Dec 1, 2008

Amazing Facts About Income Tax: Taxation of Notional Income

“A taxpayer is someone who works for the federal government but who doesn’t have to take a civil service examination”

– Ronald Reagan

JOKES APART, THERE ARE some amazing facts about income tax which you should know about. Are you aware that income tax is levied not only on your actual income but also on the notional or deemed income under certain circumstances?

Here is a list of 3 such instances:

1. Notional rental income of a single house
In case you are having a single house (which is not let-out), it will be treated as self-occupied for the purposes of income tax and exempted from tax, but there is one exception to this rule.

In case your own house is lying vacant (it may be situated in the same city or in a different city) while, for your personal convenience (and not due to employment/ professional/ business compulsion), you stay in any other accommodation (it is immaterial whether you pay rent or not) then in that case your own house will be treated as deemed to be let out and you will have to pay tax on its notional rental value (though in such a case you will be allowed actual interest paid without any maximum limit).

2. Notional rental income of second home
Do you know that even if you don’t earn any income from your second house (it may be lying vacant or used for self-occupation), you may still be liable for tax on its notional income? Actually, what is taxed is not the actual rent but the capacity of the property to earn rent.

Thus, in case you are buying your second house, remember that its notional rental income is taxable even though you use it for your own residential purposes because for tax purposes only one house is allowed for self occupation and all others are deemed to be let out.

3. Capital gains from property sale
Are you aware that under section 50C of Income Tax Act, 1961, you may be asked to pay tax on capital gains from sale of property in excess of the actual amount?

In case value adopted for stamp duty purposes is more than the actual sale consideration received by you for selling the property, then the deeming provisions of section 50 of income tax act comes into play, according to which you will have to consider the stamp duty value while computing capital gains.

Section 50C was introduced with effect from FY 2002-03 (AY 2003-04) to prevent undervaluation of property in sale/purchase transactions with an intention to evade taxes. It replaced the earlier provisions in the Income Tax Act wherein the tax authorities had presumptive powers to acquire properties in certain cases.

By valuation property at higher rates for stamp duty purposes, state government gets more revenue by way of stamp duties and central government gets higher taxes on capital gains, while the buyer suffers by paying higher stamp duty and seller suffers by paying higher income tax.


1 comment:

  1. Dear Sir

    I have a flat in Madipakkam Chennai for which all loans are repaid. It is rented out. I am staying in a new own flat in saligramam chennai for which i am paying emi (55000 per month). For availing tax benefits to the maximum can I show madipakkam house as self occupied and saligramam house as rented out

    Pl. advise



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