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Time to re-think in changed times: Business head for activity of letting out properties to tax real income is most appropriate.

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Time to re-think in changed times: Business head for activity of letting out properties to tax real income is most appropriate.
March 20, 2018
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Present situation:

At present in large number of cases rental income from landed property  (land and building) are assessed under head ‘income from house property’(HP) , in some situations such income is assessed under head ‘business or profession’ (BOP) or ‘other sources’ (OS).

The income is assessed in manner which provide computation of income in a notional manner. For example, even if property is vacant, notional rent can be taxable, repairs expenses are incurred on certain intervals, however standard deduction is allowed every year. There may not be any or significant expenses, on account of collection of rent and repair yet 30% standard deduction is allowed every year whereas in some year there can be higher expenses and in other years can be nominal expenses.

Ground reality is that in many situations of small landlords, expenses, if any, may be incurred but not accounted for but standard deduction is claimed.


The building suffers wear and tear due to lapse of time and use both. However, depreciation is not allowed when income is assessed under head H/P. Depreciation may be allowed, subject to fulfilment of conditions if income is assessed under heads BOP or OS.

Depreciation allowance is an essential allowance for computing real income. However, in case of rental income real income is not computed due to non-allowance of depreciation.

Wear and tear replacement and renewals:

Whether the building be used by owner or by tenants, it suffer wear and tear. Depending on use wear and tear will take place. For example in case of factory building wear and tear will be more than in case of residential building. In case of personal use by owner were and tear will be less whereas in case of use by tenant it is likely to suffer more wear and tear. 

In present days of stylish and fashionable furnishing many items in a property require renewal and replacement frequently.

Therefore, provisioning of depreciation to ensure replacement is necessary.

Adventure in nature of commerce:

Now-a-days it is not simple case of letting out property and getting rent. Increased investment options itself make activity of landlord-ship as a highly complex aspect of commerce and investing.

Purchasing land or obtaining leasehold land, constructing building, or even purchasing a ready to move in building and letting out is an adventure in nature of commerce. There are several risks involved in this activity. The activity is also a systematic activity involving:

a. Decision making for investment in landed property.

b. Selection of property- type, location, size, investment etc.

c. Purchasing property and financing from own and borrowed funds.

d. Selection of money lenders and negotiations.

e. Selection of tenant.

f. Enetring into agreement with due care and caution.

g. Entering into agreements with service providers in property and in relation to property like owners association, service for up-keep, maintenance, insurance etc.

h. Up-keep, repair and maintenance of property,

i. Municipal tax, GST and other tax and levies management is also an important and skilled activity for which even experts are required.

j. Statutory compliances related to buildings.

Risks in letting out of properties:

Several type of commercial, financial and legal risks are involved in activity of owning and letting out properties. Some of important risks involved are:

a. Fall in price of property.

b. Fall in rate of rent.

c. Property remaining vacant.

d. Risk of tenant being in trouble and disputes causing delay in rent realization and delay in getting vacant property.

e. Competition amongst landlords,

f. Increase in rate of interest and other yields in other investment,

g. Risk of delay in getting property vacant than expected,

h. Risk of rent being freeze due to rent law or disputes,

i. Risk of disputes with tenant.

j. Risk to property.

In view of above discussion it is clear that activity of owning and letting out properties (land and building) is a systematic and organized activity. It involves risks. Increase in value of property is a very long-term aspect, whereas in short to medium term fall in prices of property is being experienced frequently. Therefore, rental income from house property need a rethink to assess it under the head income form business.


By: CA DEV KUMAR KOTHARI - March 20, 2018



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