Renting out a house can take many forms. A owner may decide to rent out the house immediately after getting the possession, doing minimum work on the property, and letting the tenant pay for the basic infrastructure with reasonable rent. On the other hand, owners who have spent some time in their new home and later decide to rent it may want to add additional amenities. Nowadays, it’s a common practice for people letting out their homes to break up the total rental that they expect between rent for the use of the house property in one part and rent for the use of furniture and other amenities (if provided) in another part from the tenant. In such cases, even though the rent is split, the tax laws are clear that both these incomes would be taxable. The rental income for use of the property has to be offered to tax under the head ‘House Property’ while the rent for amenities will need to be charged under the head ‘Other Sources’.
Deductions that can be claimed
To understand deductions that can be claimed from income under the head ‘House Property’, the tax laws provide that property taxes paid, standard deduction (calculated at 30 per cent of the rental income) and interest paid on home loans are the deductions that can be claimed against the rental income. On the other hand, for income offered under the head ‘Other Sources’, the Income Tax Act (‘the Act’) provides that any expenditure incurred wholly and exclusively to earn such income shall be permitted to be deducted while computing the income chargeable to tax. The tax laws are not any more specific here and hence what constitutes ‘wholly’ and ‘exclusively’ can be open to different interpretations.
To cite an instance: A non-resident taxpayer who had a property in India gave it out on rent. The rent was divided into two parts — One part for the property and the other for amenities. In his return of income, he showed income from house property, short-term capital gains and income from other sources. During the assessment, on verification of details filed by the taxpayer, the taxman observed that the taxpayer had claimed a deduction (under the relevant provisions of the Act) on account of his travelling expense of Rs 2 lakhs against compensation for amenities shown under the head ‘Other Sources’. The taxpayer submitted that these expenses are related to the management of his property in India and hence should be allowed as a deduction. The tax officer, however, wasn’t convinced and disallowed the claim in his order.
Before the first appellate authority, the taxpayer argued that to manage the property, the taxpayer has to travel to India and hence the same should be allowed against the amount received for the use of amenities of the property. The taxpayer had visited India many times, he claimed, and the actual travelling and lodging expenses incurred by him are much more than the amount claimed as a deduction in the return of income.
Travel expenses claimed by a taxpayer do not qualify as expenditure
The first appellate authority thought that the expenses claimed by the taxpayer do not qualify as expenditure incurred wholly and exclusively to earn the income from amenities, as prescribed under the Act. Given the same, the authority agreed with the tax officer and disallowed the claim. When the matter came up for hearing before the second appellate authority (the Mumbai Tax Tribunal), the judge was of the view that no travelling expenses can be allowed for the taxpayer’s international travel for income received related to house property in India. Further, the taxpayer had claimed the amount in a lump sum without any support whatsoever. The Tribunal accordingly did not interfere with the orders passed by the lower authorities and confirmed the disallowance of the deduction.
The above decision though in the context of a non-resident taxpayer, the interpretation may hold good even in the case of resident taxpayers who may be owning properties in different parts of the country and incur travel expenditures to maintain the same.
Points to remember
1. The standard deduction, municipal taxes paid and interest on home-loan are allowed as a deduction from income on house property.
2. Rent from amenities in a rental house may be offered to tax as income from other sources.
3. Expenses incurred wholly and exclusively to earn income may be claimed as a deduction from income.
4. The expenses need to be backed by documents in support of its claim.
