Will demonetisation reduce demand for rented properties?
Many, including salaried employees, have invested in a second house taking advantage of the availability of bank loans. Owing to the unique mechanism of taxing `income from house property’, challenges arise during income-tax (I-T) assessment, especially if the second house is lying vacant. In such cases, the I-T official typically seeks to raise an I-T demand based on annual value (which, in general terms, is a deemed rental value).
The moot question is: Can you, as the owner of a second house that is lying vacant, claim a `nil’ annual value in your I-T return?
The Delhi I-T tribunal, this September, in the case of Renu Shamlal, held that: As the house property could not be let out owing to recession, the I-T officer should accept the `nil’ value declared by the tax payer in her I-T return.
This decision has come at the right time as demonetisation may result in price corrections in the real estate market. With buying becoming an attractive option, those having a second house may find it difficult to find a tenant or may earn lower rentals. The fallout of this will be visible in the coming months and this is how the scenario may pan out for owners of a second house:
Market corrections in property prices will have a ripple effect, as demand for rented properties will weaken. Anuj Puri, Chairman & Country Head, JLL India, forecasts a correction in the resale properties market and in projects by smaller developers in emerging corridors and smaller cities wherever such players have in the past based their business model on cash components. Similarly, Pankaj Kapoor, MD at Liases Foras, a real estate rating & research outfit, thinks emerging market areas will be more attractive for end-use buyers, especially with a possible decline in interest rates to sub 9% within two-three months coupled with good schemes and discounts from developers.
The I-T basics
If a person has two residential properties, only one can be treated as self-occupied and exempt from I-T. The other is taxed based on annual value determined as per section 23 (1) of the I-T Act. Some deductions like municipal taxes are permitted.
Lower rentals & I-T implications
If the second house is let out, fair rent which the property can fetch (the ceiling limit for fair rent is the municipal rateable value) or the actual rent received, whichever is higher, determines the annual value. Demonetisation could result in a decline in rental earnings.
However, Gautam Nayak, tax partner, CNK & Associates, points out, “In almost all cases, even this reduced rent is likely to be higher than the municipal rateable value (MRV). Except for sham cases, the income tax authorities have to accept the actual rent received, if it is higher than the MRV.”
The Bombay high court, in the case of Tip Top Typography in 2011, held that the income tax officer can disregard the rent actually received by the owner and adopt market rent only when the arrangement is found to be a sham. “The onus to prove this, based on cogent and reliable evidences, is on the I-T officer,” explains Amarpal S Chadha, tax partner at EY India.
Chadha adds, “Further, should the I-T officer, during assessment, attempt to revise the income declared to bring the lower rental income at par with that of the previous year, the taxpayer could rely on the Bombay high court decision.” Nayak states, “Additional supporting evidence -such as news reports or details from realty websites regarding fall in rentals in that locality -should be kept handy as evidence.”
Second house remains vacant
If the second house was let out for only a few months during a fiscal year or was vacant throughout the year, then the actual rent received would be less than the fair rent.
Technically, it appears that a `nil’ annual value can be claimed by the owner of the second house if the house has remained vacant despite best efforts to find a tenant.However, tax experts do not rule out litigation.
Section 23(1)(c) provides that where the property is let out, but was vacant during the whole or any part of the year, owing to which the actual rent received is less than the fair rent, then the annual value is the actual rent received.
If the second house had never been let out earlier, the taxpayer stands on a weaker footing. But the claim of a nil annual value is stronger if the property had been let out in earlier years and the economic scenario (such as the demonetisation impact) has now resulted in lower rentals or vacancy. Nayak cautions, “Evidence will have to be produced to show that efforts had been made to let out the property, but that such efforts had not been successful.”
There are a few judicial precedents, such the Delhi ITAT decision mentioned above, which the taxpayer can rely upon. However, it is up to the I-T official to accept the `nil’ value claimed in the I-T return and litigation cannot be ruled out, say tax experts.