NRI Problems: Standard rent and commercial rent

Under Section 23 of the Income-tax Act, the annual value of the property is defined to mean the sum for which the property might reasonably be expected to let from year to year.

By H.P. Ranina

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Published: Mon 20 Jul 2015, 11:57 PM

Last updated: Tue 21 Jul 2015, 9:13 AM

My father has two residential properties in Mumbai. One property is used for family residence where I also stay when I visit India, and the other property is kept locked until we find a reliable party to whom the property can be given on leave and licence. In respect of the second property, my father has to pay tax and he had shown the standard rent of the property as his income. However, the tax officer has rejected this and has adopted the commercial rent of the property to be the taxable income. What is the correct law?
- K.R. Motwane, Sharjah
Under Section 23 of the Income-tax Act, the annual value of the property is defined to mean the sum for which the property might reasonably be expected to let from year to year. In several decisions it has been held that the annual value would be the sum at which the property may be let by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances. Where the properties are subject to rent control legislation, as in Mumbai, the standard rent of the property would be liable to tax. Where the fair rent is less than the standard rent, courts have held that the fair rent would be taken as the annual letting value and not the standard rent.
Therefore, the assessing officer is not correct in treating the market rent or the commercial rent as being taxable in the hands of your father. The Maharashtra Rent Control Act, 1999 applies to Mumbai and, therefore, what would be taxable in the hands of your father is only the standard rent under the law. Hence, your father should file an appeal in case assessment is made on him by treating the market rent as the annual value of the property.
I will be returning to India shortly after retirement, having worked in the Gulf for several years. I do not have sufficient savings to lead a comfortable life as I have been used to. However, I have a property in Bangalore where I will be staying which is currently having a high market value. If I sell it, I will have to move to a much smaller house and, therefore, I want to continue to stay in my present apartment. Is there any way to enhance my income?
- K.R. Subba, Doha
If interest on your savings is not large enough to enable you to sustain a comfortable life, you may consider approaching a bank for receiving an annuity under a reverse mortgage scheme. Under this scheme, you will need to mortgage your present apartment to a bank which will give you a lump sum every year or a monthly annuity. The bank will determine the current value of your residential house, assuming that at present it is free from all encumbrances. The bank will then sanction a loan amount, which will roughly be 50-60 per cent of the current property value.
Such loan can be availed of by you in the form of a fixed monthly amount. Interest will be charged on the quantum of the loan availed of by you. Generally, such interest varies from 11-12.5 per cent. The main advantage of this scheme is that you can continue to live in your existing property during your life time, provided the loan amount with accumulated interest is within the limit of 50-60 per cent of the value of the property.
Upon your death, your heirs can inherit the property if they agree to discharge your liability to the bank. If not, the bank will sell the property in the open market, recover their total dues, and pay the balance amount to your heirs. Capital gains will only be taxed when the property is actually sold and the executors of your will would be liable to pay the tax from your estate.
My mother, who is settled in India, is already paying tax at the maximum rate. She has now inherited some funds which need to be invested. I want to know whether there are any tax-free bonds in which my mother can invest her funds.
- P.L. Sahni, Manama
The government is going to permit certain public sector undertakings to issue tax free bonds during the current financial year. The interest payable would range from seven per cent to 7.5 per cent depending upon the tenure of the bonds. A certain portion of the issue will be reserved for retail investors. The public issue of these bonds would be to the extent of 70 per cent and the remaining would be through private placement.
The writer is a practising lawyer specialising in tax and exchange management laws of India.

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