Do you have to pay taxes even on your apartment that you could not rent?

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The onset of the pandemic 2 years ago has left many homeowners with a problem – tenants leaving their rented premises due to working from home (WFH). Many tenants, especially those who have migrated from other towns/cities, have chosen to work from their own homes while continuing their jobs in larger cities and thus saving their rental costs, which can be quite high. , especially in large cities. The current financial year which is due to end on March 31, 2022 will see many landlords unable to rent their apartment for the whole of this year. This leads to the next question – how does this affect their income tax given that the rent from these properties is subject to income tax.

The Income Tax Act (the Act) provides that an individual may declare up to 2 properties as being used for his own purposes and therefore not subject to tax. In other words, if an individual owns 3 properties and all 3 are used for their own use, then according to the tax provisions, the person is required to offer rent (even fictitious) on one of the 3 properties to impose. Considering the above provisions, if during this year, an individual who seeks to rent his property, but is unable to obtain one, will this lead to the individual having to pay a tax on the fictitious rent? Let’s find out.

An individual taxpayer had filed his tax return which was then selected for review assessment. During the valuation, it was observed that the taxpayer owned four properties in Pune costing Rs. 60 lakhs (Flat A), Rs. 82.80 lakhs (Flat B) and Rs. 75 lakhs (Flat C and D each ). While apartments C and D were used for their own occupation, apartment A was rented for a period of 9 months at Rs. 15,000 hrs during the year; which has been duly accepted by the tax officer.

However, the taxpayer had indicated that apartment B was vacant all year on the grounds that a suitable tenant could not be found. Thus, the taxpayer had claimed Vacation allowance and declared nil income in this respect. Under the provisions of the Act, if a property is let and was vacant for all or part of a year and by reason of such vacancy, the actual rent received or receivable by the landlord in respect thereof is less than the amount for which the property can reasonably be expected to be rented; then the taxable income from that property can be claimed at the reduced amount. This benefit of being allowed to offer a lower rental income is called vacation allowance.

The tax agent asked the taxpayer to give reasons why he offered no rental income for apartment B. The tax agent argued that although he wanted to rent the apartment, he could not unable to find a suitable tenant. The tax officer rejected this explanation and calculated the rental income at Rs. 8.60 lakhs being @6% of the value of the two apartments totaling Rs. 1.43 crore.

At the first level of appeal, the taxpayer demonstrated the efforts made to rent apartment B by providing copies of written letters to the builder asking him to identify the tenants. The appeals authority observed that these letters were written on plain paper and there was no evidence available on file for the sending as well as the receipt of these letters. There was also no response from the manufacturer. In view of this, the authority treated the letters as insufficient evidence to support the taxpayer’s claim. He also observed that a cautious person wanting to rent a house would approach available estate agents instead of just writing a few letters to the builder. However, the appeal authority granted some relief to the taxpayer finding that, according to information from the magicbricks.com portal; the probable rate for Flat B should be Rs. 15,000 per month. As a result, the tax officer was instructed to limit the rental income of said apartment to Rs. 126,000 (after deducting the standard deduction @ 30% of the total rent of Rs. 180,000) instead of Rs. 8.60 lakhs calculated by the officer.

In second instance before the Tax Court, the taxpayer argued that in the first letter sent to the contractor, he had thanked him for having identified the tenant of his Apartment A and had also asked him to identify the tenant from his other apartment. Subsequently, reminder letters were sent to the builder twice. The Tax Court relied on an earlier decision in an identical question and observed that the words “property leased” as used in the law cannot be interpreted to mean “property actually leased”. Thus, if a property is held with the intention of renting it, together with efforts made to rent it, the benefit of the vacancy allowance should be open to these taxpayers. Accordingly, this case was decided in favor of the taxpayer.

(The author is the founder of Arvind Rao and Associates, a tax and financial advisory firm based in Mumbai)

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Published on: Sunday 06 February 2022, 07:00 IST

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