Income from letting out to be treated as business income
When the income is taxable under section 22, the tax payer would be entitled to claim as a deduction all the municipal taxes paid in respect of such property.
By H P Ranina/NRI Column
Published: Mon 26 Oct 2015, 12:00 AM
Last updated: Mon 26 Oct 2015, 9:10 AM
I want to get into the real estate development business when I return to India. However, my plan is to sell only so many apartments in the building which would enable me to recover the cost of the project. The remaining flats will be rented out by me so that I earn a regular income there from. Will such income be taxed as business income or as income from house property?
- R K Joseph, Abu Dhabi
Income from letting out property would be treated as business income only if such letting out is temporary because it would be a case of exploiting business assets. On the other hand, if the letting out of property is for an indefinite period with the object of earning rent, such income would be taxable under section 22 of the Income-tax Act under the head 'Income from House Property'. This is a well-established principle of law which has been sanctified by several court decisions. When the income is taxable under section 22, the tax payer would be entitled to claim as a deduction all the municipal taxes paid in respect of such property and, from the net rent so arrived at, 30 per cent of such amount would be allowed as a standard deduction. In other words, only 70 per cent of the net rent would be liable to tax. As regards claim for standard deduction, no questions would be asked and no records need to be maintained of the actual expenditure incurred. In fact, even if no expenditure is incurred, the standard deduction would still be available.
A British company has set up a subsidiary company in India.This British company will be providing guidance to its Indian subsidiary in the field of finance, operations, human resources and performance related matters.The services will be rendered primarily from the UK. Will the fees payable by the Indian company be taxable in the hands of the British parent in India?
- K Shankar, Dubai
Under Article 13(4) of the Double Tax Avoidance Agreement between India and the UK, fees for technical services are taxable in India. In February 1994, managerial services have been expressly excluded from the definition of 'fees for technical services'. Therefore, under the definition of 'fees for technical services', only services which make available technical knowledge, experience, skill, know-how or processes are covered.
Further, if the fees relate to development and transfer of a technical plan or technical design, such consideration would be liable to tax in India. Therefore, in the case of the British company, the agreement would have to be examined to consider whether the services fall within the aforesaid definition. If the services are of a managerial nature, the fees would not be liable to tax in India.
In a recent case, it was held that where a person based in the UK was rendering services to an Indian company which related to fund management, cost controls, human resource matters, and quality reviews, the fees paid were not covered under Article 13(4) of the DTAA.
The Indian Government is catching up on resident Indians who are having foreign bank accounts. If a person is prosecuted for holding unaccounted foreign bank accounts, is there any way out to avoid being convicted?
- P R Malhotra, Sharjah
The Central Board of Direct Taxes has recently issued guidelines for compounding of offences under the Income-tax Act, 1961 in case of persons holding undisclosed foreign bank accounts.These guidelines would apply to those tax payers who fully co-operate with the tax department and pay the outstanding dues. The offences may be compounded by the competent authority on his satisfaction of eligibility conditions and keeping in view factors such as conduct of the person, nature and magnitude of the offence, provided the person undertakes to pay the compounding fee. The tax payer must also agree to withdraw any appeal filed by him which has a bearing on the offence sought to be compounded. The guidelines also stipulate that the compounding can be done only after prosecution has been initiated. Compounding cannot be done at the stage of the show cause notice and without the complaint being filed in Court. Prosecution instituted under the Indian Penal Code cannot be compounded as per these guidelines.
There are several small banks which have been given licences recently. My son has got a job in one of these banks in a senior management position. I am told that he cannot apply for a loan from the same bank in view of his position. Is this correct? If not, what will be the tax situation if the loan is granted?
- M K Shah, Doha
The Reserve Bank has recently relaxed the norms for granting loans to senior executives, including Chief Executive Officers and whole-time Directors of banks. Where the loan is given for purchase of car, personal computers, acquiring a house for personal use, festival advances, etc., it will not fall in the prohibited category. Therefore, even if your son holds a senior position, he will be eligible to take loans for the aforesaid purposes from the bank where he is working. The loan will be subject to the guidelines framed by banks in respect of loans to senior executives. Under the income-tax law, an interest-free loan or loan given at a concessional rate of interest would attract tax on the perquisite value. Such value is determined by calculating the difference between the rate of interest charged by State Bank of India on similar type of loan and the rate charged by the bank to its senior executive. For example, if SBI charges 12 per cent rate of interest on loan for a particular purpose, and your son receives the loan at the rate of eight per cent from his bank, the difference of four per cent will be taken into account to determine the perquisite value on the outstanding amount of the loan every year.
The writer is a practising lawyer, specialising in tax and exchange management laws of India.