : Composite rent i.e. rent of building and charges for various services. Composite rent i.e. rent of building and rent of other assets. 3. Tax treatment when un-realised rent is subsequently realised. 4. Tax treatment of arrears of rent. What are the basic conditions as provided in section 22 of the Act to tax any income under the head “Income from house property”? Charging section Section 22 of the Act is the charging section for taxing any income under the head “Income from house property”. The charging section reads as follows : The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head “Income from house property”. Considering section 22, following are the conditions to be satisfied to tax any income under the head “Income from house property”: There should be a property consisting of building or land appurtenant thereto. The property should be owned by the assessee. The property should not be used by the owner of the property for the purpose of his business or profession, the profit of which is chargeable to income-tax. What are the major points to be kept in mind while interpreting the provisions of section 22, i.e., the charging section? Important points to be kept in mind as drawn from section 22 ♠ Tax under this head is not levied on the rent of the property but it is on the capacity of a property to earn income. The basis of measurement of the capacity of property to earn income is “Annual Value” (i.e., Gross Annual Value). This fact can be confirmed from the charging section which says as follows : “Annual value” of a property, consisting of building or land appurtenant thereto, of which the assessee is the owner, shall be charged to tax under the head “Income from house property”. ♠ Rental income of any property, being building or land appurtenant thereto, is only charged to tax under this head. Hence, rent of vacant plot is not charged to tax under this head. ♠ If the property being rented is building or land appurtenant thereto but the assessee is not the owner of the property, then the rental income will not be charged to tax under this head. ♠ It will make no difference whether renting is the business of the assessee or not. In other words, on satisfaction of above conditions, rental income from building or land appurtenant thereto will be charged to tax under the head “Income from house property”, even if the assessee is doing the business of renting of properties. How is income from a let-out property computed? Manner of computation of Income from house property (in case of let-out property) The provisions relating to computation of computation of income chargeable to tax under the head “Income from house property” have already been discussed in study material and in case study (Day 6). However, for ease of reference the relevant portion of these provisions is reproduced below : Manner of computation of income from house property in case of a let-out property : Gross annual value (*) XXXX Less.- Municipal taxes paid during the year XXXX Net Annual Value (NAV) XXXX Less.- Deduction under section 24 Deduction under section 24(a) @ 30% of NAV XXX Interest on borrowed capital under section 24(b) XXX XXXX Income from house property XXXX (*) Gross annual value is determined in following three steps : Step 1: Compute reasonable expected rent of the property (Note 1). Step 2: Compute actual rent of the property (Note 2). Step 3: Compute gross annual value (Note 3). Rent pertaining to vacancy period is to be deducted from amount derived at step 3 Note 1 Reasonable expected rent will be higher of the following : ➣ Municipal value of the property; or ➣ Fair rent of the property. If a property is covered under the Rent Control Act, then the reasonable expected rent cannot exceed standard rent. In other words, in case of a property covered under the Rent Control Act reasonable expected rent will be higher of the municipal value or fair rent subject to standard rent of the property. Note 2 It is the actual annual rent for which the property is let-out during the previous year. While computing actual rent, rent pertaining to vacancy period is not to be deducted. Treatment of unrealised rent while computing actual rent: Unrealised rent: It is the rent of the property pertaining to the previous year, which the owner of the property could not recover from the tenant. If following conditions are satisfied, then unrealised rent pertaining to the previous year is to be deducted from actual rent of the previous year: ➣ The tenancy is bona fide. ➣ The defaulting tenant has vacated the property, or steps have been taken to compel him to vacate the property. ➣ The defaulting tenant is not in occupation of any other property of the assessee. ➣ The assessee has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless. Note 3 Gross annual value will be higher of amount computed at step 1 or step 2. What is the treatment of refundable deposit, non-refundable deposit and advance rent while computing annual rent of a property? Following important points should be kept in mind while computing annual rent of a property : Non-refundable deposit received from tenant is to be included in annual rent, i.e., rent received or receivable. Non-refundable deposit is to be added to annual rent on a pro rata basis. Refundable deposit cannot be added to annual rent. Further, notional interest on refundable deposit can be added to annual rent only if it is proved that such deposit is given to compensate for non-payment of rent or short payment of rent. Deposit taken for purposes like ensuring timely payment of rent, proper security of property, etc., cannot be added to annual rent. Advance rent cannot be considered in rent received or receivable to be used for the purpose of computation of GAV. Deductions available while computing income from house property Detailed discussion on various deductions available while computing income from house property is already provided in study material as well as on day 6 of programme. However, for ease of understanding the same points are once again discussed over here. While computing income from house property, only following items can be claimed as deductions. It should be noted that any item other than following three items cannot be claimed as deductions while computing income from house property: Deduction on account of Municipal taxes paid by the assessee during the year. Deduction under section 24(a) @ 30% of Net Annual Value. Deduction under section 24(b) on account of interest on capital borrowed for the purpose of purchase or construction of the property. Deduction on account of Municipal taxes Assessee can claim deduction on account of Municipal taxes levied on the property by any local authority. Municipal taxes are deducted from the gross annual value of the property. Deduction on account of Municipal taxes is available if following conditions are satisfied : ➣ Municipal taxes are borne by the owner; and ➣ Municipal taxes are actually paid by the owner during the previous year. The remaining amount left after deducting Municipal taxes (from gross annual value) is called as “Net Annual Value”. Following is the manner of claiming deduction on account of Municipal taxes : Gross annual value (*) XXXX Less.- Municipal taxes paid during the year XXXX Net Annual Value (NAV) XXXX Common mistakes made by the assessees while claiming deduction on account of Municipal taxes Following are the few common mistakes made by the assessees while claiming deduction on account of Municipal taxes : ♠ Municipal taxes not paid upto 31st March, i.e., paid in next year. However, owner makes mistake by claiming deduction on account of outstanding Municipal taxes. Example : Mr. Rahul has rented a building at a monthly rent of Rs. 84,000. Municipal taxes of the property for the year 201 2-13 amounting to Rs. 25,200 are paid by him in April, 2013. In this case, Municipal taxes are not paid by him during the year 2012-13 but are paid in the next year. Hence, he cannot claim the deduction of Municipal taxes of Rs. 25,200 while computing income from house property for the year 2012-13. ♠ Municipal taxes paid by the tenant and the owner makes mistake by claiming deduction of taxes paid by the tenant. Example : Mr. Kunal has rented a building at a monthly rent of Rs. 84,000. As per the rent agreement, the Municipal taxes of the property are to be born by the tenant. In this case, Mr. Kunal cannot claim deduction on account of Municipal taxes, since the Municipal taxes are paid by the tenant and not by the owner, i.e., not by Mr. Kunal. ♠ Municipal taxes pertaining to earlier year or Municipal taxes pertaining to future years paid in advance are not claimed by the assessee as deduction in the year in which they are paid. The assessee makes mistake by not claiming the entire Municipal taxes paid during the year. He may make a mistake by claiming only the amount of Municipal taxes pertaining to the year for which income from house property is being computed. Example : Mr. Kunal has rented a building at a monthly rent of Rs. 84,000. During the year 2012-13, he paid following amount on account of Municipal taxes of the above property : Rs. 25,200 on account of outstanding Municipal taxes pertaining to the year 2011-12. Rs. 8,400 on account of Municipal taxes for the year 2012-13. Rs. 28,400 on account of advance Municipal taxes for the year 2013-14.

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