Request response on the following questions on tax pertaining to undivided property and tax applicable to rent:
1. Can the rent allotted from undivided properties located in urban neighbourhood be considered separately under Hindu undivided family account for income tax purpose? If this rent is less than minimum slab, is it necessary to file an undivided family account?
2.A Father occupies a house with the name of his son, he pays a nominal rent as a relief to his son. Whether this can be considered as a gift and gets relief for the son from paying income tax?
3. When an individual owns only one house in an urban neighbourhood and collects a rent. He however, stays in another town for living. How is the rent accounted for IT purpose?
4. An individual has purchased a house using a housing loan — EMI basis in a city– and has a house in an urban neighbourhood and collects a nominal rent. Which I-T form needs to be used? The first house has not yet been transferred to his name. How is this rent accounted for I-T purpose?
1) Pursuant to section 22 of Income Tax Act, 1961 (the Act), rental income derived from the undivided property owned by the Hindu undivided family (HUF) shall be assessed in the hands of HUF. Further, if the total income derived by the HUF in a financial year (FY) is less than the basic exemption limit (₹250,000 for the FY 2019-20) HUF is not required to file the Income tax return (ITR). However, if the HUF had deposited amounts exceeding one crore rupees in one or more current accounts during the FY or incurred foreign travel expenditure exceeding two lakh rupees or electricity expenditure in excess of one lakh rupees then tax return has to be filed even if the total income is below the basic exemption limit.
2) We understand that the house property is owned by son and his father pays nominal rent for occupying the house. As the underlying transaction is occupation of the house and payment of rent therefore, such payments by father to son ought not be regarded as ‘Gift’ under section 56 (2) (X) of the Act. Accordingly, such rental income earned by the son need to be offered to tax under the head ‘House Property’.
3) Rental income earned by the individual from the property located in urban neighbourhood is liable to tax under the head ‘House property’. Standard deduction of 30 per cent on such rental income earned and actual municipal taxes paid could be claimed as deduction under the Act. Further, interest on housing loan (if any), without any deduction limit can be claimed under section 24 of the Act.
Further, where the individual stays in a rented accommodation in another town for his living, he may claim, either of : Exemption of house rent allowance (HRA) u/s 10(13A) of the Act, if he is a salaried person, or Deduction u/s 80GG of the Act, subject to fulfilment of specified conditions.
4) Based on the details provided, a house property is owned by the individual and the same is currently let out. He earns a nominal rental income from that property. As per section 23 of the Act, the annual value of the property let out during the year shall be higher of the actual rent received/ receivable or fair rental value for which the property is expected to let out.
For let out property, rental income shall be offered to tax while filing the tax return and specified deductions (30 per cent standard deduction, municipal taxes paid and interest on housing loan) can be claimed. With respect to the other house property which is not transferred to the name of the individual, it may tantamount to not having a legal ownership in that property and the eligible deductions with respect to interest/principal payment may not be claimed under the Act. It needs to be further analysed based on the documents in place. For property under-construction, any interest paid before possession is tax deductible in five instalments beginning from the year in which construction was completed under the Act. Deduction for interest on housing loan is capped at ₹200,000 for a self- occupied property and the amount of principal payment can be claimed up to ₹150,000 u/s 80 C of the Act, subject to conditions.
Use of IT form: ITR 1 could be used if the income is less than ₹ 50 lakhs in a FY and the individual has salary income, one house property, further subject to specified conditions.