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If owner and tenant live in same house, claim of rent can be denied

The tax officer can demand proof of this being a genuine claim

I am a salaried individual. I had bought a piece of land in Chennai using personal loans and savings. Next I bought a flat by taking a home loan and now that property is rented out. On the land, I and my wife constructed an independent house, 50% of its cost was from my wife’s savings and the rest from a home loan in my name with my wife as co-applicant. From an income tax point of view (for AY 2018-19) the flat is shown as ‘loss from house property’. Can I make a sale agreement stating that the independent house is sold to me by the spouse, even though it is under home loan? Can I transfer monthly rent to my spouse and claim HRA exemption benefit?

—Kartik L.

As the flat is let out, you can continue to show the property as let out. If the net computation of income from the let-out property is a loss, you can offset this loss against your salary and other income. You have another property (an independent house), which is self-occupied, and on which you and your wife have availed a housing loan and are paying interest towards. Your portion of the interest paid can be claimed as a loss from self-occupied house. As per the current laws, you can claim a total loss under the head ‘Income / Loss from house property’ only up to Rs2 lakh, irrespective of whether the property is self-occupied or let out. Accordingly, the total loss that you would be eligible to offset against your salary and other income for the current financial year is Rs2 lakh. Any unadjusted house property loss can be carried forward and set off only against house property income for up to 8 successive financial years.

Your share of the principal paid towards the loan can be claimed as deduction under section 80C of the Income-tax Act, 1961 from your gross total income. However, the maximum allowable deduction under section 80C is Rs1.5 lakh. You may sell your portion of the property to your wife. However, the sale transaction may attract capital gains tax if the sale consideration exceeds your indexed cost of construction. Also, the tax rate and exemption from such taxes would depend on the number of years this property was held by you.

Assuming that you have transferred or sold your share of property to your wife and if you actually pay a rent to your wife who owns this property, you may be entitled to claim house rent allowance (HRA) exemption. You would need to provide your employer the prescribed declaration (Form 12BB), specifying your wife’s name, address and permanent account number, or PAN (this will be needed if the aggregate rent paid during the financial year exceeds Rs1 lakh).

The tax officer can demand proof of this being a genuine claim and he can call for documents such as lease and licence agreement, letter to the housing co-operative society notifying the tenancy, electricity bill, water bill and proof of payment of rent to wife.

The Indian revenue authorities could consider this arrangement as a colourable device, especially as the landlord and the tenant are living together in the same house-property. Accordingly, the exemption could be denied even though rent is actually paid to the wife.

There have been recent judicial precedents wherein the revenue authorities denied the claim of rent paid to mother by a taxpayer in the absence of documents, information or records evidencing payment of rent.

Parizad Sirwalla is partner (tax), KPMG.

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