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Under Indian Income Tax Law, income from house property is one of the categories where even notional incomes are determined and liable to tax.  Every individual who owns more than two self-occupied properties has to treat the remaining as deemed let out and offer notional rental income.  A property is treated as self-occupied property if the same is used by an individual for his residential usage.  Also, no other benefit should be derived from such property.  Till FY 2018-19, only one house could be treated as self-occupied, and from FY 2019-20, two properties are allowed.  However, it is important to note that the total housing loan interest allowed as a deduction from both the properties together is capped at INR 2 Lakhs. 

The Income Tax provisions treat a property as ‘self‑occupied’ if it satisfies any one of the following conditions:

  1. The owner of the property is using it for his residential usage; or
  2. The property is vacant due to an individual’s employment, business, or profession in another place, where he has to reside in a property not belonging to him.

Let us understand the law with few illustrations. 

Arun, an individual living in Bangalore owns 2 houses and both are utilized for his own usage.  Arun uses Bangalore house for his self-occupation and the other one is situated in his native place outside Bangalore used by Arun himself during his visits to native place.  As per law, Arun can treat both as self occupied properties as both are used for self usage.

Varun, an individual living in Bangalore, owns 2 houses one in Bangalore used for his family and another one in his native place kept vacant.  Varun would need to treat the house situated in a native place as ‘deemed let-out’ property and offer notional rental income.  The house situated in native is not self-occupied, hence the condition (1) mentioned above is not satisfied. The house situated in native, not satisfying condition (2) as Varun stays in his own house in Bangalore.

It is important to note that condition (2) has two parts.  One part states that the house should be vacant due to an individual’s employment or business in another place and hence this property is vacant.  The second part states that the property being used in place of employment or business should not be an individual’s own property.  In Varun’s case, the native property though vacant due to employment in Bangalore, the second part, i.e. individual’s stay in place of employment should be at a property not owned by him is not satisfied. Hence, the native place property though vacant and even if not intended for let-out, still needs to be treated as deemed let-out property offering notional rental income.

From the above illustrations, it is clear that if a property needs to be treated as self-occupied for income tax purposes, then it should satisfy one of the conditions mentioned above.  Also, the income tax provisions have not defined what instances would be treated as own usage.  

Generally, the individual’s personal occupation alone is treated as self-occupied.  The property occupied by parents or any other family members and which is not used by an individual for his personal stay is not treated as self-occupied.  This principle has been upheld in a few Income Tax rulings also.

In case of individuals who qualify as ‘resident & ordinarily resident’ in India are liable to offer global income to tax in India.  They need to apply the above-said principles/ conditions even to the properties they own abroad in addition to properties owned within India.  Suppose an individual who has come to India on employment, owns one house in India (used for self‑occupation) & another one abroad in USA (kept vacant & not used for letting out or self-usage), then he has to offer the house in USA under ‘deemed let-out’ basis as he does not satisfy either of the conditions discussed above.  Similar issue arises even for non-residents who stay in own house abroad and have vacant house within India which is neither used for the self purpose or letting out purpose.

Based on the above points, each individual needs to analyze his case though he may own only two properties, whether both can be claimed as self-occupied for income tax purposes.

Also, read Taxation of Income from House Property – First guide to basics

The above information of Income from house Property is for general understanding and awareness purposes only.  It is highly suggested that the readers discuss their facts specifically with their respective tax consultants to determine the appropriate compliances applicable for their specific case.  

Who should file ITR and When? – These questions have been hitting our inbox for some time. There are many misconceptions among taxpayers regarding ITR filings. We have tried to clear such misconceptions in this article.

But before getting into the topic “Who should file ITR? And When?”, let us try to understand the benefits of filing income tax return. Let us see some of the benefits:

Benefits of filing ITR:

  1. Income Tax Return (ITR) is a well-accepted proof of your income and wealth
  2. Loan/credit card can be approved easily based on your income
  3. Quicker visa approvals
  4. Timely filing of return allows claiming losses incurred if any on account of capital gains, business/profession, and house property
  5. Can claim a refund of excess TDS deducted if any 
  6. To comply with the land of the law and avoid interest and penalties.

Who should file ITR:

  • Every individual based on his/her age and whose total income is more than the specified limit as per the below table must file the income tax return every year with the department.
Age limitTotal income threshold limit
Below 60 yearsMore than Rs. 2,50,000/-
Above 60 but below 80 yearsMore than Rs. 3,00,000/-
Above 80 yearsMore than Rs. 5,00,000/-
Individual taxpayers – income thresholds

For calculating the total income threshold during the financial year, one should consider all the sources of income and exclude the deductions relating to capital gains and chapter- VIA deductions such as LIC, tuition fee, PPF contribution, repayment of housing loan and etc. However, section 10 exemptions can be excluded like agricultural income, share of the profit from partnership firm, income from mutual funds, etc.

However, in the following cases it is mandatory for an individual to file tax returns even his/her income is below taxable income;

  • If he/she deposits more than one crore rupees in cash during the financial year in one or more current accounts maintained with a banking company or a co-operative bank.
  • If he/she incurs expenditure which is more than Rs. 2,00,000/- towards foreign travel during the financial year.
  • If he/she incurs expenditure which is more than Rs. 1,00,000/- towards the consumption of electricity during the financial year.
  • Resident individual who is a beneficial owner or otherwise, who holds any asset (including financial interest in any entity) which is located outside India
  • Resident individual who is a signing authority in any account located outside India.
  • Resident individual who is a beneficiary of any asset (including financial interest in any entity) which is located outside India.
  • Non-resident individual is liable to file the return only when he earns income in India which is more than the specified threshold limit as given below;
Age limitTotal income threshold limit
Below 60 yearsMore than Rs. 2,50,000/-
Above 60 but below 80 yearsMore than Rs. 3,00,000/-
Above 80 yearsMore than Rs. 5,00,000/-
Non-resident income thresholds

Let us see this with some illustrations for better understanding:

  • Mr. Ram, a resident individual aged 52 years has earned rental income of Rs. 2,40,000/- during the year and he does not have any other income other than rental income during the financial year. With the accumulated savings, he travelled to US along with family. He spent an amount of Rs. 4,00,000/- towards travel expenditure. Is Mr. Ram liable to file the Income Tax Return?

Ans:  Yes, Mr. Ram is liable to file income tax returns. Though his total income is below Rs. 2,50,000/- he is liable as he spent more than Rs. 2,00,000/- towards foreign travel. 

  • Mr. Gopal is a resident individual whose age is 65 years earned agriculture income of Rs. 10,00,000/- during the year and he does not have any other income during the year. Is Mr. Gopal liable to file the Income Tax Return?

Ans:   No, Mr. Gopal is having only agricultural income, which is excluded from the total income threshold, hence he is not liable to file the income tax return.

  • Mr. Varma is a non-resident individual whose age is 45 years & has earned Rs. 2,30,000/- from the house property situated in India and earned salary income of Rs. 35,00,000/- from a US entity during the year. Is Mr. Varma liable to file the income tax return?

Ans:  No, as Mr. Varma is a non-resident and his income earned in India is less than Rs. 2,50,000/-, he is not liable to file the income tax return.

When ? ITR – Due Dates

  1. Every individual who is having income from business/profession and subject to tax audit, the due date for filing income tax return is 31st October.
  • In any other case (other than tax audit), the due date for filing of income tax returns is 31st July.

However, due to COVID-19, for all the cases due date for filing of income tax returns has been extended to 30/11/2020 for the financial year 2019-20.

Consequences for non-filing/late filing of IT return:

Late filing of IT return

Belated return can be filed till 31st March of next financial year. However late filing fee will be levied as per the below table.

DateLate filing fee if total income is below Rs. 5,00,000/-Late filing fee if total income is more than Rs. 5,00,000/-
Before 31st DecemberRs. 1,000/-Rs. 5,000/-
After 31st December but before 31st MarchRs. 1,000/-Rs. 10,000/-
Penalties for late filing
  • Along with the late filing fee, if you are having tax liability then, interest under section 234A will be levied at the rate of 1% p.m.
  • Apart from the above late filing fee and interest, business loss and capital losses cannot be carried forward.

Non-filing of IT return

If you fail to furnish the IT return before 31st March, then the consequences are as follows:

  • Fee (penalty) anyway will be levied up to Rs. 10,000/- based on total income.
  • If you are having taxable income and if you fail to file the return, that can be treated as concealment of income and the penalties will be higher and it may go up to 300% of your tax liability along with interest.
  • You cannot claim the refund of taxes (excess TDS deducted, if any).
  • You cannot carry forward the losses.

Also read Selection of Correct ITR From & More Pointers in filing IT Returns

LLP or Private Limited Company? This is one of the most asked questions by new and old entrepreneurs. What’s the most suitable structure to start his/her business? A simple google search would yield thousands of results and tens of good articles on the subject. I would share some of the good ones with these entrepreneurs but nevertheless, a few questions remain unanswered in those articles. So, I thought of compiling a simple table, although not exhaustive, (with the least amount of legal and financial jargon) to address such unanswered questions.

LLP is the newest kid on the block. LLP structure was introduced with the passing of The Limited Liability Partnership Act, 2008, which came into effect in early 2009. This structure has been in the west for many decades. The traditional partnership businesses burdened the partners with unlimited liability, many times this burden induced by other partners with the “principle of agency” at play. One partner’s actions leading to a massive loss became all partners’ burden. It had the potential to bankrupt the partners of the firm. LLP structure addresses this point primarily by borrowing the concept of “limited liability” from the corporate structure. On the other side, a typical corporate structure would entail a long list of compliance costs which can be prohibitive to many businesses. The fusion of traditional partnerships and corporates is LLP.

Hope the readers find the table useful. If any doubt still persists, please feel free to write to me or leave your query in the comment section. We shall be happy to get back.

Income Tax

  S No   Particulars   Private Limited Company   LLP
  1   Rate of Tax   Tax Rate 25%   (If Turnover is less than Rs.400 Crore. However, the Companies can choose to pay taxes @ 22%, without any deductions)   Tax Rate @ 30 % (If Turnover exceeds 400 Crore)   Surcharge; Income 1 Crore to 10 Crores -7%              more than 10 Crores -12%   Health & Education Cess : 4 %       Tax Rate @ 30 %                   Surcharge; Income Exceeds 1 Crore – 12%     Health & Education Cess : 4 %  
  2 MAT   (Minimum alternate tax) MAT -15%   On Book profit Not Applicable   AMT (Alternate Minimum Tax) 18.5% in special cases where there is deduction u/s 10AA/80IB etc.,
3 Profit Distribution Taxable in the hands of Shareholders based on their tax slab   Profit distributed post tax is exempt from tax  
4 Salary/Remuneration  to Directors/Partners No Restriction/Cap on payments to Directors Aggregate of   90 % of the first Rs.300,000/-  Plus60 % of the Balance Profit In the case of loss maximum salary allowed as expense for tax purpose will be Rs.1,50,000/-  

Companies Act vs LLP Act

S No. Particulars Private Limited Company LLP
 1 Governing Law Companies Act, 2013 Limited Liability Partnership Act, 2008
 2 Name Must contain suffix ‘Ltd’ or ‘Pvt Ltd’ Must contain suffix ‘LLP’
 3 Organizational Structure Rigid & governed by Companies Act Flexible & governed by LLP Agreement
 4 Loans & borrowings (Other than from Banks & Financial Institutions) Directors cannot borrow and lend money to CompanyThere is a Cap on shareholders lending to Company No Restrictions. Governed by LLP Agreement
5 Convening of Meetings Board Meetings are mandatoryAnnual General Meetings is Mandatory     No Mandatory requirement.   But however, the partners may decide to have periodical meetings and the same will be governed by LLP Agreement
6 Intimating ROC regarding Creation of Charge  Mandatory when a charge is created on assets of the Company Not Mandatory
   7   Maintenance of Statutory Records Many Registers are required to be maintained like Shareholders/Members Register, Directors Register No such requirement  
    8 Increase in Capital Require to Pass Ordinary resolution in General Meeting and file form SH-7. Only require to amend LLP Agreement and File e-form Form-3.
    9 Annually form filling requirement There are many E-forms  like AOC-4, Form –MGT-7  and E – form-ADT-1 Only Two annual form E-form- 8, E-form-11
   10 Disclosure of Interest Require to Take disclosure from director under Section-184(1) No such requirement
   11 Audit of Accounts Audit is Compulsory. Require only if Turn over above 40 lacs or Contribution more than 25 lacs.
   12 Related Party Transactions Transaction to be at arm’s length price only and as per provisions of Secton-188 of Companies Act-2013. No Restrictions. Governed by LLP Agreement
13 Reporting Requirements- FDI-FEMA Single Master Form (SMF) has to be filed with RBI within 30 days from the date of allotment.   FLA Return – Annually before 15th July Single Master Form (SMF) has to be filed with RBI within 30 days from the date of receiving of Capital Contribution from Partner   FLA Return – Annually before 15th July

Other Statutes

S No. Particulars Private Limited Company LLP
1 Provident Fund On Salaries to Directors/Partners Director Remuneration is covered for the purpose of Provident Fund Designated Partner’s Remuneration is not covered for Provident Fund
2 Labour Laws As per labour laws a Whole Time Director is a employee and eligible for GratuityLeave encashmentLeave as per statute Designated Partners are not Employees and hence provisions of labour laws are not applicable

Others

S No. Particulars Private Limited Company LLP
1 Investment by Angel Investors/PEs/VCs Preferred Not preferred

The write-up is for general understanding. We suggest the readers to discuss with their consultants before deciding on choosing either of the structures.

Our efforts at Daily Economics is aimed at simplifying the complex legal and financial jargon and present the information in an easy to understand manner. We have been trying to achieve that objective in all our articles especially in “Know Your Taxes” column. Previously we covered Selection of Correct ITR Form and Common Mistakes in filing Income Tax Returns in as simple English as possible. We received many queries from the readers regarding the TDS and 26AS. Both the articles had plenty of easy to understand pointers in deciphering income tax requirements. We have made a list of more such pointers in filing IT returns.

TDS and IT returns

There is a misconception among some taxpayers that if TDS has been deducted, then there is no need to file IT return or declare the same while filing the IT Return. It is to be noted that TDS is not the final Tax.

As per the provisions of Income tax Act, it is mandatory to file IT return if income is more than basic exemption limit i.e Rs.2.5 lakhs for individuals other than senior citizen and Rs. 3 lakhs for senior citizen. So, if your income is more than the specified limit, you are liable to file IT returns otherwise you will receive notice for non-filing of IT return, and this leads to penalties as well.

The taxpayer should consider the income on which TDS has been deducted and compute the final tax payable. Let us see this with an example for better understanding.

e.g: Mr. Naveen is a resident taxpayer. During the year, he earned fixed deposit interest of Rs. 1,00,000/- from SBI and the bank had deducted Rs. 10,000/- as TDS at the rate of 10%. He is also having income from other heads amounting to Rs. 12,00,000/-. The final tax can be computed as follows:

His total income for the year is Rs. 13,00,000/- (12 lakhs + 1 lakh). Tax on the same is Rs. 2,10,600/- (including cess). He can claim the TDS of Rs. 10,000/- and remaining tax Rs. 2,00,600/- has to be paid.

Since his income is more than Rs. 10 Lakhs, the income is subject to 30% tax slab. Hence the interest income which is earned is also subject to 30% tax. The tax payable on interest income is Rs. 31,200/- (including cess). He can claim Rs. 10,000/- which is TDS deducted by the bank and remaining tax has to be paid.

Reconciliation of information available in 26AS

CBDT has mandated certain persons including government agencies to report to income tax authorities on transactions like sale/purchase of immovable property, investment in securities, cash deposits more than 10 lakhs during the year.

It is imperative for the taxpayer to consider the following:

  • Reconciliation of income
  • Whether TDS claimed is matching with the amount reflecting in Form 26AS.
  • Income from securities have been offered to tax if the same is subject to tax under income tax act like dividends, capital gain on redemption of mutual funds.

If your employer/payer had deducted TDS but if the same is not reflecting  in Form 26AS ensure that the concerned parties files the necessary forms with IT department so that TDS is reflected in Form 26AS before filing the IT return.

TDS credit should be availed in the year in which the corresponding income is offered to tax.

e.g: Mr. Sai has bought a property of Rs. 60,00,000/- from Mr. Manoj and he has given an advance of Rs. 29,70,000/- by deducting Rs. 30,000/- as TDS in the year 2018-19. And in the year 2019-20, they have executed the sale deed and Mr. Sai has paid remaining amount of Rs. 29,70,000/- by deducting additional TDS of Rs. 30,000/-.

Now, Mr. Manoj has to declare income in the year 2019-20 and should claim the entire TDS of Rs. 60,000/- as the sale deed executed in the year 2019-20. He should not claim the TDS of Rs. 30,000/- in the year 2018-19 just because it is deducted and reflecting in 26AS.

There may be instances where some TDS credits are reflecting in Form 26AS which are not related to you, then the credit for same should not be taken.

The tax payer has to comply with requirement while filing the IT return to report the head of income under which income is offered to tax for every TDS credit. It is important that the correct head of income is selected against every TDS credit to avoid receiving notices from IT department for mismatch.

For example, when you are taking a credit for TDS on rental income, then the head of income should be income from house property and not income from other sources. 

Non-disclosure of exempt income

There is a misconception about disclosure of exempt incomes. The taxpayer has to disclose all incomes including exempt incomes. This includes agricultural incomes, savings bank interest, PPF interest and income from mutual funds.

Verification of IT returns

Just filing of IT return, will not end the process. It shall be verified manually or electronically within 120 days of filing of IT return. If you wish to verify manually, then you have to sign and send the IT return acknowledgment to the CPC. An electronic verification can be done through one of the four options, (a) through Aadhaar OTP (b) through net banking (c) through demat account (d) pre-validation of bank account number.

If you do not verify the return within 120 days from the date of filing, then the IT Return will be treated as invalid and considered as if you have not filed the return.  

There are multiple tools and online applications available which are provided by private players and income tax department for filing tax returns online, where information is captured from Form 26AS and Form 16. However, due caution should be exercised by taxpayer before submitting the tax return, particularly those who are filing on their own as the process will be completed instantly. Also, it is important to note that the taxpayer is responsible for all the information provided in the IT return.   

Rental income earned from immovable property is passive income to a person, as generally, he does not put any effort to earn it.  There is a separate chapter namely “Income from house property” under the Indian Income Tax Act, 1961 which deals with the taxation of such income. The peculiarity of this chapter is that it intends to tax notional income. You may end up paying tax on the income which you have never earned.  Let us try to decipher the nitty gritties in this article.

Typical computation of income from house property is depicted in the table below :

ParticularsAmount
A. Gross Annual Value i.e. expected rent/ actual rent received or receivable whichever is higherxxxx
However, in case of vacancy, expected rent or actual rent received or receivable whichever is lower
B. The amount of rent which could not be realizedxxxx
C. Taxes actually paid and borne by owner to local authorityxxxx
D. Net Annual Value (NAV) ( A – [B+C] )xxxx
E. Deduction allowed under section 24xxxx
F. Standard Deduction @30% of NAVxxxx
G. Interest on borrowed Capitalxxxx
Income Chargeable under the Head “Income from house property” ( D – [E+F+G] )xxxx
Template to calculate income under income from house property

Basics of Taxation of Income from House Property

In this article, I will try to give a broad overview of various provisions under “Income from House Property”. Based on the response from the readers, I will try to explore finer details in the coming days.

Although the heading states “Income from house property”, the provision is extended to income from any building whether residential or commercial and/or Land appurtenant (adjoining) thereto.  The other two conditions for an income to fall under this head are as follows:

            i.  Assessee has to be the owner of such property

            ii. Property must be used for any purpose other than for the purpose of his own business/ profession.

Computation of Gross annual value

Gross Annual value is computed by considering the following four factors:

            1. Actual rent received or receivable

            2. Municipal value (Available only in few states)

            3. Fair rent of property which it is expected to fetch depending on its location and area.

            4. Standard rent (Available only in few states)

Computation of Gross annual value
Arriving at Gross annual value

Unrealised rent & other deductions

In order to deduct the unrealised rent amount, the following rules have to be satisfied:

(a) Tenancy is bonafide

(b) Defaulting tenant has vacated, or steps have been taken to compel him to vacate the property

(c) Defaulting tenant is not in occupation of any other property of the assessee.

(d) Assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.

Municipal Tax:

In order to claim the deduction of municipal tax, it should have been paid by the assessee to the local body.  It is only on payment basis, irrespective of the year for which it is paid, it is allowed as deduction.

Standard Deduction:

Deduction of 30% of the Net Annual Value will be allowed as Standard Deduction.  This is irrespective of any spending by the assessee as such.

Interest on Borrowed Capital:

When the property has been acquired, constructed, repaired, renewed, or reconditioned with borrowed funds, the amount of interest payable on such borrowings is allowed as deduction.

Here it should be noted that Interest payable for the year is deductible, irrespective of whether it is actually paid or not.

Interest payable till the completion of construction is allowed as a deduction in five equal yearly installments from the year in which the construction of the property is completed.

More basics…

  • In case of self-occupied property, net annual value will be taken as NIL and only interest on housing loan can be claimed from it, subject to a maximum of Rs. 2,00,000/-.
  • Benefit of self-occupation can be claimed only in respect of two properties.
  • Interest on borrowed funds from outside India cannot be deducted unless such interest is subject to withholding tax in India.

In the unprecedented situation of COVID-19, there are many instances of tenants refusing to pay rent taking shelter under force majeure.  However, since the Income Tax statute actually taxes annual value, owners of properties may end up paying taxes on the rent which they are never going to realize.  Keeping in view many extraordinary situations the taxpayer is facing, the Government may have to consider the genuine hardship of the rare breed of the tax-paying population ( less than 10%) of India and come out with some relaxations and clarifications.

The views expressed are based on the statutory provisions as it stands on the date of this article and is intended for general understanding. We suggest the readers to consult their CAs for detailed tax planning.