income from house and business

7/30/2019 income from house and business

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Slide 1

Computing Property and Business

Income


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Slide 2

Objectives

In this session, we will:

Define house property Explain computation of houseproperty in case of:

Self Occupied Property Let out Property Vacant property

Explain important accountingconcepts

Explain computation of incomecharged to tax under the headProfits and gains of business or

profession


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Slide 3

Check Your Understanding

1. In case of non-Government employees, the value of

perquisite in respect of rent free unfurnished accommodation

provided to the employee (the accommodation taken on

lease by the employer) will be actual rent of the

accommodation paid or payable by the employer.

a) True

b) False

2. In case of non-Government employees, the value of

perquisite in respect of rent free unfurnished accommodation

provided to the employee (accommodation owned by the

employer) will be __________% of salary if the

accommodation is located in Mumbai .

a) 7.5%

b) 10%

c) 15%d) None of the above

Answers:

1. b)

2. c)

Recap


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Slide 4


3. If the employer bears the cost of supply of gas, electricity and

water to the employee, value of perquisite arising from

supply of gas and electricity will be charged to tax, however,

nothing will be charged to tax in respect of supply of water.

a) True

b) False

4. Nothing shall be charged to tax in respect of reimbursement

of private medical expenditure upto to Rs.15,000 per

_______ .

a) month

b) quarter

c) annum

d) half year

Answers:

3. b)

4. c)

Recap


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Slide 5

Under section 22 of the Act, the income chargeable to tax under the head Income from house

property is the annual value of property consisting ofany buildings or lands appurtenant

thereto of which the assessee is the owner.

What income is charged to tax under the head

Income from House Property?

House Property

Not House

Property

House Property


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Slide 6

Conditions for charging income under the head house property

House Property Income

1

The property should consist of any building or land

appurtenant thereto

2 The assessee should be the owner of the property

3

The property should not be used by the owner forthe purpose of any business or profession carried on

by him, the profits of which are chargeable to tax.


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Slide 7

Consider

Reflect

ProblemMr. Raja owns following properties :

A shop at Delhi : The shop is give on rent at a monthly rent of Rs. 84,000.

A plot of land at Delhi : The plot is given on rent at a monthly rent of Rs. 1,000.

A car : The car is rented on a monthly rent of Rs. 20,000.

Apart from above, he has taken a shop on rent from his friend at a monthly rent of Rs. 25,000.

This shop is subleased by him to a company at a monthly rent of Rs. 30,000.

Advice him regarding the heads of income under which above incomes will be taxed.

Solution

As per the provisions discussed in previous slides, the taxability of various incomes will be as

follows :

Rental income of shop at Delhi will be charged to tax under the head Income from houseproperty.

Rental income of plot of land will be charged to tax under the head Income from othersources. Rental income of car will be charged to tax under the head Profits and gains of businessor profession or Income from other source (as the case may be).

Rental income of shop subleases by Mr. Raja will be charged to tax under the headIncome from other source.


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Slide 8


1. Rental income from a commercial building is not charged to tax under the

head income from houseproperty.

a) True

b) False

2. Income from plot of land subleased by the assessee

will be charged to tax under the head Income from

house property.

a) True

b) False

Answers:

1. b)

2. b)

Quiz


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Slide 9

House Property can be categorized as:

Computation of House Property Income

Let out Property

Property has been rentedto someone else.

Self Occupied Property

Property is being usedfor own residentialpurpose.


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Slide 10

Computation of Income from Let Out House Property

Gross annual value XXXX

Less:- Municipal taxes paid during the year XXXX

Net Annual Value (NAV) XXXX

Less:- Deduction under section 24

Deduction under section 24(a) @ 30% ofNAV

XXXX

Interest on borrowed capital undersection 24(b)

XXX XXXX

Income from house property XXXX

Income from house property in respect of a let-out property is computed

as follows :

Income from house property = (Gross annual value - Municipal taxespaid during the year ) - Deduction under section 24


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Slide 11

Computation of Gross Annual Value

Reasonableexpected rent of the

property

Will be higher of: Municipal valueof the property

Fair rent of theproperty.

Cannot exceedstandard rent, ifcovered underRent Control Act.

Actual rent of theproperty

Is the actualannual rent forwhich theproperty is let outduring theprevious year.

Gross annual value in case of a let-out property is higher of :


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Slide 12

Definitions of Related Terms

For collection of municipal taxes, local authorities make periodicsurvey of all buildings in their jurisdiction. Such value determined bythe municipal authorities in respect of a property, is called municipalvalue of the property.

Municipal value of the property

It is the reasonable expected rent which the property can fetch. Itcan be determined on the basis of rent fetched by a similar propertyin the same or similar locality.

Fair rent of the property

It is the maximum rent which a person can legally recover from histenant under Rent Control Act. Standard rent is applicable only incase of properties covered under Rent Control Act.

Standard rent of the property


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Slide 13

Unrealised rent is the rent of the property pertaining to the previous year, which

the owner of the property could not recover from the tenant.

If following conditions are satisfied, then unrealised rent pertaining to the previous

year is to be deducted from actual rent of the previous year:

The tenancy is bona fide

The defaulting tenant has vacated the property, or

steps have been taken to compel him to vacate the

property

The defaulting tenant is not in occupation of any otherproperty of the assessee

The assessee has taken all steps to recover suchamount, including legal proceedings or he satisfies the

Assessing Officer that legal proceedings would beuseless.

Treatment of Unrealised Rent While Computing Actual Rent


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Slide 14

Consider

ProblemFrom the following information provided by Mr. Raja in respect of 3

properties rented by him compute the gross annual value of the

properties:

Reflect

Particulars Property A

(Rs.)

Property B

(Rs.)

Property C

(Rs.)

Municipal Value 8,48,484 8,48,484 2,52,252

Fair Rent 2,52,252 2,52,252 8,48,484

Standard Rent Not

Applicable

84,252 9,84,000

Actual rent 9,60,000 60,000 9,60,000

Unrealised rent (*) 1,60,000 NIL 80,000

(*) All the conditions specified for deduction of unrealised rent

are satisfied.


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Slide 15

Consider

SolutionIn the example, gross annual value will be computed as follows:

Reflect

Particulars PropertyA (Rs.) Property B (Rs.) Property C (Rs.)

Amount at Step 1 (Note

1)

8,48,484 84,252 8,48,484

Amount at Step 2 (Note

2)

8,00,000 60,000 8,80,000

Amount at Step 3

Gross annual value

(Note 3)

8,48,484 84,252 8,80,000

Note 1: Amount at Step 1 (i.e. Reasonable expected rent) is higher of

municipal value or fair rent (subject to standard rent).

Note 2: Amount at Step 2 is actual rent after deducting unrealised rent.

i.e. Rs.8,00,000 (9,60,000 - Rs.1,60,000) in case of property A,

Rs.60,000 in case of property B and Rs.8,80,000 (Rs.9,60,000 -

Rs.80,000) in case of property C.

Note 3: Amount at Step 3 is higher of amount at Step 1 or Step 2.


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Slide 16

Vacancy period is the period during which the property was ready to be let

out, but could not be let out.

Computation of GAV of Vacant Property

Gross Annual Value (GAV) of a property which remained vacant will be computed as

follows :

1.Compute the GAV considering as if the property is not vacant at any time

during the year. For ease of understanding we can name this amount as GAV

before vacancy.

2. Deduct the rent pertaining to vacancy period from the GAV computed as

above, i.e., gross annual value before vacancy.

In other words, to derive at GAV of property which remained vacant during the

year, we have to deduct the rent pertaining to vacancy period from the GAV

before vacancy computed in previous step.

Note: It should be noted that, if the property remained vacant throughout the previous

year, then gross annual value of such property shall be taken as nil.


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Slide 17

Consider

ProblemFrom the following information provided by Mr. Raja in respect of 3

properties rented by him, compute the gross annual value of the

properties:

Reflect

Particulars Property A (Rs.) Property B (Rs.) Property C (Rs.)

Municipal Value 8,48,484 48,484 2,52,252

Fair Rent 2,52,252 65,000 8,48,484Standard Rent N.A 59,000 9,84,000

Actual rent 9,60,000 60,000 N.A.

Unrealised rent (*) 1,60,000 NIL N.A.

Vacancy period 1 month 1 month 12 months

Loss due to

vacancy

80,000 5,000

(*)All the conditions specified for deduction of unrealised rent are

satisfied.


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Slide 18

Consider

SolutionIn this situation, gross annual value will be computed as follows:

Reflect

Particulars Property A

(Rs.)

Property B

(Rs.)

Property C

(Rs.)

Amount at Step 1 (Note 1) 8,48,484 59,000 8,48,484

Amount at Step 2 (Note 2) 8,00,000 60,000 NIL(*)

Amount at Step 3 Gross annual value before

vacancy (Note 3)

8,48,484 60,000 NIL(*)

Amount at Step 4 Gross annual value (Note

4)

7,68,484 55,000 NIL (*)


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Slide 19

Consider

Solution (Contd)

Reflect

(*) Gross annual value in case of property C will be nil since the property

remained vacant throughout the previous year.

Note 1: Amount at Step 1 (i.e. Reasonable expected rent) is higher of

municipal value or fair rent (subject to standard rent).

Note 2: Amount at Step 2 is actual rent after deducting unrealised rent, i.e.,

Rs.8,00,000 (Rs.9,60,000 - Rs.1,60,000) in case of property A and Rs.60,000(Rs.60,000 - NIL) in case of property B.

Note 3: Amount at Step 3 (Gross annual value before vacancy) is higher of

amount at Step 1 or Step 2; this will become gross annual value before vacancy,

i.e., Rs.8,48,484 and Rs.60,000 for property A and B, respectively.

Note 4: Amount at Step 4 (Gross annual value) is arrived at after deducting

loss due to vacancy from amount at Step 3 (i.e. Step 3 loss due to vacancy)

i.e. Rs.8,48,484 Rs.80,000 = Rs.7,68,484 in case of property A and Rs.60,000

Rs.5,000 = Rs.55,000 in case of property B.


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Slide 20

Points to Remember

Next step after computation of GAV is to compute the Net annual value

(NAV).

Net annual value = Gross annual value - Municipal taxes

Following points should be kept in mind while claiming deduction on

account of municipal taxes :

Municipal taxes (irrespective of the year or years to which theyrelate) are deductible only if they are actually paid by the assessee-

owner during the relevant previous year.

If Municipal Taxes are borne by the tenant, no deduction isadmissible.

No deduction can be claimed in respect of Municipal Tax payablebut not actually paid.

Job Aid


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Slide 21

Section 24(a) - Standard Deduction

Deduction under section 24(a) commonly referred to as standarddeduction, will be equal to 30% of net annual value.

Deduction under section 24(a) @ 30% of net annual value isavailable, whether or not the assessee has incurred any

expenditure.

Deductions Under Section 24

To derive taxable income from house property, we

have to deduct following deductions from NAV

(i) Standard deduction under section 24(a) and

(ii) Interest on capital borrowed for purchase or

construction of the property under section 24(b).


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Slide 22

Section 24(b) Interest on borrowed capital

Interest on capital borrowed for the purpose of purchase, construction, repair, renewal or

reconstruction is deductible under section 24(b).

Following points should be kept in mind in this regard:

Interest on capital is deductible on accrual basis (irrespective of the method of accountingfollowed by the assessee).

There is no limit on the amount of interest deductible under section 24(b) in case of let out

property. However, for self-occupied property, there is a limit of Rs.1,50,000/Rs.30,000 on the

amount of interest deductible under section 24(b) (to be discussed later).

Pre-construction period interest is allowed as deduction in five equal annual installmentscommencing from the previous year in which the house property was acquired or constructed.

Pre-construction period is the period commencing from the date of borrowing of loan and ends

on earlier of the following:

Date of repayment of loan; or 31st March immediately prior to the date of completion of the construction/acquisition ofthe property.

Interest on loan taken to repay the original loan is also allowed if the original loan was taken forthe purpose specified above.

Deductions Under Section 24


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Slide 23

Consider

Problem

On 1st August, 2008, Mr. Chopra borrowed Rs.60,000 @ 10% per

annum for constructing a house. Construction of the house was

completed on 1st January, 2013. Loan is repaid on 28th April, 2013.

Calculate the amount of interest deductible under section 24(b) for

the previous year 2012-13.

Reflect


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Slide 24

Consider

Solution

In this case, the amount of interest admissible under section 24(b),

will be computed as follows:

Step.1 - Calculation of Pre-construction period

Pre-construction period will start from the date of borrowing (i.e. 1st

August, 2008) and will end on earlier of the following:

a) 31st March, immediately prior to the date of completion of

construction. Construction is completed on 1st January, 2013,

thus immediately prior date will be 31st March, 2012.

b) Date of repayment of loan (i.e. 28th April, 2013).

Based on above, period from 1st August, 2008 to 31st March, 2012

will become pre-construction period.

Reflect


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Slide 25

Consider

Solution (Contd)

Step. 2 - Calculation of interest pertaining to pre-construction

period.

Interest on pre-construction period, i.e., 1st August, 2008 to 31st

March, 2012 will be computed as follows:

a) Interest for period of 1-8-2008 to 31-3-2009 (i.e. for period of 8

months) will be Rs.4,000 (@ 10% on Rs.60,000 for 8 months).

b) Interest for period of 1-4-2009 to 31-3-2012 will amount to

Rs.18,000 (Rs.6,000 annual interest for 3 years).

c) Total pre-construction period interest will be total of interest

computed at (a) and (b) above i.e. Rs.22,000 [Rs.4,000 (+)Rs.18,000].

Reflect


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Slide 26

Consider

Solution (Contd)

Step. 3 -Amount of deduction in respect of pre-construction period

interest.

Pre-construction period interest is deductible in 5 equal installments

beginning from the year in which construction is completed.Thus, amount of pre-construction period interest, deductible in

previous year 2012-13 will be Rs.4,400 (i.e. 1/5th of Rs.22,000).

Step 4 - Calculation of post construction period interest (i.e. current

years interest).

The period of 12 months (i.e. 1-4-2012 to 31-3-2013) will beconsidered for computing current years interest.

Interest will be Rs.6,000.

Reflect


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Slide 27

Consider

Solution (Contd)

Step 5 - Computation of interest deductible under section 24(b).

Interest deductible under section 24(b) will be total of 1/5th of pre-

construction period interest and interest pertaining to current year.

Thus, total deduction under section 24(b) in respect of interest willbe Rs.10,400 [Rs.4,400 (+) Rs.6,000].

Note : For easy calculation, interest is calculated on monthly basis

and not on daily basis.

Reflect


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Slide 28

Consider

ProblemThe following are the particulars in respect of a property for the

financial year 2012-13:

Reflect

Municipal value Rs. 50,000

Fair rent Rs. 63,000

Standard rent Rs. 70,000

Actual rent receivable @ Rs.

3,000 p.m.

Rs. 36,000

Municipal taxes paid Rs. 10,000

Interest on borrowed capital for

construction

Rs. 5,000

Collection charges Rs. 1,400

Insurance of the building Rs. 8,400The property remained vacant from 1-1-2013 to 31-1-2013.

Determine the income from house property.


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Slide 29

Consider

SolutionComputation of property income for assessment year 2013-14

Reflect

Gross annual value

(See Note 1)

Rs. 60,000

Less : Municipal

taxes

Rs. 10,000

Net annual value Rs. 50,000

Less deductions :

Ad hoc deduction of

30%

Rs. 15,000

Interest on borrowed

capital

Rs. 5,000 Rs. 20,000

Income from house

property

Rs. 30,000


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Slide 30

Consider

Solution (Contd)

Notes :

Gross annual value will be computed as follows :

Step 1:Actual rent for the year ignoring vacancy period rent = Rs.36,000

Step 2: Higher of municipal value or fair rent but subject to standard rent =Rs.63,000

Step 3: GAV before vacancy will be higher of step 1 or 2 = Rs.63,000.

Step 4: GAV will be Rs.63,000 less vacancy period rent of Rs.3,000 =

Rs.60,000.

Reflect


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Slide 31


1. Gross annual value of rented property will becomputed by comparing actual rent with higher of

municipal value or __________ subject to

___________.

a) Fair rent, standard rent

b) Standard rent, fair rent

2. While computing gross annual value, unrealized rentcan never be deducted from actual rent of the

property.

a) True

b) False

Answers:

1. a)

2. b)

Quiz


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Slide 32


3. While computing income from house property, which of thefollowing can be claimed as deduction from gross annual value?

a) Municipal taxes

b) Insurance premium of the property

c) Ground rent

d) All of the above

4. While computing income from house property, which of the

following cannot be claimed as deduction?

a) Municipal taxes

b) Interest on capital borrowed for constructing the house property

c) Interest on capital borrowed for purchasing the house property

d) None of the above

Answers:

3. a)

4. d)

Quiz


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Slide 33

Exception to above Rule

However, if such property cannot be occupied by the owner because of his

employment, business or profession at another place and he has to reside at another

place not belonging to him, then such property will also be treated as self-occupiedproperty.

Self Occupied House Property

A property which is occupied throughout the previous year by the

assessee for his residential purpose (i.e. not let out or put to use for

any other purpose) will be treated as a self-occupied property.

Computation of income for more than one self occupied house property:

If the assessee uses more than one property for his residence, then he can claimthe benefit of self occupied property (i.e. SOP benefit) only in case of any oneproperty.

All other properties will be treated as deemed to be let out properties (DLOP).


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Slide 34

Net Annual Value of self-occupied property will be Nil No Deduction u/s 24(a) is admissible Interest on capital is deductible subject to maximum limit of Rs.1,50,000 or

Rs.30,000 as discussed below. If all the following conditions are satisfied, then

limit in respect of interest on borrowed capital will be Rs.1,50,000:

Self Occupied House Property

Income from self occupied house property is computed as follows:

Capital is borrowed on or after 1-4-1999. However, the construction can

start even before 1-4-1999.

Capital is borrowed for the purpose of acquisition or construction (i.e. not forrepair, renewal, reconstruction).

The acquisition or construction is completed within 3 years, from the end ofthe financial year in which the capital was borrowed.

The person extending the loan certifies that such interest is payable inrespect of the amount advanced for acquisition or construction of the houseor as re-finance of the principal amount outstanding under an earlier loan

taken for acquisition or construction of the property.

If any of the above conditions is not satisfied, then the limit will be Rs.30,000.


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Slide 35

Consider

ProblemMr. Sharma resides in his own building which was purchased by him from a

bank loan. During the year 2012-13 he has paid interest on housing loan of

Rs.1,80,000. Apart from interest he has also paid municipal taxes of Rs.10,000

and insurance premium of the property of Rs.20,000. He wants to claim a loss

of Rs.2,10,000 (i.e. total of all the above items) as loss from self-occupied

house property. Advice him in this regard.

Reflect


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Slide 36

Consider

Solution

The property occupied by Mr. Sharma will be treated as self-occupied property

and he cannot claim deduction on account of any expenditure other than interest

on housing loan. Further, the deduction on account of interest on housing loan will

be limited to Rs.1,50,000 only. Thus, in this case he cannot claim deduction of

insurance premium and municipal taxes, however, he can claim deduction on

account of interest on housing loan subject to Rs.1,50,000. In this case, he

cannot claim loss of Rs.2,10,000. The computation of loss from self-occupiedproperty will be as follows:

Reflect

Particulars (Rs.)

Gross annual value Nil

() Deduction on account of municipal taxes Nil

Net annual value Nil

() Deduction under section 24(a) Nil() Deduction under section 24(b) in respect of

interest on housing loan of Rs. 1,80,000 restricted to

Rs. 1,50,000 in case of self occupied house property

(1,50,000)

Loss from self-occupied house property (1,50,000)


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Slide 37

Consider

ProblemMr. Keshav owns 3 residential houses (bungalow). All these bungalows are

used by him throughout the previous year for his own residence. Details of

these properties are as follows:

Reflect

Particulars House 1

(Rs.)

House 2

(Rs.)

House 3

(Rs.)

Municipal value 3,40,000 2,52,000 1,84,000

Fair rent 4,00,000 3,00,000 1,50,000

Interest (including 1/5th of pre-construction

interest) on capital borrowed for the purpose of

purchase of property. Amount was borrowed

after 31-3-1999.

4,84,000 50,000 2,52,000

Municipal taxes paid during the previousyear

20,000 10,000 7,000

Determine the income from house property.


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Slide 38

Consider

SolutionIn the example, Mr. Keshav owns three properties and all the properties are used

by him for his residence and hence only one property will be treated as SOP and all

the other properties will be treated as DLOP. The selection of the property to be

treated as SOP will be as follows :

Step 1: Compute income from all the properties considering all the properties as let

out throughout the previous year.

Reflect

Particulars House 1

(Rs.)

House 2

(Rs.)

House 3

(Rs.)

GAV (higher of municipal value or fair rent) 4,00,000 3,00,000 1,84,000

Less: Municipal taxes paid (20,000) (10,000) (7,000)

NAV 3,80,000 2,90,000 1,77,000

Less:

Deduction u/s 24(a) @30% of NAV (1,14,000) (87,000) (53,100)

Deduction u/s 24(b), interest on capital (4,84,000) (50,000) (2,52,000)

Income from house property (2,18,000) 1,53,000 (1,28,100)
mailto:@30%mailto:@30%


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Slide 39

Consider

Solution

Step 2: Compute income from all the properties considering all the properties

as self-occupied throughout the previous year.

Reflect

Particulars House 1

(Rs.)

House 2

(Rs.)

House 3

(Rs.)

NAV (Nil since properties are considered as

SOP)

Nil Nil Nil

Less:

Deduction u/s 24(a) @ 30% of NAV Nil Nil Nil

Deduction u/s 24(b), interest on capital (*) (1,50,000) (50,000) (1,50,000)

Income from house property (1,50,000) (50,000) (1,50,000)

(*) Since the properties are treated as SOP and capital is

borrowed after 31-3-1999, the limit of interest will be

Rs.1,50,000.


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Slide 40

Consider

Solution

Step 3: Construction of matrix.

We will create a matrix of different options. In each option, we will select

different property as SOP. The options will be as follows:

Option 1: House 1 will be treated as SOP, thus House 2 and House 3 will be

DLOP.

Option 2: House 2 will be treated as SOP, thus House 1 and House 3 will beDLOP.

Option 3: House 3 will be treated as SOP, thus House 1 and House 2 will be

DLOP.

Based on above options, the matrix will be as follows :

Step 4: Selection of the option.We will select option 2, since total income (i.e. loss) under this option is

maximum. Mr. Keshav should select House 2 as SOP and House 1 and House

3 as DLOP.

Reflect


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Slide 41


1. In case of a self-occupied property, the amount of deduction on account ofinterest on loan taken for the purpose of constructing the property is restricted

to _____.

a) Rs.1,50,000

b) Rs.30,000

c) Rs.1,80,000

d) No limit

Answers:

1. a)

2. b)

Quiz

2. In case of a self-occupied property, the interest pertaining to pre-construction period is deducted in ___ installments.

a) 3

b) 5

c) 10

d) 15


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Slide 42


3. In case of a let-out property, the interest pertaining to pre-construction period isdeducted in ___ installments.

a) 7

b) 10

c) 8

d) 5

Answers:

3. d)

Quiz


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Slide 43

Composite Rent

Composite rent = HouseProperty + Other Facilities

Rental Income of House Property

shall be computed under thehead House Property

Rental charges for other facilitiesshall be computed under incomefrom business or profession orincome from other sources

Composite rent = HouseProperty + Letting of other

assets

If the letting of property is

separable from the letting of otherassets then rental Income ofHouse Property shall becomputed under the head incomefrom House Property and rentalincome of other assets shall becomputed under Income fromBusiness or profession or Incomefrom other sources

However, if the composite rent isinseparable, it shall be taxedunder income from business orprofession or income from othersources.

At times the owner of the property provides some facilities or let out some other assets to the

tenant along with the house property and receives the amount against those services along

with rent. The amount so received will be termed as Composite Rent. Tax treatment in case ofcomposite rent will be as follows:


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Slide 44

Points to Remember

Other Important points to be kept in mind while in computing Income from houseproperty

If any house is divided into different portions, in such cases, every portion isconsidered to be a separate house and income shall be computed accordingly.

If property is co-owned by two or more persons, then the share of each suchperson shall be included in his income.

If the property is self-occupied by co-owner, each of the co-owner shall beentitled to the deduction on account of interest upto Rs.30000/150000 (asthe case may be)

Apart from Property used for own business/ profession and one self-occupiedproperty, income under this head is not charged to Income Tax in following

cases:

Income from farm house (if comes under preview of agricultural income)

Property held for charitable purposes Income from house property owned by local authority/ registered tradeunion.

Job Aid

Points to Remember


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Slide 45


1. If a building is rented along with assets and letting of other assets is non-separable, then rent of building as well as rent of other assets will be taxed

under the head Income from house property.

a) True

b) False

Answers:

1. b)

2. b)

3. b)

Quiz

2. If a building is rented along with various services like lift, air-conditioning,

watchman, electricity supply, etc., then rent of building as well as charges for

services will be taxed under the head Income from house property.a) True

b) False

3. If the property is used by the assessee for his business, then the

property will be treated as deemed to be let-out.

a) True

b) False


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Slide 46

Income earned by an assessee from business or profession is charged to tax

under the head Profits and gains of business or profession. As per section 29,

income from business/profession is to be computed in accordance with theprovisions contained in section 30 to 43D.

Profits and Gains of Business or Profession

Following is the list of major expenses which are allowed as deductions while computing

income chargeable to tax under the head Profits and gains of business or

profession:

Deduction in respect of rent, rates, taxes, repair, etc., of building [Section 30] Repairs and insurance of machinery, plant and furniture [Section 31] Depreciation [Section 32] Bonus or commission paid to employees [Section 36(1)(ii)] Interest on capital borrowed for the purpose of business or profession [Section

36(1)(iii)]

Employers contribution to certain funds [Section 36(1)(iv)/(iva)/(v)] Employees contribution [Section 36(1)(va)] Bad debts [Section 36(1)(vii)] Securities transaction tax, etc. [Section 36(1)(xv)] General deduction [Section 37(1)]


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Slide 47

Deduction Under Section 30

Deduction under section 30 is available in respect of:

Rent Rates Taxes Repair

Insurance in respect of building used by the assessee for the purpose of business or

profession.

Following points should be noted in this regard:

No deduction is available for capital repairs. Any sum on account of:

Land revenue Local rates Municipal taxesis deductible, subject to the provisions of section 43B (section 43B is discussed

later).

Deduction in respect of rent, rates, taxes, repair, etc., of building

[Section 30]


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Slide 48

Deduction Under Section 31

Deduction under section 31 is available in respect of

expenses on:

Repairs and insurance in respect of machinery, plantand furniture used for the purpose of business orprofession of the assessee.

No deduction is available for capital repairs.

Repairs and insurance of machinery, plant and

furniture [Section 31]


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Slide 49

Depreciation is decrease in the value of an asset due to wear and tear,

passage of time, obsolescence etc. It is a business expense.

While computing income from business/profession, an assessee can claim deduction

on account of depreciation subject to fulfillment of following conditions :

Asset must be owned by the assessee.Asset must be used by the assessee for the purpose of his own business orprofession.

Asset must be used during the previous year.If an asset is partly used for the purpose of business or profession and partly for anyother purpose, then depreciation is available only on the part which is used for the

purpose of business or profession.

Depreciation cannot be claimed in respect of assets which are not used for thepurpose of business or profession.

Depreciation

It should be noted that if : (a) an asset is acquired by the assessee during the previous

year and (b) such an asset was put to use for less than 180 days during that previous

year, then the depreciation in respect of such an asset for that previous year will be

limited to 50% of the amount of normal depreciation on such an asset.


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Slide 50

Depreciation (Contd)

Under the Income-tax Act, depreciation is available on written down

value (WDV) of the block of assets and not on the value of individualasset. Further, Income-tax Rules (i.e., Rule 5), have prescribed the

method of computing depreciation as well as the rates of

depreciation applicable to various block of assets. In other words,

depreciation under income-tax depends on three things, viz., block of

assets, written down value of the block and the rate of depreciation

prescribed under the Income-tax Rules.


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Slide 51

Computation of Depreciation

No depreciation is available:

(a) If the WDV of the block is zero, though the block is not empty ( i.e., still there are some assets in the

block). This happens when the money received/receivable in respect of sale, etc., of one or more asset

exceeds the sum of opening WDVplus cost of assets acquired during the previous year; or

(b) If the block is empty or ceases to exist on the last day of previous year, though the WDV may not

come to zero. This happens when all the assets under the block are sold, discarded, etc.

Written down value(WDV) of the block of assets as on the first day of

previous year(block ofassets means a group of assets falling within a

class of assets comprising of tangible assets or intangible assets inrespect of which the same percentage of depreciation is prescribed) XXXXX

Add: Cost of asset falling in the same block acquired during the

previous year XXXXX

Less: Money received/receivable (together with scrap value) in respect

of the asset (falling under the same block) which is sold, discarded,

demolished or destroyed during the relevant previous yearXXXXX

WDV of the concerned block of assets (eligible for claiming

depreciation) for the relevant previous year XXXXX

Less: Depreciation for the relevant previous year at prescribed rate XXXXX

WDV as on the last day of the previous year (after depreciation) XXXX


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Slide 52

Points to Remember

Job Aid

The following are depreciation rates in respect of different block of assets:

Office building : 10% Furniture: 10% General plant and machinery:15% Car, scooter, bike: 15% Computer: 60%


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Slide 53

Consider

ProblemMr. Raja is engaged in garment manufacturing business. He owns a block of

assets consisting of plants A, B and C (depreciation rate 15%). Opening WDV

of this block as on 1-04-2012 is Rs.84,000. He acquired following assets

during the year :

Reflect

Particulars Amount

(Rs.)

Plant D acquired on 8-4-2012 (depreciation rate 15%) 16,000

Plant E acquired on 1-6-2012 (depreciation rate 15%) 1,00,000

Office furniture acquired on 10-6-2012 (depreciation rate 10%) 50,000

Office building acquired on 15-6-2012 (depreciation rate 10%) 10,00,000

On 31-12-2012, he sold plant D for Rs. 50,000. Compute the amount ofnormal depreciation for the assessment year 2013-14.


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Slide 54

Consider

SolutionIn this case, depreciation for the previous year 2012-13 i.e. assessment year

2013-14 will be computed as follows :

Reflect

Particulars Plant

15%

Furnitur

e 10%

Building

10%

Opening WDV 84,000 Nil Nil

(+) Assets falling under same block

acquired during the year

1,16,00

0

50,000 10,00,000

(-) Assets falling under same block sold

during the year (50,000)

Nil Nil

WDV before depreciation for the year 1,50,00

0

50,000 10,00,000

(-) Depreciation for the year @ 15%, 10%

and 10%

(22,500) (5,000) (1,00,000)

Closing WDV after depreciation 1,27,50

0

45,000 9,00,000


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Slide 55

Consider

ProblemFollowing are the details regarding a block of assets (consisting of plant

eligible for depreciation @ 15%) owned by Raja Enterprises, a manufacturing

concern :

Reflect

Compute the amount of normal depreciation for the assessment year 2013-

14.

Particulars Amount (Rs.)

WDV as on 1-4-2012 of block consisting of plant A, B & C 2,52,000

Cost of plant D acquired and put to use on 1-6-2012 84,000

Cost of plant E acquired and put to use on 31-12-2012 25,200Sale value of plant A sold on 31-1-2013 50,000


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Slide 56

Consider

SolutionComputation of depreciation

Reflect

Particulars Amount (Rs.)

WDV as on 1-04-2012 of block consisting plant A, B & C 2,52,000

Add:-

Cost of plant D acquired and put to use on 1-6-2012

84,000

Cost of plant E acquired and put to use on 31-12-2012 25,200

Total value before sale 3,61,200

Less:- Sale value of plant A sold on 31-1-2013 (50,000)

WDV before depreciation 3,11,200

Less:-

(a) Depreciation @15% (full rate) on Rs. 2,86,000 (Rs 3,11,200

Rs. 25,200 being value of plant E eligible for half

depreciation)

(42,900)

(b) Depreciation @7.5% (half rate) on Rs. 25,200 (cost of plantE which is put to use for less than 180 days)

(1,890)

WDV after depreciation (Closing WDV) 2,66,410


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Slide 57

Consider

Solution

Note:-Following points should be kept in mind while computing depreciation

as per section 32:

When an asset forms part of a block, such an asset transfers its value (i.e.cost) to the WDV of the bock.

Once the assets form part of the block, for the purpose of computation ofdepreciation under section 32, the individual identity of such asset is lost

and depreciation is computed by considering the WDV of the block and

not by considering the value of individual asset.

Considering above provisions, in this case depreciation on value of plant Ais computed even though plant A is sold during the year.

Reflect


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Slide 58


1. An assessee can claim depreciation in respect of which of the following assets?a) Residential building used by him for his residence

b) Building taken on rent by him which is used by him for his business

c) a and b both

d) None of the above

Answers:

1. d)

2. b)

3. b)

Quiz

2. An assessee can claim depreciation in respect of tangible assets only. No

depreciation can be claimed on intangible assets.

a) Trueb) False

3. Depreciation in respect of computers used by the assessee for his

business can be claimed @ ______%.

a) 50

b) 60

c) 70

d) 100


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Slide 59


4. Depreciation in respect of motor car used by the assessee for his business canbe claimed @ ______%?

a) 5

b) 10

c) 15

d) 20

Answers:

4. c)

5. d)

Quiz

5. Which of the following is a non-depreciable asset?a) Office building

b) Office furniture

c) Vehicles used for the business

d) Land


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Summary

In this session, we learnt to:

Define house property Explain computation of house property incase of:

Gross Annual Value (GAV)

Self Occupied Property Let out Property Vacant property

Treatment of unrealised rent whilecomputing actual rent

Net Annual Value (NAV) Deductions u/s 24

income from house and business

Documents