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Capital gain on transaction by Power of Attorney (POA) |
TAX TALK-25.07.2016-THE HITAVADA
TAX TALK
CA. NARESH JAKHOTIA
Chartered Accountant
Capital gain on transaction by Power of Attorney (POA)
Query 1]
Someone is having 1 flat at Kolkata. He wants buy to another flat at Nagpur. Please reply to my following queries from your end:
1. Whether one can keep 2 flats in his own name?
2. What are the conditions under the Income Tax law?
3. Whether income tax benefit would be available?
Please advise suitably. [amalofaj@gmail.com]
Opinion:
There is no bar under the Income Tax law holding 2 or more flats by any person. The distinctions slouch in the tax treatment of second or subsequent house property. Tax treatment of the second house property is not same or similar to that applicable to first house property. If taxpayers have two or more houses which are used for own residence, then they have an option to choose any one of the house (according to their own choice) as self-occupied house, for which they would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether or not actually let out] & would be taxable on the basis of its annual value. In short, if taxpayer owns more than one house property then even if the house properties are not let out,
a) One house property can be treated as self occupied house property and nothing would be taxable from such house property.
b] Other house properties shall be deemed to have been let out and its income shall be taxable on notional basis considering its annual value.
Computing Income from House Property:
Income from house property is not taxable on the basis of actual rental income alone but is taxable on the basis of its annual value. Annual Value is the sum for which the property might reasonably be expected to be let out from year to year.
To determine Annual Value of the property, one has to get familiar with four terms i.e., Municipal Value, Fair Rental Value, Standard Rent and Actual Rent. The same is discussed hereunder:
i. Municipal Value: For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property. Normally municipal authorities charge house tax on property based on various factors like type of residential, floor, facilities available in the premises etc.
ii. Fair Rental Value: The rent which a similar property in the same or similar locality would have fetched is the fair rental value of the property. This is nothing but notional rent a property can get if it has been let out for a year. e.g. In case of flat, one can assume approx rent of other similar flat which is already let out with some addition or reduction in rent with reference to facilities of both flats.
iii. Standard Rent: It is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.
iv. Actual Rent: For any let out property, Actual rent received or receivable is important for annual value. Actual rent received or receivable is always subject to agreement entered by owner and tenant or matter of negotiable between them whereby if tenant agree to pay for municipal taxes on behalf of owner then these taxes should be added in actual rent received/receivable to derive annual value. There could be vice versa case, where owner has agreed to pay some obligation of tenant, in that case rent will be reduced by that amount.
With above brief idea of the relevant terminology, it may be noted that for any house property, Gross Annual Value (GAV) is higher of Actual Rent Received or Expected Rent. Expected Rent is nothing but higher of Municipal Value or Fair Rental Value but restricted to the Standard Rent. From the amount of gross annual value, municipal taxes would be deducted to arrive at the net annual value. There are only two types of tax deductions which can be claimed from net annual value, as under:
a] First is standard fixed ad-hoc deduction of 30% towards repairs & maintenance. This means 30% of the net annual value can be reduced towards repairs, maintenance etc. The deduction is available irrespective of the amount actually spent or not.
b] The second deduction is of interest if the property is purchased/ constructed with borrowed fund up to a maximum of Rs. 2 Lacs p.a. from the FY 2014-15. The ceiling of Rs. 2 Lacs is not applicable in case of let out or deemed to have been let out house property.
Query 2]
I, Mr. H purchased a Plot on 18/12/2003 (F.Y. 2003-04) for Rs. 31,500/- & sold to Mr. T for Rs. 2,40,000/- on 05/04/2006 (F.Y. 2006-07). No sale deed was executed, but I gave General Power of Attorney (POA) to Mr. T. Later Mr. T sold the plot to Mr. K on 27/01/2016 (F.Y. 2015-16) for Rs. 8,50,000/- but the Market Value as per Stamp Duty is Rs. 14,65,000/-. My query, who will be liable for Capital Gain Tax, Mr. H. or Mr. T? i.e., Rs. 14,65,000 less 31,500/- + indexation) in the hands of Mr. H. or Rs. 14,65,000 Less 2,40,000+ indexation in the hands of Mr. T. or Rs. 8,50,000 less 2,40,000/- + indexation? Can exemption u/s 54EC be availed by depositing the Capital Gain amount in Long Term specified bonds i.e., NHAI or REC bonds within six months from the date of transfer i.e. 27/01/2016 (up to 26/07/2016) ? [Karuna Jambhulkar-karuna123.kj@gmail.com]
Opinion:
1. Taxability depends upon the actual deal, date of possession, contents and stipulations incorporated in the Power of Attorney (POA) executed on 05.04.2006 in between Mr. H & Mr. T.
2. Since the documents & wording of agreement plays an important role in tax implications in such case & considering the complexity involved, you and all other readers are advised to obtain individual professional advice before arriving at any conclusions. Though generalized reply could not be given in such cases, the following views may assist you to know the legal provision and arrive at a better conclusion.
3. If from the POA dated 05.04.2006, it can be inferred that the property is sold, rights is transferred & possession is handed over by Mr. H to Mr. T, then
a] Mr. H would have been liable for taxation in the FY 2006-07 itself as Short term capital gain as the property was transferred within a period of 3 years.
b] Mr. T would be liable the Long term capital gain (LTCG) on the profit incurred over and above Rs. 2.40 Lakh. Mr. T would be entitled for indexation benefit also. LTCG could be saved u/s 54EC by Mr. T by investing the amount of LTCG within a period of 6 months from the date of transfer in specified NHAI/REC bonds.
c] The transactions in between Mr. T & Mr. K would not have any tax implications over Mr. H.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.com.]
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