The Budget 2019 proposals give further relief and grant exemption from levy of income tax on notional rent on the second self-occupied house with nil annual value.
By Preeti Goel
Two very significant sops handed by the Finance Minister (FM) to individuals in Budget 2019 are certainly aimed at providing the much-needed boost to real estate consumption, battling with a depressed market and shortage of funds.
Firstly, the FM has announced “Considering the difficulty of the middle class having to maintain families at two locations on account of their job, children’s education, care of parents etc, I am proposing to exempt levy of income-tax on notional rent on a second self-occupied house.” Typically, rental income derived from a let-out property is taxed under the head “Income from House Property”.
However, when an individual owns more than one house property, even if the same is not let out, it is treated as “deemed to be let out” and income tax is payable on the notional rent of such properties. Under the existing provisions of the tax laws, where an individual owns multiple house properties, he could treat any one of the several such house properties as ‘self-occupied’ with nil annual value. He has to then offer the other house properties to tax at a notional rental value.
The Budget 2019 proposals give further relief and grant exemption from levy of income tax on notional rent on the second self-occupied house with nil annual value. This certainly gives impetus to individuals to invest in real estate and avail tax benefits where families are constrained to stay at two locations due to job requirements and education of children. Recent decisions of courts allow individuals to choose the property to be treated as self-occupied, not just at the time of filing the return of income but even during audit proceedings.
Secondly, the FM in Budget 2019 has said “the benefit of rollover of capital gains u/s 54 of the Income-tax Act will be increased from investment in one residential house to two residential houses for a tax -payer having capital gains up-to INR 2 crores. This benefit can be availed once in a lifetime.” As per Section 54, long term capital gains arising from transfer of a residential house is exempt if amount is re-invested in “one residential house in India” within the stipulated period and per specified conditions. The FM has now afforded a onetime opportunity to tax payers to avail of the exemption by utilising the capital gain to purchase “two residential houses in India” instead of “one residential house in India.” This is a welcome step to boost real estate investment and allow individuals to save tax.
In the past, Section 54 of the Act was amended with effect from April 1, 2015 to replace “a residential house” with “one residential house in India” as the former phrase took into consideration multiple houses per interpretation by courts. It is noteworthy that courts have held that purchase of more than one flat used as a single residential unit will be entitled to the exemption u/s 54 (Bombay High Court in CIT v. Devdas Naik and Karnataka High Court in CIT vs D Ananda Basappa and several Tribunal decisions including the Delhi Tribunal in BB Tayal v. ACIT on October 13, 2016)
The individual tax-payers would greatly benefit by the above proposals and “double” their happiness and encourage real estate development as well.
(Views expressed are personal. The author is a Tax Director, EY India)