Photo: iStock
Photo: iStock

You can deduct 30% of annual rental value for repairs, regardless of actual expenses incurred

Independent of the same, whether any renovation expense can be considered as cost of improvement would be subject to examination of the nature of expenditure

If I claim 30% exemption on rental income, can I also claim the same to be capital renovations and avail exemption in capital gains?

—Arvind Sharma

The tax law permits a standard deduction capped to 30% of the annual value of a let-out property, regardless of the amount of actual expenses incurred.

Independent of the same, whether any renovation expense can be considered as cost of improvement would be subject to examination of the nature of expenditure. Any routine repair costs should be distinguished from expenditure that is meant to extend the useful life of the property significantly. If the renovation costs incurred by you could be treated as ‘cost of improvement’ then it would reduce the taxable capital gains arising when this property is sold. If the house has been owned by you for more than 24 months, it is treated as a ‘long-term capital asset’ and the indexed cost of the renovation can then be reduced from taxable capital gains. Indexation refers to using the Cost Inflation Index (CII) notified by the tax authority in the years of renovation and sale, to determine the impact of inflation on the cost of renovation. It is suggested that you retain proof of incurring the renovation costs (such as invoices and bills) to justify the expenditure as cost of improvement and not distinguish the same from routine repair or upkeep expenditure.

Is section 80EE deduction of the income tax act available for the assessment year 2018-19 also?

— Dr A.L.M. Subhashini

The deduction under section 80EE of the Income-tax Act, 1961, in respect of interest on housing loan, was introduced beginning from assessment year (AY) 2017-18 and can be claimed for AY 2018-19 as well. The deduction is capped to Rs50,000 and is allowed only if all conditions stipulated are met, such as: the housing loan was sanctioned between 1 April 2016 and 31 March 2017, the loan sanctioned did not exceed Rs35 lakh, the value of the residential property acquired using the loan did not exceed Rs50 lakh, no tax deduction has been claimed under any other section of the Act in respect of the interest deduction claimed under section 80EEE, and the taxpayer claiming this deduction did not own any other residential property when loan was sanctioned.

I had transferred some equity shares to my married sister in 2011. If she decides to sell those shares now, what would be the tax implication? Please explain in detail.

—Name withheld on request

Your sister should not be subject to tax on receipt of shares in 2011, in respect of the shares gifted by you, since such gifts made between close family members (including siblings) are not considered taxable income. It is advisable for the gift to be documented in a legal document—a gift deed—and placed in your records, if not already done.

When your sister sells these shares, any gains from the sale would be taxable in her hands. The gains from the sale would be taxable as long-term capital gains (LTCG), since the shares were held by you as well as by your sister cumulatively for at least 6 years now.

If the shares are listed in a recognised stock exchange in India and Securities Transaction Tax (STT) was paid both at the time of purchase and sale of the shares, the LTCG arising from the sale will be exempt from taxes. Else, the resultant LTCG will be taxable at 20.60%, plus applicable surcharge. The indexed cost of acquisition (the purchase price paid by you to acquire the shares) is reduced from the sale consideration of shares to determine the taxable capital gains. Indexation refers to using the CII notified by the tax authority in the years of purchase and sale, to determine the impact of inflation on the cost of purchase.

In case the LTCG is taxable, an exemption can be claimed by re-investing the sales proceeds into a residential property in India or re-investing such LTCG in specified bonds (up to Rs50 lakh). Such exemption is subject to satisfaction of various other conditions, such as the timing of the investment and number of other residential properties owned.

Parizad Sirwalla is partner (tax), KPMG.

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