You could almost hear the huge sigh of relief as the Indian public digested the changes outlined by Pranabda in the direct taxes code (DTC) discussion paper.

All the more controversial aspects such as asset-based MAT, EET method of taxation for savings instruments, etc are proposed to be modified. Of course, all that is going to come at a still-to-be-determined cost (perhaps the tax slabs will not be as generous as was proposed in the draft DTC code as also the limits for deductions for savings instruments may be toned down). One area where the proposed changes will be most welcome is in the taxation of income from house property. The changes are:

The current provision requires that in respect of every property (other than one self-occupied property) whether let out or not, the assessee needs to calculate gross rent at the "contractual rent" or a level of reasonable rent, whichever is higher.

The draft had come up with the concept of calculating gross rent in respect of every property except one "not let out" property. The gross rent was to be taken at higher of "contractual rent" or "presumed rent" (a pernicious provision that assumed that the property would be let out at 6% of the "flat value" even if it was lying empty for the whole year).

Fortunately, the discussion paper improves even on the current tax provisions by providing for calculation of gross rent only for properties that are actually let out. For all other properties, the gross rent will be taken as nil. The big implications is that people who have multiple properties (which are lying vacant) and therefore are liable to pay tax on notional rental income both under the current provisions and the DTC, will not be required to include any notional income on this account.

The current tax provisions provide for a deduction of a maximum of Rs 1.5 lakh as interest payable to acquire one "self-occupied" property. The draft had omitted this deduction. The latest discussion paper re-instates this deduction for one "non let out" property.

All homeowners can breathe easy now. Of course, the discussion paper also promises (or should I say threatens) that the savings limit that had been hiked from Rs 1 lakh to Rs 3 lakh will be "calibrated accordingly" (essentially, we will probably see the limit for deduction going down significantly). Also, the draft code's proposal to reduce the standard deduction of 30% (under current tax provisions) to 20% continues in the discussion paper.

For people who have taken a loan to acquire a property that is not let out, while they will not have to calculate rental income on notional basis, they will also not be able to claim any deduction for interest payable on such loan. l The provision for deduction of interest payable for the under-construction period in 5 equal installments was deleted in the draft code and the discussion paper is also silent on it.

On the wealth tax front, the current provisions provide that anything other than one property would be treated as "unproductive asset" and be charged to wealth tax. The draft code had virtually abolished wealth tax with an exemption limit of Rs 50 crore, but the discussion paper plans to revert back to the current system. Hopefully, this time they will not qualify house property as "unproductive assets" no matter how many you own.

The overall impact will be quite positive for residential property segment, both for actual users as well as investors. Of course, one consequence could be increased reluctance of buyers to buy under-construction property, as the interest payable during the construction period will no longer be tax deductible. This is not as bad as it looks, as elsewhere in the world too, it is the builder who bears the construction risks (and the entire interest cost during the construction period). This may actually lead to institutionalising of the market, which can only be good for the larger industry players. But we will have to wait till the actual DTC to come out to really know what it holds.

Source: http://digital.dnaindia.com/