TAXATION- Concept Book

Q10. Not Covered under Gratuity Act---Least of the following amount of gratuity is exempt from tax (a) Actual amount received Rs.3,15,000 (b) Maximum limit of Rs.10,00,000 less Rs.75,000 , i.e., Rs.9,25,000 (c) 15/30 x Avg. Salary x 16 years = 15/30 x Rs.1,36,000 Rs.17,000 x 16 years Q11. Calculation taxable Salary of Mr. J ( Rs.15,000 x Rs.1,57,500 Basic Salary 10.5) DA ( Rs.3,500 X 10.5) Rs.36,750 Gratuity Less: Exempt u/s 10(10) Rs.3,15,000 Rs.1,79,000 Taxable Salary Rs.1,36,000 Rs.3,73,250 Q12. Calculation of Taxable Salary Calculation of Un-commuted pension ( Rs.7,500 x 9.5 month) Rs.71,250 ( Rs.2,500 x 9.5 month) Rs.23,750 Q13. Calculation of Taxable salary of Mr. J ( Rs.2,000 x 9.5 month) Rs.19,000 Basic Salary Rs.1,14,000 DA Allowance Taxable Salary Q14. Computation of Total Income Q15. Calculation of Mrs. J’s Income Q16. Calculation of Taxable income of Mrs. J CFP Level 2 - Module 2 – Taxation - India Page 195

Q17-20-21 Calculation of Total Income of Mr. J Calculation of Total Income of Mrs. J Income from Salary Rs.80,000 Income from Salary Rs.1,20,000 Income from House Nil Income from House Property Nil Property Income from PGBP Nil Income from PGBP Nil Income from Capital Nil Income from Capital Gain Nil Gains Income from other Nil Income from other Sources sources Family pension ( Rs.4500 × 4) Rs.18,000 Less: exempt Rs.6,000 Lower of the following is exempt: (a) Limit Rs.15,000 (b) 1/3 of Rs.18,000 Rs.6,000 Total income Rs.80,000 Total Income Rs.1,32,000 Q20. Calculation of Taxable Salary when salary gets due on the last day of the month Q21. Calculation of Taxable Salary when salary gets due on the first day of the next month Not Covered under Gratuity Act—Least of the following amount of Gratuity is exempt from tax CFP Level 2 - Module 2 – Taxation - India Page 196

Q22. Leave Encashment exempt from Tax is least of Calculation of salary Salary =Basic Salary + DA (for the retirement purposes) + Commission on % basis of turnover Dec Rs.5,000 + 0 + 0 Rs.5,000 Nov Rs.5,000 + 0 + 0 Rs.5,000 Oct Rs.5,000 + 0 + 0 Rs.5,000 Sept Rs.5,000 + 0 + 0 Rs.5,000 Aug Rs.5,000 + 0 + 0 Rs.5,000 July Rs.5,000 + 0 + 0 Rs.5,000 Jun Rs.4,500 + 0 + 0 Rs.4,500 May Rs.4,500 + 0 + 0 Rs.4,500 April Rs.4,500 + 0 + 0 Rs.4,500 March Rs.4,500 + 0 + 0 Rs.4,500 Average salary is Rs.5,000 x 6 + Rs.4,800 Rs.4,500 x 4 10 Calculation of Unavailed leave Leave allowed Company’s data As per Income tax rules Completed year of Job 40 30 Total leave 16 16 Leave availed 640 480 Leave Un availed 340 340 300 140 CFP Level 2 - Module 2 – Taxation - India Page 197

Sub-Section–2.2: Income from House Property Learning Objectives After studying this unit, you would be able to understand –  when income is chargeable under the head “Income from house property”  what are the conditions to be satisfied for income to be chargeable under this head.  what is composite rent and what is the tax treatment for the same.  how to determine annual value of different categories of house property  the tax treatment for unrealized rent  what are the admissible deductions from annual value  what are the inadmissible deductions while computing income from house property  how to compute income from house property for different categories of house property  what is the tax treatment on recovery of unrealized rent and arrears of rent  what is meant by co-ownership and what is the tax treatment in respect of the same.  who are the deemed owners of house property  the cases where income from house property is exempt from tax. 2.2.1. Basis of Charge and Applicability – Section 22 (i) Property should consist of any building or land appurtenant thereto. (a) Buildings include not only residential buildings, but also factory buildings, offices, shops, godowns and other commercial premises. (b) Land appurtenant means land connected with the building like garden, garage etc. (c) Income from letting out of vacant land is, however, taxable under the head “Income from other sources”. (ii) Assessee must be the owner of the property (a) Ownership includes deemed ownership (see section 27) (b) The assessee must be the owner of the house property during the previous year. It is not material whether he is the owner in the assessment year or not. (iii) The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him. CFP Level 2 - Module 2 – Taxation - India Page 198

2.2.2. Self-occupied and Let out House Property A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence or for his own use. A self-occupied property means a property which is occupied throughout the year by the owner for his residence. Thus, a property not occupied by the owner for his residence cannot be treated as a self occupied property. However, there is one exception to this rule. If the following conditions are satisfied, then the property can be treated as self-occupied and the annual value of a property will be \"Nil\", even though the property is not occupied by the owner throughout the year for his residence: (a) The taxpayer owns a property; (b) Such property cannot actually be occupied by him owing to his employment, business or profession carried on at any other place and he has to reside at that other place in a building not owned by him; (c) The property mentioned in (a) above (or part thereof) is not actually let out at any time during the year; (d) No other benefit is derived from such property. Let out Property: A property is considered to be let out when the owner passes on the right of its occupancy or usage to another person against a consideration (rent). 2.2.3. Determination of Gross and Net Annual Value – Section 23 Particulars Rs. Rs. Gross Annual Value (see para 2.5 for detailed discussions) xxx Less: Municipal taxes paid during the year by the assessee xxx Annual Value (also called Net Annual Value) xxx Less: Deductions u/s 24 xxx (a) Standard deduction @ 30% of NAV xxx xxx (b) Interest on borrowed capital Income from House Property xxx CFP Level 2 - Module 2 – Taxation - India Page 199

Property Taxes (Municipal Taxes) (1) Property taxes are allowable as deduction from the GAV subject to the following two conditions: (a) It should be borne by the assessee (owner); and (b) It should be actually paid during the previous year. (2) If property taxes levied by a local authority for a particular previous year is not paid during that year, no deduction shall be allowed in the computation of income from house property for that year. (3) However, if in any subsequent year the arrears are paid, then the amount so paid is allowed as deduction in computation of income from house property for that year. (4) Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise, the deduction in respect of such taxes will be allowed only in the year of actual payment. 2.2.4. Deductions from Income from House Property – Section 24 30% of NAV is Allowed as Deduction u/s 24(a) (a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred. (b) In case annual value is nil or negative, the assessee will not be entitled to deduction of 30%. (c) Any expenditure incurred in respect of property shall not be allowed under any provision of the Act. Interest on borrowed capital is allowed as deduction u/s 24(b) (a) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction. (b) Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction. (c) Interest relating to the year of completion of construction can be fully claimed in that year irrespective of the date of completion. (d) Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed, can be claimed as deduction over a period of 5 years in equal annual instalments commencing from the year of acquisition or completion of construction. Number of years taken to complete the construction, etc. is irrelevant. CFP Level 2 - Module 2 – Taxation - India Page 200

(e) There is no ceiling on interest deduction u/s 24(b) except in case of self-occupied property (discussed later on). Because of interest deduction there could be loss under head Income from House Property which could be set-off against other incomes of the assessee. (f) Deduction u/s 24(b) for interest is available on accrual basis. Therefore interest accrued but not paid during the year can also be claimed as deduction. (g) Interest on unpaid interest is not deductible. Amendments made by the Finance Act, 2019 The Finance Act, 2019 has amended Section 23(4) to provide that Where there are more than two residential houses, which are in the occupation of the owner for his residential purposes than he may exercise an option to treat any two of the houses to be self-occupied. The other’s houses will be deemed to be let out and the annual value of such house(s) will be determine as per section 23(1)(a) that is the sum for which the property might reasonably be accepted to let from year to year. In other words, the annual value of two self occupied houses opted by the assessee can be taken as NIL. The Finance Act, 2019 has amended section 24(b) to provide that- Where the assessee has opted for two houses to be treated as self occupied, the deduction of amount of interest shall be in aggregate of Rs.30000 (in case property is made after five years starting from initial construction) or Rs.200000 (when property is made within 5 years) as the case may be, whether assessee has opted for one residential house or two residential houses to be self occupied. Thus the aggregate of the amount of deduction of interest in the case of first and second self – occupied house shall not exceed Rs.200000. Annual Value of house property held as stock-in-trade which was not let-off during the whole of the previous year [Section 23(5)]: Amendment made W.e.f A.Y 2020-21 The Finance Act , 2019 has amended Section 23(5) as to extend the period of one year earlier to two years if the property is treated as stock-in trade in PY. Thus the annual value of the house property consisting of any building or land appurtenant thereto if held as stock-in-trade shall be taken as NIL for the period upto two years from the end of the financial year in which the CFP Level 2 - Module 2 – Taxation - India Page 201

certificate of completion of construction of the property is obtained from the competent authority. Earlier the exception was for one year from the date of completion of construction. Mr. J ownsa house property the details of which are as below:- Rs.1,00,000 Municipal Valuation Fair Rental Rs.1,12,000 Standard Rent Rs.90,000 Actual Rent Received Rs.11,000 per month Municipal Taxes Rs.15,000 Municipal Taxes paid 40% of the above Repairs charges for the property Rs.10,000 Insurance Premium Rs.7,500 Mr. J has borrowed an amount of Rs..5,00,000 @ 10% per annum from HDFC on 1st April 2014 and construction of the property was completed in April 2016. Calculate the income from house property for the PY 2019-2020. Solution Calculation of House Property Income 132000 GAV 6000 126000 Less MT 37800 70000 NAV 18200 Less 24(a) Less 24(b) Income u/h HP Pre -construction interest 1/4/2014 31/3/2016 500000 x 10% x 2 = 100000/5 = 20000 Current Period:500000 x 10% = 50000 Total Interest 70000 CFP Level 2 - Module 2 – Taxation - India Page 202

Gross Annual Value – Section 23 Case A: Where the property is let out throughout the previous year Where the property is let out for the whole year, then the GAV would be the higher of – (a) Annual Letting Value (ALV) {also called expected rent} and (b) Actual rent received or receivable during the year (i.e. actual rent on accrual basis) Notes:  The ALV is the higher of fair rent (FR) and municipal value (MV), but restricted to standard rent (SR).  ALV cannot exceed standard rent (SR) but it can be lower than standard rent, in a case where standard rent is more than the higher of MV and FR.  Municipal value is the value determined by the municipal authorities for levying municipal taxes on house property.  Fair rent means rent which similar property in the same locality would fetch. In case fair rent is not provided in the examination, then assume fair rent equals to actual rent per month and then solve accordingly.  The standard rent is fixed by the Rent Control Act.  From the GAV computed above, municipal taxes paid by the owner during the previous year is to be deducted to arrive at the NAV. Case B: Where let out property is vacant for part of the year Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower than the ALV, then the actual rent received or receivable will be the GAV of the property. Illustration-1 Compute NAV in the following cases assuming municipal taxes paidareRs.5,000 in each case. Case 1. House is let out @ 20000 pm. If FR is 30000 pm; MV is 36000 pm; SR is 28000 pm and period of vacancy is 3 months. Case 2. Assume in (1) house is Let out at 40000 p.m. Case 3. Assume in (1) above house is let out at 30000 p.m. Case 4. Assume in (1) above that house is let out at 40000 p.m. and remained vacant for 10 months. Case 5. Assume in (1) above house is let out at 28000 p.m. and was vacant for 3 month. Case 6. Assume in (1) above house is let out at 24000 p.m. and was vacant for 3 month. CFP Level 2 - Module 2 – Taxation - India Page 203

Solution 336000 276000 60000 180000 Case 1 Expected rent 276000 Less: Loss of vacancy 336000 5,000 Actual Rent 120000 2,71,000 GAV Less: Municipal taxes paid 336000 216000 NAV 90000 360000 360000 Case 2 Expected rent 336000 5,000 Less: Loss of vacancy 400000 3,55,000 Actual Rent GAV 336000 246000 Less: Municipal taxes paid 84000 270000 NAV 270000 5,000 Case 3 Expected rent 2,65,000 Less: Loss of vacancy Actual Rent Nil GAV 80000 Less: Municipal taxes paid 80000 NAV 5,000 75,000 Case 4 Expected rent Loss of vacancy 252000 Actual Rent 252000 GAV 252000 Municipal taxes paid 5,000 NAV 2,47,000 Case 5 Expected rent Page 204 Loss of vacancy Actual Rent GAV Municipal taxes paid NAV CFP Level 2 - Module 2 – Taxation - India

Case 6 Expected rent 336000 264000 Loss of vacancy 72000 216000 Actual Rent 264000 GAV 5,000 Municipal taxes paid 2,59,000 NAV Case C: In case of self-occupied property or unoccupied property (a) Where the property is self-occupied for own residence or unoccupied throughout the previous year, its Annual Value will be Nil. (b) The benefit of exemption of two self-occupied house is available only to an individual/HUF. (c) The expression “Unoccupied property” refers to a property which cannot be occupied by the owner by reason of his employment, business or profession at a different place and he resides at such other place in a building not belonging to him. (d) No deduction for municipal taxes is allowed in respect of such property. Deduction of Interest u/s 24(b) in respect of two self-occupied property where annual value is nil Conditions Interest deduction – maximum limit  Loan taken on or after 01/04/1999, & Rs.2,00,000  Loan taken for purchase or construction, &  Purchase/construction is completed within 5 years from the end of the financial year in which the loan was taken If any of the conditions stated above does not fulfilled, Rs.30,000 like:  Loan taken before 01/04/1999  Loan taken for repair, renewal or reconstruction  Purchase/construction gets completed after 5 years Note: Limit of Rs..2,00,000 orRs.30,000 shall be applied on the interest amount inclusive of 1/5th of the accumulated interest of pre-construction period. Case D: Where a house property is let-out for part of the year and self-occupied for part of the year CFP Level 2 - Module 2 – Taxation - India Page 205

(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining part of the year, then the Expected Rent or (ALV) for the whole year shall be taken into account for determining the GAV. (b) The ALV for the whole year shall be compared with the actual rent for the let out period and whichever is higher shall be adopted as the GAV. (c) However, property taxes for the whole year is allowed as deduction provided it is paid by the owner during the previous year. Illustration-2 Mr. J owns a house in Hyderabad, Municipal value of the property isRs.90,000. During the PY, the property was self-occupied for 3 months and let-out forRs.10,000 p.m. from July onwards. The tenant vacated on31st December and the property remained vacant during January and February. From March again it was let out for Rs.11,000 p.m. Municipal taxes paid areRs.2,000. Solution: Calculation of NAV - PLO/ PSO House MV 90000 SO 3 months LO 6+1 months Vacant 2 months Rent 10000 x 6 60,000 11000 + 11000x 1 71000 90,000 GAV 2,000 88,000 Less: Municipal taxes NAV Case E: In case of deemed to be let out property (a) Where the assessee owns more than twoproperties for self-occupation, then the income from any two such properties, at the option of the assessee, shall be computed under the self-occupied property category and its annual value will be nil. (b) The other self-occupied/unoccupied properties shall be treated as “deemed let out properties”. (c) This option can be changed year after year in a manner beneficial to the assessee. (d) In case of deemed let-out property, the ALV shall be taken as the GAV. CFP Level 2 - Module 2 – Taxation - India Page 206

The question of considering actual rent received/receivable does not arise. Consequently, no adjustment is necessary on account of property remaining vacant or unrealized rent. Municipal taxes actually paid by the owner during the previous year can be claimed as deduction. J owns three houses properties, which are situated in three different cities. All the house properties are meant for self-occupation of the assesses. The particulars of the house properties are as under. Property A Property B Property C Municipal valuation 1,00,000 1,20,000 1,40,000 Fair rent 1,40,000 1,50,000 1,60,000 Standard rent 1,30,000 1,60,000 1,50,000 Municipal taxes paid 30,000 20,000 80,000 Interest on money borrowed (on purchase/construction of house property) 35,000 20,000 15,000 Ground rent due 5,000 — 8,000 Land revenue due — 6,000 — Compute the income under the head House Property by making assumption in such a manner that the tax liability of J is minimum. Solution: Calculation of House Property Income assuming all houses are let out AB C 150000 GAV 130000 150000 80000 70000 Less MT 30000 20000 21000 15000 NAV 100000 130000 34000 24(a) 30000 39000 24(b) 35000 20000 House Property Income 35000 71000 Various combinations to calculate House Property Income Option I A SO (35000) B SO (20000) C DLO 34000 CFP Level 2 - Module 2 – Taxation - India Page 207

House Property Income (21000) Option II A DLO 35000 B SO (20000) C SO (15000) House Property Income 0 Option III A SO (35000) B DLO 71000 C SO (15000) House Property Income (21000) Answer is Option I because it has the least house property income. Case F: In case of a house property, a portion let out and a portion self-occupied (a) Income from any portion or part of a property which is let out shall be computed separately under the “let out property” category and the other portion or part which is self-occupied shall be computed under the “self-occupied property” category. (b) There is no need to treat the whole property as a single unit for computation of income from house property. (c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between the let-out portion and self-occupied portion on reasonable basis. (d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion or floor on a reasonable basis. Illustration-3 Mr. J owns a House.The Municipal value of the house isRs.80,000. He paidRs.18,000 as local taxes during the year.He uses this house for his residential purposes but lets out half of the house atRs.3,000 p.m. with effect from 1/4/2019. Compute the annual value of the house. Solution: Calculation of NAV LO ½ SO ½ GAV 40000 Nil Less MT 9000 Nil NAV 31000 Nil Note: For the purpose of computing GAV, ALV (Annual Letting value) or expected rent shall always be considered for the whole year except in two cases: (a) House property is purchased/ constructed during the year. (b) House property is sold during the year. In these cases, ALV shall be considered for the period of ownership only. CFP Level 2 - Module 2 – Taxation - India Page 208

Notional Income Instead of Real Income Thus, under this head of income, there are circumstances where notional income is charged to tax instead of real income. For example –  Where the assessee owns more than two house properties for the purpose of self- occupation, the annual value of two properties, at the option of the assessee, will be nil and the other properties are deemed to be let-out and income has to be computed on a notional basis by taking the ALV as the GAV.  In the case of let-out property also, if the ALV exceeds the actual rent, the ALV is taken as the GAV. Mr. J has let out a property on a rent of Rs..9000 pm. Fair rent of the property isRs.10000 p.m. Whereas municipal value isRs.8000 P.m. J paid municipal taxes @10% during the previous Year. Construction of the house was completed on 25/2/16 with the help of a loan of Rs..8,00,000 @12% raised on 1-4-11. Half of the loan was repaid on 31/3/14 and rest is still outstanding. Compute Mr. J’S income from house property for the assessment year 2020-21. Solution: Gross Annual value 1, 20,000 Less Municipal taxes 9600 Net annual value 110400 24 (a) 33120 24(b) 115200[67200+48000] 148320 Income from HP (37920)Loss Interest for pre-construction period: 800,000 *12 *36 month [1-4-11 to 31-03-14] = 288000 *400000*12*12 month [31-03-14 to 31-03-15] = 48000 336000 1/5th of 336000 = (67200) to be allowed in 5 installments. Interest for Post Construction Period - 4L @ 12% = 48000 Interest will be aggregated from the date of borrowing till the previous year prior to the previous year in which the house is completed and till the date of completion of construction. Special Provisions Unrealised Rent – Explanation to Section 23 The amount of rent which the owner cannot realize shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable were , CFP Level 2 - Module 2 – Taxation - India Page 209

a. The tenancy is bona fide; b. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property; c. The defaulting tenant is not in occupation of any other property of the assessee; d. The assessee has taken all responsible steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing officer that legal proceeds would be useless. The amount of actual rent received or receivable by the owner shall not include the amount of rent which the owner cannot realise. Following points may be noted in this regard:  Unrealised rent shall be subtracted from actual rent, and then balance actual rent shall be compared with ALV to compute GAV.  Unrealised rent of a particular year shall be subtracted from actual rent of that year only. As per the income tax return form, unrealized rent has been shown as deduction from gross annual value ( i.e after taking expected rent or actual rent whichever is higher).It is therefore, recommended that unrealized rent should be deducted after computation of Gross annual Value. The particular so far residential house are given below. Mr. Sunil furnishes the following particulars in respect of house property owned by him in Mumbai. Municipal Value : Rs.2, 30,000 Fair Rent : Rs. 2, 50,000 Actual Rent (per month) : Rs.22000 Municipal Taxes paid during the year: Rs.20000 The tenant vacated the property on 31.10.2019 and thereafter the property was let out for Rs.25000 per month. Mr. Sunil could not realize the rent for the month of September and October. Compute the annual value of the property for the AY 2020-21 Solution: : Rs.2, 30,000 a. Municipal Value : Rs.2, 50,000 b. Fair Rent : Rs.2.79, 000 c. Actual Rent (22000*7+ 25000*5) CFP Level 2 - Module 2 – Taxation - India Page 210

Gross Annual Value : Rs.2, 79,000 Less: Unrealized rent : Rs. 44,000 Less: Municipal Tax : Rs. 20,000 Net Annual Value : Rs. 2, 15,000 Recovery of Unrealized Rent and Arrears of Rent – 25A UR AR Taxable as income of the previous year in Taxable as income of the year in which he which he recovers the unrealized rent. receives the arrears of rent. Taxable in the hands of the assessee whether Taxable in the hands of the assessee he is the owner of that property or not. whether he is the owner of that property or not. 30% of amount to be allowed as deduction. 30% of the amount of arrears shall be allowed as deduction. Unrealised rent means the rent which has been Arrears of rent is in respect of rent not deducted from actual rent in any previous year charged to income-tax for any previous for determining annual value. year. Mr. J has received a sum of Rs..15000 from a defaulted tenant during July 2017 out of the unrealized rent of Rs..25,000 due from him. Mr. J had claimed the unrealized rent of Rs..25000 for the AY 2012-13 which the Assessing Office fully allowed as deduction u/s.24. Incidentally, Mr. J had sold his property during March 2017. Advice him about the chargeability of the amount of Rs..15000 realized from the defaulted tenant. What will be your answer if the Assessing Officer had allowed onlyRs.10000 as deduction instead of Rs..25000. Solution: (a) Even if assesses is not an owner recovery of URR is taxable u/h HP. Therefore [Rs.15,000 – Rs.4500} 10,500 shall be taxable u/h HP. (b) Rs15000 shall not be taxable. Mr. J let out a house to Mr. K on 1/4/2012 @Rs.3000p.m.for five years upto 31/3/2017.After the expiry of five years, Mr. K refused to vacate the house. Hence, Mr. J filed a suit to get the house vacated and incurred expenses Rs.1,000 in this connection. Later on Mr. J agreed to renew the tenancy for five years w.e.f.1/4/2017 if Mr .K pays him rent @Rs.4000p.m. K agreed to it and paid the arrears of rent from1/4/2017 to 31/3/2019, On 1/6/2019. CFP Level 2 - Module 2 – Taxation - India Page 211

Mr. J paid the following amount during the PY House taxRs.6000; Insurance premiumRs.800; Ground rent of Rs.500 and interest of Rs.50000 Find out the income from house property for PY 2019-2020. Solution: Calculation of House Property Income GAV 48000 6000 Less MT 42000 12600 NAV 50000 (20600) Less 24(a) 96000 67200 24(b) 46600 House Property Income Add: Arrear of rent Less:30%u/s25B 28800 Income from house property Property Owned by Co-owners – Section 26 Where the house property owned by co-owners is let out, the income from such property shall be computed as if the property is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their specific share. Where the house property owned by co-owners is self-occupied by each of the co-owners, the annual value of the property of each co-owner will be Nil and each co-owner shall be entitled to a deduction of Rs..30,000 /Rs.2,00,000, as the case may be, u/s 24(b) on account of interest on borrowed capital. “Owner of house property” defined – Section 27 (Deemed owner) Situation Deemed owner Property transferred by an individual (husband/wife) to his spouse Individual Exceptions (i.e. spouse shall be the owner in following cases): (i.e. transferor)  Transfer for adequate consideration  Transfer in connection with an agreement to live apart (e.g. divorce)  Transfer before marriage (e.g. fiancée) Note: Individual shall be deemed to be the owner forever except in case relationship of husband & wife ceases to exist or in case of death of individual. Property transferred by an individual (father/mother) to his minor Individual CFP Level 2 - Module 2 – Taxation - India Page 212

child (i.e. transferor) Exceptions (i.e. child shall be the owner in following cases):  Transfer for adequate consideration  Married daughter Note: Individual shall be deemed to be the owner forever except in case minor attains majority or in case daughter gets married. Importable estate Holder Flat in co-operative society, company, housing society, etc. Member A person who is allowed to take or retain possession of any building Person in or part thereof in part performance of a contract of the nature possession referred to in section 53A of the Transfer of Property Act, 1882 If building is leased out for a period of 12 years or more. Lessee Impact: Impact of the same is that in case lessee sub-lets the same property further, such income shall be computed as per provisions of Income from House Property only and not as per Income from Other Sources. Special Cases (i) Where property is held by the assessee as stock-in-trade of a business – Annual value of house property will be charged under the head “Income from house property”. (ii) Where the assessee is engaged in the business of letting out of property on rent – Annual value of house property will be charged under the head “Income from house property”. (iii) Letting out is supplementary to the main business (a) Where the property is let out with the object of carrying on the business of the assessee in an efficient manner, then the rental income is taxable as business income, provided letting is not the main business but it is supplementary to the main business. (b) In such a case, the letting out of the property is supplementary to the main business of the assessee and deductions/allowances have to be calculated as relating to profits/gains of business and not relating to house property. (c) E.g. letting out properties to employees, letting out property to bank branch (iv) Composite Rent Meaning of composite rent: The owner of a property may sometimes receive rent in respect of building as well as – 1. other assets like say, furniture, plant and machinery. CFP Level 2 - Module 2 – Taxation - India Page 213

2. for different services provided in the building, for e.g. – (a) Lifts; (b) Security; (c) Power backup; The amount so received is known as “composite rent”. Tax Treatment of Composite Rent (1) Where composite rent includes rent of building and charges for different services (lifts, security, etc.), the composite rent is has to be split up in the following manner – (a) the sum attributable to use of property is to be assessed u/s 22 as income from house property; (b) the sum attributable to use of services is to charged to tax under the head “Profits and gains of business or profession” or under the head “Income from other sources”. (2) Where composite rent is received from letting out of building and other assets (like furniture) and the two lettings are not separable – (a) If the letting out of building and other assets are not separable i.e. the other party does not accept letting out of buildings without other assets, then the rent is taxable either as business income or income from other sources; (b) This is applicable even if sum receivable for the two lettings is fixed separately. (3) Where composite rent is received from letting out of buildings and other assets and the two lettings are separable – (a) If building is let out along with other assets, but the two lettings are separable i.e. letting out of one is acceptable to the other party without letting out of the other, then income from letting out of building is taxable under “Income from house property”; (b) Income from letting out of other assets is taxable as business income or income from other sources; (c) This is applicable even if a composite rent is received by the assessee from his tenant for the two lettings. Note: Rent attributable to services, assets, etc. shall be subtracted from actual rent, and balance actual rent shall be compared with ALV to compute GAV. CFP Level 2 - Module 2 – Taxation - India Page 214

SUMMARY 1. Rent of building (residential or commercial) taxable under this head. 2. Assessee must be the owner 3. If used for business or let out to employees, then PGBP head shall apply 4. Income = GAV – municipal taxes = NAV – standard deduction @ 30% - interest on borrowed capital 5. Municipal taxes on actually paid basis 6. Interest on accrual basis = RPY interest + 1/5th of preconstruction interest. 7. Section 23 – GAV = Annual Letting Value/Expected Rent (Fair Rent or Municipal Value, whichever is higher, but restricted to standard rent) or Actual rent, whichever is higher. 8. ALV shall always be of full year & actual rent shall be of period actually let out. Unrealised rent shall be subtracted from actual rent and balance actual rent shall be compared with ALV to determine GAV. 9. Self-occupied house = NAV shall be NIL. Interest deduction limited toRs.2,00,000 (inclusive of 1/5th of pre-construction interest) 10. More than twoself-occupied house = except two house, all other shall be deemed to be let out. 11. Arrears of rent – standard deduction allowed. Recovery of unrealised rent – standard deduction allowed 12. Co-ownership – in case of self-occupied house, interest deduction of Rs..2,00,000 allowed to each co-owner. 13. Section 27 – Deemed owner – transferors to spouse or minor child. CFP Level 2 - Module 2 – Taxation - India Page 215

PRACTICE QUESTIONS Question-1 Mr. Kalpesh borrowed a sum of Rs..30 lakhs from the National Housing Bank towards purchase of a residential flat. The loan amount was disbursed directly to the flat promoter by the bank. Though the construction was completed in May, 2019, repayments towards principal and interest had been made during the year ended 31.3.2020. In the light of the above facts, state: (i) Whether Mr. Kalpesh can claim deduction u/s 24 in respect of interest for the assessment year 2020-21; (ii) Whether deduction u/s 80C can be claimed for the above assessment year, even though the construction was completed only after the closure of the year. Question-2 Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the house is self-occupied by Mr. X and another unit is rented forRs.8,000 p.m. The rented unit was vacant for 2 months during the year. The particulars of the house for the previous year are as under: Standard rent Rs.1,62,000 p.a. Municipal valuation Rs.1,90,000 p.a. Fair rent Rs.1,85,000 p.a. Municipal tax 15% of municipal valuation Light and water charges Rs.500 p.m. Interest on borrowed capital Rs.1,500 p.m. Lease money Rs.1,200 p.a. Insurance charges Rs.3,000 p.a. Repairs Rs.12,000 p.a. Compute income from house property of Mr. X for the A.Y. Question-3 Mrs. Indu, a resident individual, owns a house in U.S.A. She receives rent @ $ 2,000 per month. She paid municipal taxes of $ 1,500 during the financial year 2019-20. She also owns a two storied house in Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of Rs.10,000. Standard rent for each floor is Rs.11,000 per month. Municipal taxes paid for the house amounts to CFP Level 2 - Module 2 – Taxation - India Page 216

Rs.7,500. Mrs. Indu had constructed the house by taking a loan from a nationalised bank on 20.6.2015. She repaid the loan of Rs..54,000 including interest of Rs..24,000. The value of one dollar is to be taken asRs.60. Compute total income from house property of Mrs. Indu. Question-4 Mr. Ramesh owns a house property which is let out. During the previous year ending 31.3.2020 he receives (i) arrears of rent of Rs..30,000 and (ii) unrealised rent of Rs.20,000. You are requested to (a) state, how they should be dealt with as per the provisions of the Act, and (b) compute the income chargeable under the head “Income from house property”. Question-5 Pritam occupied two flats for his residential purposes, particulars of which are as follows: Municipal valuation Flat 1 Flat 2 Fair rent Rs. Rs. Fair rent under Rent Control Act 90,000 45,000 Municipal taxes paid 1,20,000 40,000 Fire Insurance 80,000 Interest payable on capital borrowed for purchase of flat Not 10% available 1,000 40,000 10% 600 Nil Income of Pritam from his proprietary business - Pritam warehousing corporation isRs.6,50,000. Determine the taxable income and tax liability for the assessment year 2020-2021, on the assumption that he contributesRs.80,000 towards the public provident fund. You are informed that Pritam could not occupy Flat 2 for two months commencing from December 1, 2019 and that he has attained the age of 59 on 23rd August, 2019. CFP Level 2 - Module 2 – Taxation - India Page 217

Question-6 Mr. Rahul Jadav furnishes the following particulars relating to his house properties and other incomes and expenditure for the year 2019-20: (i) First House: This house is taken by him on lease for 10 years which is let to a tenant, for his residence, at a monthly rent of Rs..2,400. He has incurred the following expenses during this year: Rs.1,000pm Lease rent Rs.200pm Salary of Durban Rs.200pm Interest on loan taken to pay for the acquisition of the lease (ii) Second House: This house was constructed by him in 2005, but was transferred to his wife in 2009 out of love and affection. He, however, continues to stay in this house with his wife till date. He has taken a loan for the construction of this house for which interest of Rs..6,000 becomes due for the year, but had not been paid by him. He has paid repair expenses of Rs.1,000 during the year. (iii) Taxable income from business for this year amounts toRs.64,000. Compute gross total income of Mr. Rahul Jadav for the assessment year 2020-2021. Question-7 Ram owned a house property at Madras which was occupied by him for the purpose of his residence. He was transferred to Bombay in June, 2019 and therefore he let out the property with effect from 1st July, 2019 on a monthly rent of Rs..3,000. The corporation tax payable in respect of the property was Rs.6,000 of which 50% was paid by him before 31.3.20. Interest on money borrowed for the construction of the property amounted to Rs.20,000. Compute the income from house property for the assessment year 2020-21. CFP Level 2 - Module 2 – Taxation - India Page 218

ANSWERS Answer-1 (a) Interest on borrowed capital is allowed as deduction u/s 24(b) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of house property can be claimed as deduction u/s 24(b). Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired on constructed, can be claimed as deduction over a period of 5 years in equal annual instalments commencing from the year of acquisition or completion of construction. It is stated that the construction is completed only in May, 2018. Hence, deduction in respect of interest on housing loan cannot be claimed in the assessment year 2018-19. (b) Clause (xviii) of section 80C is attracted where there is any payment for the purpose of purchase or construction of a residential house property, the income from which is chargeable to tax under the head ‘Income from house property’. Such payment covers repayment of any amount borrowed from the National Housing Bank. However, deduction is prima facie eligible only if the income from such property is chargeable to tax under the head “Income from House Property”. During the assessment year 2018-19, there is no such income chargeable under this head. Hence, deduction u/s 80C cannot be claimed for A.Y. 2018-19. Answer-2 Computation of Income from house property for A.Y. 2020-21 ( Rs.) ( Rs.) Particulars 95,000 A. Rented unit (50% of total area – See Note 1 below) 92,500 Step I - Computation of Annual letting Value 81,000 Municipal valuation ( Rs.1,90,000 x ½) 81,000 Fair rent ( Rs.1,85,000 x ½) Standard rent ( Rs.1,62,000 x ½) Annual letting value is higher of Municipal valuation and fair rent, but restricted to standard rent CFP Level 2 - Module 2 – Taxation - India Page 219

Step II - Actual Rent 96,000 Rent receivable for the whole year ( Rs.8,000 x 12) Step III – Computation of Gross Annual Value 80,000 Actual rent received owing to vacancy ( Rs.96,000 – Rs.16,000) Since, owing to vacancy the actual rent received is lower than the annual letting value, the actual rent received is the Gross Annual Value Gross annual value 80,000 Less: Municipal taxes (15% of Rs.95,000) 14,250 Net Annual value 65,750 Less: Deductions u/s 24 (i) 30% of net annual value 19,725 28,725 (ii) Interest on borrowed capital ( Rs.750 x 12) 9,000 37,025 Taxable income from let out portion B. Self-occupied unit (50% of total area – See Note 1 below) Nil Annual value Less: Deduction u/s 24 9,000 (9,000) Interest on borrowed capital ( Rs.750 x 12) 28,025 Income from house property Notes: (1) It is assumed that both the units are of identical size. Therefore, the rented unit would represent 50% of total area and the self-occupied unit would represent 50% of total area. (2) It is assumed that the municipal taxes have been paid by the owner during the year. (3) No deduction will be allowed separately for light and water charges, lease money paid, insurance charges and repairs. CFP Level 2 - Module 2 – Taxation - India Page 220

Answer-3 Computation of Income from House Property of Mrs. Indu for the Assessment Year 2020-21 Particulars ( Rs.) ( Rs.) House property in USA GAV– Rent received (treated as fair rent) 14,40,000 ($2000 p.m. x Rs.60 per USD x 12 months) Less: Municipal taxes paid ($1500 x Rs.60 per USD) 90,000 Net Annual Value (NAV) 13,50,000 Less: Deduction u/s 24 30% of NAV 4,05,000 9,45,000 House property In Mumbai (Let-out portion - First Floor) Gross Annual Value Standard Rent ( Rs.11,000 x 12) (taken as ALV in the 1,32,000 absence of information relating to municipal value and fair rent) Actual Rent received ( Rs.10,000 x 12) 1,20,000 1,32,000 Less: Municipal taxes paid (50% of Rs.7,500) 3,750 Net Annual Value (NAV) 1,28,250 Less: Deduction u/s 24 30% of NAV 38,475 Interest on housing loan (50% of Rs.24,000) 12,000 50,475 77,775 Income from House property in Mumbai (Self-occupied portion - Ground Floor) Gross Annual Value Nil Less: Municipal taxes Nil Net Annual Value (NAV) Nil Less: Deduction u/s 24 30% of NAV Nil Interest on housing loan (50% of Rs.24,000) 12,000 (12,000) CFP Level 2 - Module 2 – Taxation - India Page 221

Income from House property 10,10,775 Alternative Answer: If it is assumed that the rent received also represents the fair rent, the annual letting value would beRs.1,20,000. Accordingly, the Income from house property would be computed. Answer-4 As per provisions of section 25A, arrears of rent and unrealized rent will be charged to tax as income from house property in the previous year in which such rent is received, after deducting a sum equal to 30% of such amount. The taxability shall be there whether Mr. Ramesh remains as the owner of the property in the concerned year or not. In this case, it shall be taxed as income from house property in the year of receipt of such arrear rent. Computation of income from house property 30,000 Arrears of rent 9,000 Less: Deduction @ 30% of Rs.30,000 21,000 14,000 Add: Unrealised rent received (20,000 – 6,000) 35,000 Income from house property Answer-5 As per the amendment in Finance Act,2019 section 23(4) , a person is allowed to have two properties as self occupied. Pritam has occupied both his properties as for own residential purpose, thus his both the properties are treated as self occupied. For self occupied property GAV is NIL. Taxable income will, therefore, be determined as under: NIL Gross annual value (Self occupied property) NIL Less: Municipal taxes (10% of 45000) NIL Net annual value NIL Less: Deductions u/s 24 @ 30% NIL Income from Flat 2 Flat 1 (self-occupied property) Nil Annual value u/s 23 Page 222 CFP Level 2 - Module 2 – Taxation - India

Less: Interest on borrowed capital (Note) 40,000 Income from house property (40,000) Computation of Taxable income 6,50,000 Income from proprietary business (40,000) Income from house property 6,10,000 Gross Total income 80,000 Less: Deduction u/s 80C in respect of PPF contribution 5,30,000 Total income 18,500 Tax payable on Rs.5,30,000 (12,500 + 6,000) 740.00 Add: Health & Education cess @ 4% 19,240.00 Tax payable 19,240.00 Tax payable (R/o) Note: It is assumed that the capital was borrowed for purchase ofproperty after 1-4-1999. Answer-6 Computation of total income of Rahul Jadav for the assessment year 2020-21 ( Rs.) ( Rs.) Nil Particulars Nil (A) Income from House property 6,000 (i) First House: Not assessed under this head as Mr. Rahul Jadav is not (6,000) the owner of this house – it is assessed underthe head 64,000 “Income from other sources *Note-1] 28,800 (ii) Second House: Self-occupied hence ALV Less: Deduction u/s 24 in respect of interest on monies borrowed Income from house property (B) Income from business Taxable business income (C) Income from other sources: Rent received from first house ( Rs.2400 X 12) Less: Actual expenses incurred CFP Level 2 - Module 2 – Taxation - India Page 223

Lease rent 12,000 16,800 12,000 Salary to Durban 2,400 70,000 Interest on loan borrowed Rs.200pm 2,400 Total income Note: (1) As Mr. Jadav has taken the first house on lease, he is not treated as owner of this house for the purpose of charging income under the head income from house property. (2) As second house is transferred to his wife without adequate consideration and without any agreement to live apart, Mr. Yadav is treated as deemed owner of the property as per section 27(i) for the purpose of charging income under the head income from house property. Answer-7 Ram’s income from house property will be computed as under:- Annual rental value Rs.3,000 X 12 9,900 36,000 Less: Corporation tax paid 20,000 3,000 Annual value 33,000 Less: Deduction u/s 24 @ 30% Interest on monies borrowed 29,900 Income from house property 3,100 CFP Level 2 - Module 2 – Taxation - India Page 224

MULTIPLE CHOICE QUESTIONS 1. Mr. J has taken a house on rent and sublets the same to Mr. A. Income of Mr. J from such house property shall be taxable under the head: (a) income from house property (b) income from other sources (c) income from salary (d) shall not be taxed at all 2. Mr. J owns a house property which has fair rent of Rs..1,50,000, standard rent Rs.1,20,000 and actual rent of Rs..1,30,000. Municipal taxes paid during the previous year for the past 7 years isRs.1,40,000. The annual value shall be: (a) Rs.20,000 (b) Nil (c) Rs.10,000loss (d) None of the above 3. Deduction u/s 24(a)of statutory deduction under the head House Property is (a) 35% of NAV (b) 30% of NAV (c) 25% of NAV (d) 40% of NAV 4. Municipal tax shall not include: (b) Scavenging tax (a) House tax (d) Water tax (c) State government tax 5. A house property whose fair rent is Rs.1,20,000 is vacant throughout the previous year. Municipal taxes paid for the house propertyareRs.20,000. Its net annual value will be: (a) Rs.1,20,000 (b) Nil (c) Rs.1,00,000 (d) (Rs.20,000) loss 6. Under the head of house property (a) Income from building is taxable (b) Income from land is taxable (c) Income from building and l and which is attached to building is taxable (d) None of the above 7. Deduction for the Interest on Capital Borrowed in covered under: (a) 24(a) (b) 24(c) (c) 24(b) (d) None of above CFP Level 2 - Module 2 – Taxation - India Page 225

8. Can there be negative NAV: (b) No (a) Yes 9. The maximum amount of deduction of Interest on borrowed capital in case of one house which is self-occupied shall be (loanwastakenon15/12/1999) (a) Rs.50,000 (b) Rs.2,00,000 (c) Rs.30,000 (d) Rs.1,50,000 10. Any person who has taken loan before 1/4/1999 for purchase or construction of the house which is self-occupied, maximum deduction for the interest shall be: (a) Rs.1,20,000 (b) Rs.30,000 (c) Rs.2,00,000 (d) Rs.1,50,000 11. In the above question if the loan is taken for repairs, renovation, reconstruction, addition or alteration then interest allowed shall be: (a) Rs.20,00,00 (b) Rs.30,000 (c) Rs.45,000 (d) None of the above Solve Q12 and Q13 from the following information Mr. J borrowed Rs.5,00,000 @12% p.a. on 1/4/2015 for construction of house property which was completed on2/4/2019. The amount of loan is still unpaid. 12. What will be the deduction of interest for AY2020-2021. (a) Rs.30,000 (b) Rs.96,000 (c) Rs.1,08,000 (d) Rs.2,40,000 13. What will be the deduction of interest for AY2020-2021 property is self-occupied: (a) (Rs.1,08,000) (b) Rs.96,000 (c) Rs.30,000 (d) Rs.2,40,000 14. Treatment of unrealized rent is given under section: (a) Explanation to 23 (2) (b) Explanation to 23 (1) (c) Both (a) and (b) (d) None of the above 15. Mr. J was allowed deduction of unrealized rent to the extent of Rs..40,000 in the past although the total unrealized rent wasRs.60,000. He is able to recover from the tenantRs.45,000 during the AY on account of such unrealized rent. He is liable for tax on: CFP Level 2 - Module 2 – Taxation - India Page 226

(a) Rs.45,000 (b) Nil (c) Rs.24,000 (d) Rs.17,500 16. Unrealized rent realized subsequently then its tax treatment is given under section: (a) section 25AC (b) section 25AB (c) section 25A (d) section 26 17. Unrealized rent is allowed as a deduction from: (a) gross annual value (b) net annual value (c) income from the head house property (d) actual rent 18. The concept of Deemed Ownership is given: (a) under section 24 (b) under section 25 (c) under section 29 (d) under section 27 19. Deduction of unrealized rent is given if certain conditions are satisfied which are given under: (a) section 27 (b) rule 4 (c) section 29 (d) rule 2B 20. Annual value of HP let out throughout the year / partly let out / partly vacant / vacant throughout the year is given under section: (a) section 23 (2) (b) section 23 (1) (c) section 27 (d) section 25 21. Annual value of HP which is self-occupied is given: (a) under section 23 (2) (b) under section 24 (c) under section 25 (d) None of the above 22. Meaning and chargeability of House Propertyis given: (a) under section 15 (b) under section 22 (c) under section 20 (d) None of the above 23. Interest of borrowed capital from outside India is deductible while calculating Income from HP if condition given under section. (a) 25B is satisfied (b) 22 is satisfied (c) 25 is satisfied (d) 25A is satisfied CFP Level 2 - Module 2 – Taxation - India Page 227

24. In case the property is owned by co-owners and it is let out, income from such property shall be computed: (a) separately for each co-owner (b) It will be first computed ignoring the co-ownership and then distributed amongst co- owners. (c) Shall not be calculated at all Solve Q25 and Q26 from the following information Mr. J gives you the following data 1) Municipal valueRs.12,000 pm 2) Fair rentRs.14,000 pm 3) Standard rentRs.13,000 pm 4) Actual rent received and receivableRs.15,000 pm 5) Municipal taxes paidRs.4,000 pa. 25. GAV of the house property will be? (b) Rs.2,00,000 (a) Rs.1,80,000 (d) Rs.5,20,000 (c) Rs.3,00,000 26. NAV of the house property will be? (b) Rs.2,00,000 (a) Rs.1,80,000 (d) Rs.5,20,000 (c) Rs.1,76,000 Solve Q27 and Q28 from the following information Mr. J is owners of a big house which is let out at the rent of Rs..20,000pm. Municipal Value of the house Rs.15,000 pm, Fair rent Rs.21,000pm, Standard rent Rs.18,000pm and Municipal Tax paid are Rs.5,000pa 27. GAV of the house property will be? (a) Rs.1,80,000 (b) Rs.2,00,000 (c) Rs.3,00,000 (d) Rs.2,40,000 28. NAV of the house property will be? (b) Rs.2,00,000 (a) Rs.1,80,000 (d) Rs.2,40,000 (c) Rs.2,35,000 29. AssumeinQ28 the property was vacant for 2 months. What will be NAV of the house property? (a) Rs.1,95,000 (b) Rs.2,00,000 (c) Rs.2,35,000 (d) Rs.2,40,000 CFP Level 2 - Module 2 – Taxation - India Page 228

Solve Q30 to Q32 from the following information Mr. J is owner the house which has two floors. The ground floor is let out atRs.40,000 pm and first floor is self-occupied. Municipal taxes paid areRs.80,000 pa & interest on borrowed capital payable isRs.45,000 pa. 30. GAV of the let out area of the house property will be? (a) Rs.4,40,000 (b) Nil (c) Rs.4,80,000 (d) Rs.4,00,000 31. NAV of the let out area of the house property will be? (a) Rs.4,40,000 (b) Nil (c) Rs.4,80,000 (d) Rs.4,00,000 32. Income under the head of house property will be? (a) Rs.3,95,000 (b) Rs.2,85,500 (c) Rs.2,63,000 (d) Rs.22,500 Solve Q33 to Q35 from the following information Compute the income under the head house property from the following data Particulars House 1 House 2 House 3 Municipal value Rs.1,00,000 Rs.1,50,000 Rs.2,00,000 Fair rent Rs.1,40,000 Rs.1,80,000 Rs.2,40,000 Standard rent Rs.1,20,000 Rs.2,00,000 Rent (p.m.) Rs.12,000 Rs.17,500 NA Period of vacancy Rs.21,000 Municipal taxes Paid Nil 1 month 6 months Interest on loan house property Rs.20,000 Rs.80,000 Rs.30,000 Rs.30,000 Rs.40,000 Rs.20,000 33. Income from house property from house1 will be? (a) Rs.1,94,000 (b) Rs.1,24,000 (c) Rs.1,44,000 (d) Rs.56,800 34. Income from house property from house2 will be? (a) Rs.35,750 (b) Rs.38,750 (c) Rs.38,570 (d) Rs.37,850 CFP Level 2 - Module 2 – Taxation - India Page 229

35. Income from house property from house3 will be? (a) Rs.47,200 (b) Rs.42,700 (c) Rs.44,700 (d) Rs.56,800 36. Mr. J tookloanfromabankforRs.10,00,000on1/11/2016@ 8% pa for the construction of the house which is self-occupied. Construction of the house got completed on 15/3/2020. Compute interest allowed as deduction u/s24(b)for AY2020-2021. (a) Rs.1,18,667 (b) Rs.1,50,000 (c) Rs.30,000 (d) Rs.80,000 Solve Q37 and Q38 from the following information Mr. J had taken the loan of Rs..9,00,000 on 1/4/2016 for the construction the house, at the rate of 20% pa. The construction of the house was completed on 15/1/2020.Computeinterest allowed as deduction under section 24(b) for AY 2020-2021. 37. Deduction u/s 24(b), if the house is self occupied will be? (a) Rs.1,50,000 (b) Rs.2,00,000 (c) Rs.2,88,000 (d) Rs.30,000 38. Deduction u/s24(b), if the house is let out will be? (a) Rs.1,50,000 (b) Rs.30,000 (c) Rs.2,88,000 (d) Rs.1,20,000 39. Mr. J tookloanfromabankforRs.1,00,000on1/1/2016@ 12%pa for the construction of the house which is self-occupied. Construction of the house got completed on1/1/2020andfull amount of loanwaspaidbackon31/1/2019. Compute interest allowed as deduction under section 24(b) for AY 2020-2021. (a) Rs.19,400 (b) Rs.6,800 (c) Rs.12,000 (d) Rs.49,000 40. J gifted his house property top his wife in 2012.Mrs. J has let out the house property @Rs.5,000 pm. The Income from such house property will be taxable in the hands of: (a) Mrs. J (b) It will be first computed as Mrs. J’s income and thereafter clubbed in the income of Mr. J u/s 64. (c) Mr. J will be treated as deemed owner of the house property and is liable to tax on income. (d) None of the above CFP Level 2 - Module 2 – Taxation - India Page 230

41. Mr. J gifted the house property to his minor son which was let out @Rs.5,000pm. Income from such house property shall be taxable in the hands of: (a) Minor son (b) It will be first computed as son’s income and thereafter clubbed in the income of Mr. J u/s64. (c) Mr. J will be treated as deemed owner of the house property and is liable to tax on income. (d) None of the above 42. Mr. J transferred his house property to his wife under an agreement to live apart. Income from such house property shall be taxable in the hands of: (a) Mrs. J (b) It will be first computed as Mrs. J’s income and thereafter clubbed in the income of Mr. J u/s 64. (c) Mr. J will be treated as deemed owner of the house property and is liable to tax on income. (d) None of the above Solve Q43 and Q44 from the following information Mr. J has taken a house property on lease from Mr. D and let out the same to Mr. S. 43. If the lease period is of 15 years, Income from such house earned by Mr. J shall be Taxable as (a) income under the head other sources (b) income under the head house property, since Mr. J is the deemed owner. 44. If the lease period is of 12 years, Income from such house earned by Mr. J shall be Taxable as (a) income under the head other sources (b) income under the head house property, since Mr. J is the deemed owner. 45. Mr. J gifted his house property to his married minor daughter. The income from such house property shall be taxable in the hands of: (a) Mr. J as deemed owner (b) It will be first computed as daughter’s income and thereafter clubbed in the income of Mr. J u/s 64. (c) Married minor daughter (d) None of the above CFP Level 2 - Module 2 – Taxation - India Page 231

46. Mr. J is a member of house building cooperative society who is the owner of flats constructed by it. One of the flats is allotted to Mr. J. The income from such house property shall be taxable in the hands of: (a) Co-operative society (b) Mr. J as deemed owner 47. Mr. J is owner of superstructure although the land was taken by him on lease. The income from such house property shall be taxable under the head: (a) Income from other sources (b) Income from house property 48. Mr. J has taken a house on rent and sublets the same to Mr. A. Income from such house property shall be taxable under the head: (a) Income from house property (b) Income from other sources 49. A has two house properties. Both are self- occupied: (a) The annual value of both houses shall be NIL (b) The annual value one house shall be NIL (c) The annual value of no house shall be NIL 50. Which deduction shall be allowed in the case of oneself occupied house property whose annual value is Nil: (a) 30% of net annual value (b) Insurance premium (c) Ground net (d) Lease rent (e) Interest on money borrowed in full (f ) Interest on money borrowed subject to limit of Rs..30,000 orRs.2,00,000 (g) Annual change 51. Tick, from the under mentioned, the cases where annual value can be negative: (a) Let out property (b) Oneself occupied property (c) Deemed let property (d) One property which could not be occupied due to employment elsewhere (e) Partly let out & party self-occupied property CFP Level 2 - Module 2 – Taxation - India Page 232

52. If annual value of the house property which his let-out is negative. Which deductions shall be allowed u/s 24? (a) Both deductions under section 24 (a) and section 24(b) (b) Neither deduction under section 24 (a) or section 24(b) (c) Deductions under section 24 (a) ie statutory deductions (d) Deductions under section 24 (b) ie interest on borrowed capital 53. In case of deemed to be let out property, which deductions shall be allowed under section 24(a). (a) Actual Repairs and collection charges (b) Insurance premium (c) Ground rent/ lease rent (d) Annual charge (e) Interest on money borrowed (f ) Vacancy allowance (g) Standard deduction of 30% 54. In case of deemed to be let out property, which deductions shall be allowed under section 24? (a) Actual Repairs and collection charges (b) Insurance premium (c) Ground rent/ lease rent (d) Annual charge (e) Interest on money borrowed (f) Vacancy allowance (g) Standard deduction of 30% 55. In which cases the income from house property can be negative due to deductions under section 24. (a) Let out property (b) Self occupied property (c) Deemed to be let out property (d) Party let out and party self-occupied property (e) One property which could not be occupied due to employment elsewhere (f) none of the above (g) all of the above CFP Level 2 - Module 2 – Taxation - India Page 233

56. Municipal tax is a deducted from: (a) gross annual value (b) net annual value 57. In case the property is owned by co-owners and it is let-out, Income from such property shall be computed: (a) separately for each co-owner (b) it will be first computed ignoring the co- ownership and then distributed amongst co- owners. 58. Mr. A borrowedRs.5,00,000 @ 12% pa on 1/4/2015 for construction of house property which was completed on 15/3/2019.The amount is still unpaid. The deduction of interest for AY 2020- 2021 be: (a) Rs.60,000 (b) Rs.96,000 (c) Rs.1,80,000 (d) Rs.2,40,000 59. Mr. A borrowedRs.5,00,000 @ 12% pa on 1/4/2015 for construction of house property which was completed on 2/4/2019.The amount is still unpaid. The deduction of interest for AY 2020- 2021 shall be: (a) Rs.60,000 (b) Rs.96,000 (c) Rs.240,000 (d) Rs.1,08,000 60. Unrealized rent is allowed as a deduction from: (a) gross annual value (b) net annual value (c) income from the house property (d) actual rent 61. An assessee has borrowed money for purchase of a house & interest is payable outside India. Such interest shall: (a) be allowed as deduction (b) not be allowed on deduction (c) be allowed as deduction if the tax is deducted at source (d) none of the above 62. The basis of chargeability under the head income from house property is — (a) Annual Value; (b) Municipal Value; (c) Standard Rent; (d) Fair Rent CFP Level 2 - Module 2 – Taxation - India Page 234

63. Which out of the following is not a case of deemed ownership of house property? (a) Transfer to a spouse for inadequate consideration (b) Transfer to a minor child for inadequate consideration (c) Holder of an importable estate (d) Co-owner of a property 64. Municipal tax is deducted from (b) NAV (a) GAV (d) income from house property (c) Taxable income 65. Charging Section of house property is- (b) Section 28 (a) Section 17 (d) Section 45 (c) Section 22 66. Mr. J had one self-occupied house property in Mumbai. Fair rent of that property is Rs.56,000 per annum. Municipal valuation is Rs.28,000. Municipal taxes paid are Rs.5,000 includingRs.1,000 for an earlier year. The house was constructed in December, 2011 with a loan of Rs..12,00,000 from a bank taken in November,2010. During the AY 2020-2021, the assessee refunded Rs.2,30,000 whichincludesRs.1,68,000 as current year interest. Compute the income from house property for AY2020-2021? (a) Loss of Rs..30,000 (b) Loss of Rs..1,68,000 (c) Nil (d) Loss of Rs..1,50,000 67. Where Standard Rent is not available then GAV shall be higher of (a) fair rent and municipal value (b) Municipal value and actual rent (c) Fair rent and municipal value and actual rent 68. The annual rental value of a house determined by the municipal authority is Rs.1,20,000 whereas its annual rent received/receivable isRs.1,50,000. Municipal taxes of the house property are Rs.20,000 out of whichRs.15,000 has been paid during the PY. The NAV of the house property in this case shall be (a) Rs.1,20,000 (b) Rs.1,50,000 (c) Rs.1,30,000 (d) Rs.1,35,000 CFP Level 2 - Module 2 – Taxation - India Page 235

69. Mr. J is owner of a big house which is let out at the Rent of Rs..20,000 pm. Municipal Value of the House Rs.15,000 pm, Fair Rent Rs.21,000 pm, Standard Rent Rs.18,000 pm and Municipal Tax paid are Rs.5,000 pa. Calculate NAV of the House. (a) Rs.2,38,000 (b) Rs.2,16,000 (c) Rs.2,40,000 (d) Rs.2,35,000 70. Assume in question 69, the Property was vacant for 2 months. Calculate NAV (a) Rs.1,95,000 (b) Rs.2,35,000 (c) Rs.2,00,000 (d) Rs.1,76,000 71. Assume that in question 69 House Property is self-occupied for the entire year, calculate NAV. (a) Rs.2,00,000 (b) Rs.2,16,000 (c) Nil (d) None of the above 72. Assume that in question 69 the House Property was vacant for the entire year NAV would be. (a) Rs.1,76,000 (b) Rs.5,000 (c) Nil (d) None of the above 73. Mr. J is owner the House which has two floors. The ground floor is let out at Rs.40,000 pm and first floor is self-occupied. Municipal Taxes paid for full house are Rs.80,000 pa and interest on borrowed capital for full house payable isRs.45,000 pa. Calculate income from House Property. (a) Rs.2,63,000 (b) Rs.2,85,000 (c) Rs.22500 (d) Rs.22,500 74. Mr. J has given his house on Rent to Mr. D at Rs.20,000 pm. On1/4/2018 they entered into an agreement whereby Rent is increased from Rs.20,000 pm to Rs.25,000 pm, which is effected from 1/1/2019. Municipal Taxes paid are Rs.10,000. Calculate his House Property Income. (a) Rs.2,03,000 (b) Rs.2,15,000 (c) Rs.2,13,500 (d) Rs.2,90,000 75. Mr. J and Mr. D are brother and Co-owners of the house which has four identical units. Both brothers have self-occupied one unit each and one unit each is let out at Rs.20,000 pm each. Municipal taxes paid by brothers for full house property are Rs.1,00,000 and interest on borrowed capitalisRs.1,50,000. Both of them have a salary income of Rs..4,00,000 each. Calculate total income for Mr. J. (a) Rs.2,30,000 (b) Rs.2,10,000 (c) Rs.4,75,000 (d) Rs.4,05,500 CFP Level 2 - Module 2 – Taxation - India Page 236

76. In Q 83, Calculate total income for Mr. D (a) Rs.4,05,500 (b) Rs.2,10,000 (c) Rs.4,70,000 (d) Rs.4,05,000 Solve Q 77 and Q80 from the following information: Mr. J is owner of a flat at Delhi which is let out to ABC Ltd. At Rs.20,000pm. He has paid Municipal Taxes of Rs.10,000 for the House Property. He is working in ABC Ltd. getting basic salary of Rs..25,000 pm, DA Rs.5,000 pm(forming part of the salary for the Retirement benefits), various allowances of Rs..6,000 pm and various Perquisites which have money value of Rs.3,000 pm. The company has given him the above mentioned flat as Rent Free Accommodation. Mr. J has deposited Rs.50,000 in PPF account and has donatedRs.25,000 to PMNRF. 77. Calculate income from house property. (b) Rs.1,62,000 (a) Rs.2,40,000 (d) Rs.1,61,000 (c) Rs.2,30,000 78. Calculate total income of Mr. J. (b) Rs.6,18,800 (a) Rs.5,32,000 (d) Rs.6,78,000 (c) Rs.6,93,800 79. Mr. X (67 years), a non-resident owns a house in India which is let out with effect from 1/10/2019. The construction of the house was completed on 1/9/2019.The house is let out a monthly Rent of Rs..50,000. Rent of one month could not be realized. Municipal valuation of the House is Rs.40,000 pm. Municipal Taxes due for PY 2019-2020 are Rs.40,000 out of which Taxes paid during the year are Rs.30,000. Out of this Rs.30,000, Rs.20,000 is paid by the owner and Rs.10,000 is paid by the tenant. Mr. X took a loan of Rs.10,00,000 from LIC on 1/9/2014 @12% pa for construction of this House Rs.2,00,000 was repaid on 31/3/2017. Remaining amount is unpaid so far, calculate the income from house property. (a) Rs.35,400 (b) Rs.1,61,000 (c) Rs.35,400 (d) Rs.67,800 CFP Level 2 - Module 2 – Taxation - India Page 237

80. Mr. A owns a house at Delhi. From the particulars given below, compute income from house property. Municipal valuation Rs.2,50,000 Fair Rent Rs.2,80,000 Standard Rent Rs. 2,60,000 Annual Rent (Rs.25,000 x 12) Rs.3,00,000 Vacancy period 1 month Unrealised Rent 1 month Municipal Taxes Paid (Half of it was born by tenant) Rs.25,000 Expenses on repair Rs.20,000 Mr. A had borrowed a sum of Rs..20,00,000 @10% pa from LIC Housing Ltd. on 1/8/2015 and the construction of the house was completed on 1/1/2019. Loan is still unpaid. (a) Rs.1,40,417 (b) Rs.2,37,500 (c) Rs.3,06,667 (d) Rs.3,00,000 ANSWERS 1. (b) 2. (c) 3. (b) 4. (c) 5. (c) 6. (c) 7. (c) 8. (a) 9. (b) 10. (b) 11. (b) 12. (c) 13. (a) 14. (b) 17. (d) 18. (d) 19. (b) 20. (b) 21. (a) 22. (b) 23. (c) 15. (d) 16. (c) 26. (c) 27. (d) 28. (c) 29. (a) 30. (c) 31. (a) 32. (c) 35. (a) 36. (a) 37. (b) 38. (c) 39. (b) 40. (c) 41. (c) 24. (b) 25. (a) 44. (a) 45. (a) 46. (b) 47. (b) 48. (b) 49. (a) 50. (f ) 52. (d) 53. (g) 54. (e),(g) 55. (g) 56. (a) 57. (b) 58. (b) 33. (d) 34. (b) 61. (c) 62. (a) 63. (d) 64. (a) 65. (c) 66. (b) 67. (c) 70. (a) 71. (c) 72. (b) 73. (a) 74. (c) 75. (d) 76. (a) 42. (a) 43. (b) 79. (c) 80. (a) 51. (a),(c),(e) 59. (d) 60. (d) 68. (d) 69. (d) 77. (d) 78. (b) CFP Level 2 - Module 2 – Taxation - India Page 238

SOLUTIONS 2. Calculation of Net Annual Value Let out for full year Nature of the House Property Nil Municipal Value Rs.1,50,000 Fair Rent Rs.1,20,000 Standard Rent Rs.1,20,000 Expected Rent Rs.1,30,000 Actual Rent Rs.1,30,000 GAV Rs.1,40,000 Less: Municipal Taxes paid Rs.10,000 NAV 5. Calculation of Net Annual Value Vacant for full year Nature of the House Property NIL Municipal Value Rs.1,20,000 Fair Rent NIL Standard Rent Expected Rent Rs.1,20,000 Actual Rent NIL GAV Less: Municipal Taxes paid Rs.1,20,000 NAV Rs.20,000 ( Rs.1,00,000) 12. Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2015 to 31/3/2019 Step 2: Pre construction period interest Rs.5,00,000 ×12%×48/12 =Rs.2,40,000/5=Rs.48,000 Step 3: Current year interest 2019 – 2020 =Rs.5, 00,000 × 12% =Rs.60,000 Step 4: Add both interests Rs.36,000 +Rs.60,000 =Rs.1, 08,000 15. Calculation of tax liability on unrealized rent Page 239 Unrealized rent recovered in Financial year: Rs. 45,000 CFP Level 2 - Module 2 – Taxation - India

Less: Adjustment of unrealized Rent : Rs. 20,000 NAV : Rs. 25,000 Less Deduction 24(a) 30% : Rs. 7,500 Income from House Property : Rs. 17,500 13. Since construction was completed within the period of 5 years, the maximum deduction allowed for the interest shall beRs.1,08,000. 25 and Q 26. Calculation of Net Annual Value Nature of the House Property Let out for full year Municipal Value Rs.1,44,000 Fair Rent Rs.1,68,000 Standard Rent Rs.1,56,000 Expected Rent Rs.1,56,000 Actual Rent Rs.1,80,000 GAV Rs.1,80,000 Less: Municipal Taxes paid Rs.4,000 NAV Rs.1,76,000 27 and Q 28. Calculation of Net Annual Value Nature of the House Property Rs.15,000 x 12 Let out for full year Municipal Value Rs.21,000 x 12 Rs.1,80,000 Fair Rent Rs.18,000 x 12 Rs.2,52,000 Standard Rent Rs.2,16,000 Expected Rent Rs.20,000 x 12 Rs.2,16,000 Actual Rent Rs.2,40,000 GAV Rs.2,40,000 Less: Municipal Taxes paid Rs.5,000 NAV Rs.2,35,000 CFP Level 2 - Module 2 – Taxation - India Page 240

29. Calculation of net Annual Value Nature of the House Property Partly let out, partly self-occupied Expected Rent Rs.2,16,000 Less: Loss due to Vacancy ( Rs.20,000x2) ( Rs.40,000) Reasonable Rent Rs.1,76,000 Actual Value ( Rs.20,000 x 10) Rs.2,00,000 Gross Annual Value Rs.2,00,000 Less: Municipal Taxes paid Rs.5,000 Net Annual Value Rs.1,95,000 31 and 32. Calculation of House Property income GAV GF is Let out FF is Self Less: Municipal Taxes paid occupied NAV Rs.4,80,000 Less: Deduction u/s 24 Rs.40,000 Nil (a) Standard Deduction Rs.4,40,000 Nil Nil Less: Deduction u/s 24 Rs.1,32,000 (b) Interest on Borrowed Capital Rs.22,500 Nil House Property income Rs.22,500 Net house property income Rs.2,85,500 ( Rs.22,500) Rs.2,63,000 Q33, Q34 and Q35. Calculation of house property income Particulars House 1 House 2 House 3 Municipal value Rs.1,00,000 Rs.1,50,000 Rs.2,00,000 Fair rent Rs.1,40,000 Rs.1,80,000 Rs.2,40,000 Standard rent Rs.1,20,000 Rs.2,00,000 Expected rent Rs.1,20,000 Rs.1,80,000 NA Loss of rent due to vacancy Rs.2,40,000 NIL Rs.17,500 Rs.1,26,000 CFP Level 2 - Module 2 – Taxation - India Page 241

Reasonable rent Rs.1,20,000 Rs.1,62,500 Rs.1,14,000 Actual rent Rs.1,44,000 Rs.1,92,500 Rs.1,26,000 GAV Rs.1,44,000 Rs.1,92,500 Rs.1,26,000 Municipal taxes Paid NAV Rs.20,000 Rs.80,000 Rs.30,000 Deduction u/s 24(a): Statutory Rs.1,24,000 Rs.1,12,500 Rs.96,000 deduction: 30% of NAV Rs.28,800 Deduction u/s 24(b): Interest on loan Rs.37,200 Rs.33,750 house property Rs.20,000 Taxable House property income Rs.30,000 Rs.40,000 Rs.47,200 Rs.56,800 Rs.38,750 Q36. Calculation of Interest on Borrowed capital Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/11/2014 to 31/3/2017 Step 2: Pre construction period Rs.10,00,000 × 8% × Rs.38,667 Rs.80,000 interest 29/12 = Rs.1,93,333/5 = Rs.1,18,667 Step 3: Current year interest = Rs.10,00,000 × 8% = Step 4: Add both interests Rs.80,000 + Rs.38,667 Q37. Calculation of Interest on Borrowed capital Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2014 to 31/3/2017 Rs.1,08,000 Step 2: Pre construction period interest Rs.9,00,000 × 20% × 36/12 Rs.1,80,000 = Rs.5,40,000/5 = Rs.2,88,000 Step 3: Current year interest = Rs.9,00,000 × 20% = Step 4: Add both interests Rs.1,80,000 + Rs.1,08,000 = If house is self occupied then deduction of Interest will be restricted toRs.2,00,000 since construction was completed within 5 years from the end of the year in which loan was taken. Q38. If house is let out then deduction of Interest shall beRs.2,88,000. CFP Level 2 - Module 2 – Taxation - India Page 242

Q39. Calculation of Interest on Borrowed capital Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/1/2014 to 31/1/2017 Step 2: Pre construction period Rs.1,00,000 x 12% x34/12 = Rs.6,800 interest Rs.34,000/5 Step 3: Current year interest NIL, since loan has been paid back Rs.6,800 Step 4: Add both interests Rs.6,800 + 0 = If house is self occupied then deduction of Interest will be restricted toRs.2,00,000 since construction was not completed within 5 years from the end of the year in which loan was taken. Q58. Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2013 to 31/3/2016 Step 2: Pre construction period interest Rs.5,00,000 x 12% x 36/12 = Rs.1,80,000/5 = Rs.36,000 Step 3: Current year interest 2017– 2018 = Rs.5,00,000 x 12% = Rs.60,000 Step 4: Add both interests Rs.36,000 + Rs.60,000 = Rs.96,000 Q59. Calculation of Interest on Borrowed capital Calculation of Interest on Borrowed capital Step 1: Pre construction 1/4/2013 to 31/3/2016 Rs.48,000 period Rs.5,00,000 x 12% x 48/12 = Step 2: Pre construction Rs.2,40,000/5 = period interest Step 3: Current year interest 2015 - 2015= Rs.5,00,000 x 12% = Rs.60,000 Step 4: Add both interests Rs.36,000 + Rs.60,000 = Rs.1,08,000 Q66. Calculation of House Property income Municipal valuation Fair rent 28,000 Standard rent 56,000 NA CFP Level 2 - Module 2 – Taxation - India Page 243

Expected rent 56,000 Actual rent NA GAV NIL Less: Municipal Taxes paid NIL NAV NIL Less: Deduction u/s 24(a): Standard Deduction NIL Less: Deduction u/s 24(b): Interest on Borrowed Capital House Property income 1,68,000 (1,68,000) Q68. Calculation of Net Annual Value Municipal Value Rs.1,20,000 Fair Rent NIL Standard Rent NIL Expected Rent Less: Loss due to vacancy Rs.1,20,000 Reasonable Rent Nil Actual Rent Gross Annual Value Rs.1,20,000 Less: Municipal Taxes paid 1,50,000 Net Annual Value Rs.1,50,000 Q69. Calculation of Net Annual Value Rs.15,000 Rs.1,35,000 Municipal Value Fair Rent Rs.1,80,000 Standard Rent Rs.2,52,000 Expected Rent Rs.2,16,000 Less: Loss due to vacancy Rs.2,16,000 Reasonable Rent Actual Rent NIL Gross Annual Value Rs.2,16,000 Less: Municipal Taxes paid Rs.2,40,000 Net Annual Value Rs.2,40,000 Q70. Calculation of Net Annual Value 5,000 Municipal Value Rs.2,35,000 Fair Rent Rs.1,80,000 CFP Level 2 - Module 2 – Taxation - India Rs.2,52,000 Page 244