Computing Property and Business Income Slide 1

Objectives

In this session, we will: Define house property Explain computation of house property in case of: Self Occupied Property Let out Property Vacant property Explain important accounting concepts Explain computation of income charged to tax under the head Profits and gains of business or profession

Slide 2

Recap Check Your Understanding

1. In case of non-Government employees, the value of perquisite in respect of rent free unfurnished accommodation provided to the employee (the accommodation taken on lease by the employer) will be actual rent of the accommodation paid or payable by the employer. a) True b) False

2.

In case of non-Government employees, the value of perquisite in respect of rent free unfurnished accommodation provided to the employee (accommodation owned by the employer) will be __________% of salary if the accommodation is located in Mumbai . a) 7.5% b) 10% c) 15% d) None of the above Answers: 1. b) 2. c)

Slide 3

Recap Check Your Understanding

3. If the employer bears the cost of supply of gas, electricity and water to the employee, value of perquisite arising from supply of gas and electricity will be charged to tax, however, nothing will be charged to tax in respect of supply of water. a) True b) False Nothing shall be charged to tax in respect of reimbursement of private medical expenditure upto to Rs.15,000 per _______ . a) month b) quarter c) annum d) half year

4.

Answers: 3. b) 4. c)

Slide 4

House Property

What income is charged to tax under the head Income from House Property?
Under section 22 of the Act, the income chargeable to tax under the head Income from house property is the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner.

Not House Property

Slide 5

House Property

House Property Income

Conditions for charging income under the head house property

1 2

The property should consist of any building or land appurtenant thereto

The assessee should be the owner of the property

The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.

Slide 6

Reflect Consider
Problem Mr. Raja owns following properties : A shop at Delhi : The shop is give on rent at a monthly rent of Rs. 84,000. A plot of land at Delhi : The plot is given on rent at a monthly rent of Rs. 1,000. A car : The car is rented on a monthly rent of Rs. 20,000. Apart from above, he has taken a shop on rent from his friend at a monthly rent of Rs. 25,000. This shop is subleased by him to a company at a monthly rent of Rs. 30,000. Advice him regarding the heads of income under which above incomes will be taxed. Solution As per the provisions discussed in previous slides, the taxability of various incomes will be as follows : Rental income of shop at Delhi will be charged to tax under the head Income from house property. Rental income of plot of land will be charged to tax under the head Income from other sources. Rental income of car will be charged to tax under the head Profits and gains of business or profession or Income from other source (as the case may be). Rental income of shop subleases by Mr. Raja will be charged to tax under the head Income from other source.

Slide 7

Quiz Check Your Understanding

1. Rental income from a commercial building is not charged to tax under the head income from house property. a) True b) False 2. Income from plot of land subleased by the assessee will be charged to tax under the head Income from house property. a) True b) False

Answers: 1. b) 2. b)

Slide 8

Computation of House Property Income

House Property can be categorized as:

Let out Property Property has been rented to someone else.

Self Occupied Property Property is being used for own residential purpose.

Slide 9

Computation of Income from Let Out House Property

Income from house property in respect of a let-out property is computed as follows :

Gross annual value Less:- Municipal taxes paid during the year Net Annual Value (NAV) Less:- Deduction under section 24 Deduction under section 24(a) @ 30% of NAV Interest on borrowed capital under section 24(b) Income from house property

XXXX XXXX XXXX

XXXX XXX XXXX XXXX

Income from house property = (Gross annual value - Municipal taxes paid during the year ) - Deduction under section 24

Slide 10

Computation of Gross Annual Value

Gross annual value in case of a let-out property is higher of :

Reasonable expected rent of the property

Actual rent of the property Is the actual annual rent for which the property is let out during the previous year.

Will be higher of: Municipal value of the property Fair rent of the property. Cannot exceed standard rent, if covered under Rent Control Act.

Slide 11

Definitions of Related Terms

Municipal value of the property For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called municipal value of the property.

Fair rent of the property It is the reasonable expected rent which the property can fetch. It can be determined on the basis of rent fetched by a similar property in the same or similar locality.
Standard rent of the property It is the maximum rent which a person can legally recover from his tenant under Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.

Slide 12

Treatment of Unrealised Rent While Computing Actual Rent

Unrealised rent is the rent of the property pertaining to the previous year, which the owner of the property could not recover from the tenant.
If following conditions are satisfied, then unrealised rent pertaining to the previous year is to be deducted from actual rent of the previous year:

The tenancy is bona fide The defaulting tenant has vacated the property, or steps have been taken to compel him to vacate the property The defaulting tenant is not in occupation of any other property of the assessee The assessee has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless.

Slide 13

Reflect Consider
Problem From the following information provided by Mr. Raja in respect of 3 properties rented by him compute the gross annual value of the properties:
Particulars Municipal Value Fair Rent Standard Rent Actual rent Unrealised rent (*) Property A (Rs.) 8,48,484 2,52,252 Not Applicable 9,60,000 1,60,000 Property B (Rs.) 8,48,484 2,52,252 84,252 60,000 NIL Property C (Rs.) 2,52,252 8,48,484 9,84,000 9,60,000 80,000

(*) All the conditions specified for deduction of unrealised rent are satisfied.

Slide 14

Reflect Consider
Solution In the example, gross annual value will be computed as follows:
Particulars Property A (Rs.) Property B (Rs.) Property C (Rs.) Amount at Step 1 (Note 8,48,484 84,252 8,48,484 1) Amount at Step 2 (Note 8,00,000 60,000 8,80,000 2) Amount at Step 3 8,48,484 84,252 8,80,000
Gross annual (Note 3) value

Note 1: Amount at Step 1 (i.e. Reasonable expected rent) is higher of municipal value or fair rent (subject to standard rent). Note 2: Amount at Step 2 is actual rent after deducting unrealised rent. i.e. Rs.8,00,000 (9,60,000 - Rs.1,60,000) in case of property A, Rs.60,000 in case of property B and Rs.8,80,000 (Rs.9,60,000 Rs.80,000) in case of property C. Note 3: Amount at Step 3 is higher of amount at Step 1 or Step 2.

Slide 15

Computation of GAV of Vacant Property

Vacancy period is the period during which the property was ready to be let out, but could not be let out.
Gross Annual Value (GAV) of a property which remained vacant will be computed as follows : 1.Compute the GAV considering as if the property is not vacant at any time during the year. For ease of understanding we can name this amount as GAV before vacancy. 2. Deduct the rent pertaining to vacancy period from the GAV computed as above, i.e., gross annual value before vacancy. In other words, to derive at GAV of property which remained vacant during the year, we have to deduct the rent pertaining to vacancy period from the GAV before vacancy computed in previous step.

Note: It should be noted that, if the property remained vacant throughout the previous year, then gross annual value of such property shall be taken as nil.

Slide 16

Reflect Consider
Problem From the following information provided by Mr. Raja in respect of 3 properties rented by him, compute the gross annual value of the properties:
Particulars Municipal Value Fair Rent Standard Rent Actual rent Unrealised rent (*) Vacancy period Loss due to vacancy Property A (Rs.) 8,48,484 2,52,252 N.A 9,60,000 1,60,000 1 month 80,000 Property B (Rs.) 48,484 65,000 59,000 60,000 NIL 1 month 5,000 Property C (Rs.) 2,52,252 8,48,484 9,84,000 N.A. N.A. 12 months

(*) All the conditions specified for deduction of unrealised rent are satisfied.

Slide 17

Reflect Consider
Solution In this situation, gross annual value will be computed as follows:

Particulars
Amount at Step 1 (Note 1) Amount at Step 2 (Note 2) Amount at Step 3 Gross annual value before vacancy (Note 3) Amount at Step 4 Gross annual value (Note 4)

Property A (Rs.) 8,48,484

8,00,000 8,48,484 7,68,484

Property B (Rs.) 59,000

60,000 60,000 55,000

Property C (Rs.) 8,48,484

NIL(*) NIL(*) NIL (*)

Slide 18

Reflect Consider
Solution (Contd) (*) Gross annual value in case of property C will be nil since the property remained vacant throughout the previous year. Note 1: Amount at Step 1 (i.e. Reasonable expected rent) is higher of municipal value or fair rent (subject to standard rent). Note 2: Amount at Step 2 is actual rent after deducting unrealised rent, i.e., Rs.8,00,000 (Rs.9,60,000 - Rs.1,60,000) in case of property A and Rs.60,000 (Rs.60,000 - NIL) in case of property B. Note 3: Amount at Step 3 (Gross annual value before vacancy) is higher of amount at Step 1 or Step 2; this will become gross annual value before vacancy, i.e., Rs.8,48,484 and Rs.60,000 for property A and B, respectively. Note 4: Amount at Step 4 (Gross annual value) is arrived at after deducting loss due to vacancy from amount at Step 3 (i.e. Step 3 loss due to vacancy) i.e. Rs.8,48,484 Rs.80,000 = Rs.7,68,484 in case of property A and Rs.60,000 Rs.5,000 = Rs.55,000 in case of property B.

Slide 19

Job Aid Points to Remember

Next step after computation of GAV is to compute the Net annual value (NAV). Net annual value = Gross annual value - Municipal taxes Following points should be kept in mind while claiming deduction on account of municipal taxes :

Municipal taxes (irrespective of the year or years to which they relate) are deductible only if they are actually paid by the assesseeowner during the relevant previous year. If Municipal Taxes are borne by the tenant, no deduction is admissible. No deduction can be claimed in respect of Municipal Tax payable but not actually paid.

Slide 20

Deductions Under Section 24

To derive taxable income from house property, we have to deduct following deductions from NAV (i) Standard deduction under section 24(a) and (ii) Interest on capital borrowed for purchase or construction of the property under section 24(b). Section 24(a) - Standard Deduction

Deduction under section 24(a) commonly referred to as standard deduction, will be equal to 30% of net annual value. Deduction under section 24(a) @ 30% of net annual value is available, whether or not the assessee has incurred any expenditure.

Slide 21

Deductions Under Section 24

Section 24(b) Interest on borrowed capital
Interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction is deductible under section 24(b). Following points should be kept in mind in this regard: Interest on capital is deductible on accrual basis (irrespective of the method of accounting followed by the assessee). There is no limit on the amount of interest deductible under section 24(b) in case of let out property. However, for self-occupied property, there is a limit of Rs.1,50,000/Rs.30,000 on the amount of interest deductible under section 24(b) (to be discussed later). Pre-construction period interest is allowed as deduction in five equal annual installments commencing from the previous year in which the house property was acquired or constructed. Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following: Date of repayment of loan; or 31st March immediately prior to the date of completion of the construction/acquisition of the property. Interest on loan taken to repay the original loan is also allowed if the original loan was taken for the purpose specified above.

Slide 22

Reflect Consider
Problem

On 1st August, 2008, Mr. Chopra borrowed Rs.60,000 @ 10% per annum for constructing a house. Construction of the house was completed on 1st January, 2013. Loan is repaid on 28th April, 2013. Calculate the amount of interest deductible under section 24(b) for the previous year 2012-13.

Slide 23

Reflect Consider
Solution

In this case, the amount of interest admissible under section 24(b), will be computed as follows:
Step.1 - Calculation of Pre-construction period Pre-construction period will start from the date of borrowing (i.e. 1st August, 2008) and will end on earlier of the following: a) 31st March, immediately prior to the date of completion of construction. Construction is completed on 1st January, 2013, thus immediately prior date will be 31st March, 2012. b) Date of repayment of loan (i.e. 28th April, 2013). Based on above, period from 1st August, 2008 to 31st March, 2012 will become pre-construction period.

Slide 24

Reflect Consider
Solution (Contd)

Step. 2 - Calculation of interest pertaining to pre-construction period.

Interest on pre-construction period, i.e., 1st August, 2008 to 31st March, 2012 will be computed as follows:

a) Interest for period of 1-8-2008 to 31-3-2009 (i.e. for period of 8 months) will be Rs.4,000 (@ 10% on Rs.60,000 for 8 months). b) Interest for period of 1-4-2009 to 31-3-2012 will amount to Rs.18,000 (Rs.6,000 annual interest for 3 years). c) Total pre-construction period interest will be total of interest computed at (a) and (b) above i.e. Rs.22,000 [Rs.4,000 (+) Rs.18,000].

Slide 25

Reflect Consider
Solution (Contd)

Step. 3 - Amount of deduction in respect of pre-construction period interest.

Pre-construction period interest is deductible in 5 equal installments beginning from the year in which construction is completed. Thus, amount of pre-construction period interest, deductible in previous year 2012-13 will be Rs.4,400 (i.e. 1/5th of Rs.22,000). Step 4 - Calculation of post construction period interest (i.e. current years interest). The period of 12 months (i.e. 1-4-2012 to 31-3-2013) will be considered for computing current years interest. Interest will be Rs.6,000.

Slide 26

Reflect Consider
Solution (Contd)

Step 5 - Computation of interest deductible under section 24(b).

Interest deductible under section 24(b) will be total of 1/5th of preconstruction period interest and interest pertaining to current year. Thus, total deduction under section 24(b) in respect of interest will be Rs.10,400 [Rs.4,400 (+) Rs.6,000]. Note : For easy calculation, interest is calculated on monthly basis and not on daily basis.

Slide 27

Reflect Consider
Problem The following are the particulars in respect of a property for the financial year 2012-13:
Municipal value Fair rent Standard rent Actual rent receivable @ Rs. 3,000 p.m. Municipal taxes paid Interest on borrowed capital for construction Collection charges Insurance of the building Rs. 50,000 Rs. 63,000 Rs. 70,000 Rs. 36,000 Rs. 10,000 Rs. 5,000 Rs. 1,400 Rs. 8,400

The property remained vacant from 1-1-2013 to 31-1-2013. Determine the income from house property.

Slide 28

Reflect Consider
Solution Computation of property income for assessment year 2013-14
Gross annual value (See Note 1) Less : Municipal taxes Net annual value Less deductions : Ad hoc deduction of 30% Interest on borrowed capital Income from house property Rs. 60,000 Rs. 10,000 Rs. 50,000 Rs. 15,000 Rs. 5,000 Rs. 20,000 Rs. 30,000

Slide 29

Reflect Consider
Solution (Contd)

Notes : Gross annual value will be computed as follows :

Step 1: Actual rent for the year ignoring vacancy period rent = Rs.36,000 Step 2: Higher of municipal value or fair rent but subject to standard rent = Rs.63,000 Step 3: GAV before vacancy will be higher of step 1 or 2 = Rs.63,000. Step 4: GAV will be Rs.63,000 less vacancy period rent of Rs.3,000 = Rs.60,000.

Slide 30

Quiz Check Your Understanding

1. Gross annual value of rented property will be computed by comparing actual rent with higher of municipal value or __________ subject to ___________. a) Fair rent, standard rent b) Standard rent, fair rent 2. While computing gross annual value, unrealized rent can never be deducted from actual rent of the property. a) True b) False

Answers: 1. a) 2. b)

Slide 31

Quiz Check Your Understanding

3. While computing income from house property, which of the following can be claimed as deduction from gross annual value? a) Municipal taxes b) Insurance premium of the property c) Ground rent d) All of the above

4. While computing income from house property, which of the following cannot be claimed as deduction? a) Municipal taxes b) Interest on capital borrowed for constructing the house property c) Interest on capital borrowed for purchasing the house property d) None of the above

Answers: 3. a) 4. d)

Slide 32

Self Occupied House Property

A property which is occupied throughout the previous year by the assessee for his residential purpose (i.e. not let out or put to use for any other purpose) will be treated as a self-occupied property.
Exception to above Rule

However, if such property cannot be occupied by the owner because of his employment, business or profession at another place and he has to reside at another place not belonging to him, then such property will also be treated as self-occupied property. Computation of income for more than one self occupied house property:

If the assessee uses more than one property for his residence, then he can claim the benefit of self occupied property (i.e. SOP benefit) only in case of any one property. All other properties will be treated as deemed to be let out properties (DLOP).

Slide 33

Self Occupied House Property

Income from self occupied house property is computed as follows:

Net Annual Value of self-occupied property will be Nil No Deduction u/s 24(a) is admissible Interest on capital is deductible subject to maximum limit of Rs.1,50,000 or Rs.30,000 as discussed below. If all the following conditions are satisfied, then limit in respect of interest on borrowed capital will be Rs.1,50,000: Capital is borrowed on or after 1-4-1999. However, the construction can start even before 1-4-1999. Capital is borrowed for the purpose of acquisition or construction (i.e. not for repair, renewal, reconstruction). The acquisition or construction is completed within 3 years, from the end of the financial year in which the capital was borrowed. The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for acquisition or construction of the property.

If any of the above conditions is not satisfied, then the limit will be Rs.30,000.

Slide 34

Reflect Consider
Problem Mr. Sharma resides in his own building which was purchased by him from a bank loan. During the year 2012-13 he has paid interest on housing loan of Rs.1,80,000. Apart from interest he has also paid municipal taxes of Rs.10,000 and insurance premium of the property of Rs.20,000. He wants to claim a loss of Rs.2,10,000 (i.e. total of all the above items) as loss from self-occupied house property. Advice him in this regard.

Slide 35

Reflect Consider
Solution The property occupied by Mr. Sharma will be treated as self-occupied property and he cannot claim deduction on account of any expenditure other than interest on housing loan. Further, the deduction on account of interest on housing loan will be limited to Rs.1,50,000 only. Thus, in this case he cannot claim deduction of insurance premium and municipal taxes, however, he can claim deduction on account of interest on housing loan subject to Rs.1,50,000. In this case, he cannot claim loss of Rs.2,10,000. The computation of loss from self-occupied property will be as follows:
Particulars Gross annual value () Deduction on account of municipal taxes Net annual value () Deduction under section 24(a) () Deduction under section 24(b) in respect of interest on housing loan of Rs. 1,80,000 restricted to Rs. 1,50,000 in case of self occupied house property Loss from self-occupied house property (Rs.) Nil Nil Nil Nil (1,50,000)

(1,50,000)

Slide 36

Reflect Consider
Problem Mr. Keshav owns 3 residential houses (bungalow). All these bungalows are used by him throughout the previous year for his own residence. Details of these properties are as follows:
Particulars Municipal value Fair rent Interest (including 1/5th of pre-construction interest) on capital borrowed for the purpose of purchase of property. Amount was borrowed after 31-3-1999. Municipal taxes paid during the previous year House 1 House 2 House 3 (Rs.) (Rs.) (Rs.) 3,40,000 2,52,000 1,84,000 4,00,000 3,00,000 1,50,000 4,84,000 50,000 2,52,000

20,000

10,000

7,000

Determine the income from house property.

Slide 37

Reflect Consider
Solution In the example, Mr. Keshav owns three properties and all the properties are used by him for his residence and hence only one property will be treated as SOP and all the other properties will be treated as DLOP. The selection of the property to be treated as SOP will be as follows : Step 1: Compute income from all the properties considering all the properties as let out throughout the previous year.
Particulars GAV (higher of municipal value or fair rent) Less: Municipal taxes paid NAV Less: Deduction u/s 24(a) @30% of NAV Deduction u/s 24(b), interest on capital Income from house property House 1 (Rs.) 4,00,000 (20,000) 3,80,000 House 2 (Rs.) 3,00,000 (10,000) 2,90,000 House 3 (Rs.) 1,84,000 (7,000) 1,77,000

(1,14,000) (4,84,000)
(2,18,000)

(87,000) (53,100) (50,000) (2,52,000)

1,53,000 (1,28,100)

Slide 38

Reflect Consider
Solution

Step 2: Compute income from all the properties considering all the properties as self-occupied throughout the previous year.
Particulars NAV (Nil since properties are considered as SOP) Less: Deduction u/s 24(a) @ 30% of NAV Deduction u/s 24(b), interest on capital (*) Income from house property House 1 House 2 House 3 (Rs.) Nil Nil (Rs.) Nil (Rs.)

Nil Nil (1,50,000) (50,000) (1,50,000) (50,000)

Nil (1,50,000) (1,50,000)

(*) Since the properties are treated as SOP and capital is borrowed after 31-3-1999, the limit of interest will be Rs.1,50,000.

Slide 39

Reflect Consider
Solution Step 3: Construction of matrix. We will create a matrix of different options. In each option, we will select different property as SOP. The options will be as follows: Option 1: House 1 will be treated as SOP, thus House 2 and House 3 will be DLOP. Option 2: House 2 will be treated as SOP, thus House 1 and House 3 will be DLOP. Option 3: House 3 will be treated as SOP, thus House 1 and House 2 will be DLOP. Based on above options, the matrix will be as follows : Step 4: Selection of the option. We will select option 2, since total income (i.e. loss) under this option is maximum. Mr. Keshav should select House 2 as SOP and House 1 and House 3 as DLOP.

Slide 40

Quiz Check Your Understanding

1. In case of a self-occupied property, the amount of deduction on account of interest on loan taken for the purpose of constructing the property is restricted to _____. a) Rs.1,50,000 b) Rs.30,000 c) Rs.1,80,000 d) No limit In case of a self-occupied property, the interest pertaining to preconstruction period is deducted in ___ installments. a) 3 b) 5 c) 10 d) 15

2.

Answers: 1. a) 2. b)

Slide 41

Quiz Check Your Understanding

3. In case of a let-out property, the interest pertaining to pre-construction period is deducted in ___ installments. a) b) c) d) 7 10 8 5

Answers: 3. d)

Slide 42

Composite Rent
At times the owner of the property provides some facilities or let out some other assets to the tenant along with the house property and receives the amount against those services along with rent. The amount so received will be termed as Composite Rent. Tax treatment in case of composite rent will be as follows: Composite rent = House Property + Other Facilities Rental Income of House Property shall be computed under the head House Property Rental charges for other facilities shall be computed under income from business or profession or income from other sources Composite rent = House Property + Letting of other assets If the letting of property is separable from the letting of other assets then rental Income of House Property shall be computed under the head income from House Property and rental income of other assets shall be computed under Income from Business or profession or Income from other sources However, if the composite rent is inseparable, it shall be taxed under income from business or profession or income from other sources.

Slide 43

Job Aid Points to Remember

Points to Remember

Other Important points to be kept in mind while in computing Income from house property

If any house is divided into different portions, in such cases, every portion is considered to be a separate house and income shall be computed accordingly. If property is co-owned by two or more persons, then the share of each such person shall be included in his income. If the property is self-occupied by co-owner, each of the co-owner shall be entitled to the deduction on account of interest upto Rs.30000/150000 (as the case may be) Apart from Property used for own business/ profession and one self-occupied property, income under this head is not charged to Income Tax in following cases: Income from farm house (if comes under preview of agricultural income) Property held for charitable purposes Income from house property owned by local authority/ registered trade union.

Slide 44

Quiz Check Your Understanding

1. If a building is rented along with assets and letting of other assets is nonseparable, then rent of building as well as rent of other assets will be taxed under the head Income from house property. a) True b) False If a building is rented along with various services like lift, air-conditioning, watchman, electricity supply, etc., then rent of building as well as charges for services will be taxed under the head Income from house property. a) True b) False If the property is used by the assessee for his business, then the property will be treated as deemed to be let-out. a) True b) False

2.

3.

Answers: 1. b) 2. b) 3. b)

Slide 45

Profits and Gains of Business or Profession

Income earned by an assessee from business or profession is charged to tax under the head Profits and gains of business or profession. As per section 29, income from business/profession is to be computed in accordance with the provisions contained in section 30 to 43D. Following is the list of major expenses which are allowed as deductions while computing income chargeable to tax under the head Profits and gains of business or profession:

Deduction in respect of rent, rates, taxes, repair, etc., of building [Section 30] Repairs and insurance of machinery, plant and furniture [Section 31] Depreciation [Section 32] Bonus or commission paid to employees [Section 36(1)(ii)] Interest on capital borrowed for the purpose of business or profession [Section 36(1)(iii)] Employers contribution to certain funds [Section 36(1)(iv)/(iva)/(v)] Employees contribution [Section 36(1)(va)] Bad debts [Section 36(1)(vii)] Securities transaction tax, etc. [Section 36(1)(xv)] General deduction [Section 37(1)]

Slide 46

Deduction Under Section 30

Deduction in respect of rent, rates, taxes, repair, etc., of building [Section 30] Deduction under section 30 is available in respect of: Rent Rates Taxes Repair Insurance in respect of building used by the assessee for the purpose of business or profession.

Following points should be noted in this regard:

No deduction is available for capital repairs. Any sum on account of: Land revenue Local rates Municipal taxes is deductible, subject to the provisions of section 43B (section 43B is discussed later).

Slide 47

Deduction Under Section 31

Repairs and insurance of machinery, plant and furniture [Section 31] Deduction under section 31 is available in respect of expenses on:

Repairs and insurance in respect of machinery, plant

and furniture used for the purpose of business or profession of the assessee. No deduction is available for capital repairs.

Slide 48

Depreciation
Depreciation is decrease in the value of an asset due to wear and tear, passage of time, obsolescence etc. It is a business expense.
While computing income from business/profession, an assessee can claim deduction on account of depreciation subject to fulfillment of following conditions : Asset must be owned by the assessee. Asset must be used by the assessee for the purpose of his own business or profession. Asset must be used during the previous year. If an asset is partly used for the purpose of business or profession and partly for any other purpose, then depreciation is available only on the part which is used for the purpose of business or profession. Depreciation cannot be claimed in respect of assets which are not used for the purpose of business or profession.

It should be noted that if : (a) an asset is acquired by the assessee during the previous year and (b) such an asset was put to use for less than 180 days during that previous year, then the depreciation in respect of such an asset for that previous year will be limited to 50% of the amount of normal depreciation on such an asset.

Slide 49

Depreciation (Contd)
Under the Income-tax Act, depreciation is available on written down value (WDV) of the block of assets and not on the value of individual asset. Further, Income-tax Rules (i.e., Rule 5), have prescribed the method of computing depreciation as well as the rates of depreciation applicable to various block of assets. In other words, depreciation under income-tax depends on three things, viz., block of assets, written down value of the block and the rate of depreciation prescribed under the Income-tax Rules.

Slide 50

Computation of Depreciation
Written down value(WDV) of the block of assets as on the first day of previous year (block of assets means a group of assets falling within a class of assets comprising of tangible assets or intangible assets in respect of which the same percentage of depreciation is prescribed) Add: Cost of asset falling in the same block acquired during the previous year Less: Money received/receivable (together with scrap value) in respect of the asset (falling under the same block) which is sold, discarded, demolished or destroyed during the relevant previous year WDV of the concerned block of assets (eligible for claiming depreciation) for the relevant previous year Less: Depreciation for the relevant previous year at prescribed rate WDV as on the last day of the previous year (after depreciation)

XXXXX XXXXX

XXXXX XXXXX XXXXX XXXX

No depreciation is available: (a) If the WDV of the block is zero, though the block is not empty (i.e., still there are some assets in the block). This happens when the money received/receivable in respect of sale, etc., of one or more asset exceeds the sum of opening WDV plus cost of assets acquired during the previous year; or (b) If the block is empty or ceases to exist on the last day of previous year, though the WDV may not come to zero. This happens when all the assets under the block are sold, discarded, etc.

Slide 51

Job Aid

Points to Remember
The following are depreciation rates in respect of different block of assets:

Office building : 10% Furniture: 10% General plant and machinery:15% Car, scooter, bike: 15% Computer: 60%

Slide 52

Reflect Consider
Problem Mr. Raja is engaged in garment manufacturing business. He owns a block of assets consisting of plants A, B and C (depreciation rate 15%). Opening WDV of this block as on 1-04-2012 is Rs.84,000. He acquired following assets during the year :
Particulars Plant D acquired on 8-4-2012 (depreciation rate 15%) Plant E acquired on 1-6-2012 (depreciation rate 15%) Office furniture acquired on 10-6-2012 (depreciation rate 10%) Office building acquired on 15-6-2012 (depreciation rate 10%) Amount (Rs.) 16,000 1,00,000 50,000 10,00,000

On 31-12-2012, he sold plant D for Rs. 50,000. Compute the amount of normal depreciation for the assessment year 2013-14.

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Reflect Consider
Solution In this case, depreciation for the previous year 2012-13 i.e. assessment year 2013-14 will be computed as follows :
Particulars Plant 15% 84,000 1,16,00 0 Furnitur e 10% Nil 50,000 Nil 50,000 (5,000) 45,000 Building 10% Nil 10,00,000 Nil 10,00,000 (1,00,000) 9,00,000

Opening WDV (+) Assets falling under same block acquired during the year (-) Assets falling under same block sold during the year (50,000) WDV before depreciation for the year 1,50,00 0 (-) Depreciation for the year @ 15%, 10% (22,500) and 10% Closing WDV after depreciation 1,27,50 0

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Reflect Consider
Problem Following are the details regarding a block of assets (consisting of plant eligible for depreciation @ 15%) owned by Raja Enterprises, a manufacturing concern :
Particulars WDV as on 1-4-2012 of block consisting of plant A, B & C Cost of plant D acquired and put to use on 1-6-2012 Cost of plant E acquired and put to use on 31-12-2012 Sale value of plant A sold on 31-1-2013 Amount (Rs.) 2,52,000 84,000 25,200 50,000

Compute the amount of normal depreciation for the assessment year 201314.

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Reflect Consider
Solution Computation of depreciation
Particulars
WDV as on 1-04-2012 of block consisting plant A, B & C Add:Cost of plant D acquired and put to use on 1-6-2012 Cost of plant E acquired and put to use on 31-12-2012 Total value before sale Less:- Sale value of plant A sold on 31-1-2013 WDV before depreciation Less:-

Amount (Rs.)
2,52,000 84,000 25,200 3,61,200 (50,000) 3,11,200 (42,900)

(a) Depreciation @15% (full rate) on Rs. 2,86,000 (Rs 3,11,200 Rs. 25,200 being value of plant E eligible for half depreciation) (b) Depreciation @7.5% (half rate) on Rs. 25,200 (cost of plant E which is put to use for less than 180 days) WDV after depreciation (Closing WDV)

(1,890) 2,66,410

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Reflect Consider
Solution Note:- Following points should be kept in mind while computing depreciation as per section 32: When an asset forms part of a block, such an asset transfers its value (i.e. cost) to the WDV of the bock. Once the assets form part of the block, for the purpose of computation of depreciation under section 32, the individual identity of such asset is lost and depreciation is computed by considering the WDV of the block and not by considering the value of individual asset. Considering above provisions, in this case depreciation on value of plant A is computed even though plant A is sold during the year.

Slide 57

Quiz Check Your Understanding

1. An assessee can claim depreciation in respect of which of the following assets? a) Residential building used by him for his residence b) Building taken on rent by him which is used by him for his business c) a and b both d) None of the above

2.

An assessee can claim depreciation in respect of tangible assets only. No depreciation can be claimed on intangible assets. a) True b) False

Depreciation in respect of computers used by the assessee for his business can be claimed @ ______%. a) 50 b) 60 c) 70 d) 100 Answers: 1. d) 2. b) 3. b)

3.

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Quiz Check Your Understanding

4. Depreciation in respect of motor car used by the assessee for his business can be claimed @ ______%? a) 5 b) 10 c) 15 d) 20

5.

Which of the following is a non-depreciable asset? a) Office building b) Office furniture c) Vehicles used for the business d) Land

Answers: 4. c) 5. d)

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Summary

In this session, we learnt to: Define house property Explain computation of house property in case of: Gross Annual Value (GAV) Self Occupied Property Let out Property Vacant property Treatment of unrealised rent while computing actual rent Net Annual Value (NAV) Deductions u/s 24

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