Types of taxes applicable on Commercial Properties.

By Abhay Shah, Realty Quarter

Property is one of India’s oldest investment avenues that existed prior to the advent of various financial products such as direct equity and mutual funds. People who invest in commercial properties do so either for their own use or for the purpose of letting them out.

Tax under commercial property given on rent.

Rentals obtained from any estate that you own are usually taxed in your hands under the head ‘household revenue’. This refers to all housing or commercial buildings.

The greater the rent actually earned or the rent reasonably anticipated to be collected on the market by such an estate is the basis of rental income taxation. The revenue from such sub-letting of commercial property will be taxed under the head ‘revenue from other sources’ if the assets are not held by you and are sublet by you.

In the event that you run a business centre on your estate, along with offering other facilities, the same can be handled as company revenue, given that the other facilities together with hiring out of the space are an important part. Except in such cases, all income from you in respect of property owned will be taxable under the head specifically provided for income from property, regardless of the name of the income. Since the revenue from letting out such assets becomes taxable under the name ‘house property income,’ no deductions can be asserted against the rental revenue, except for those specifically given by law.

Deduction from the rent amount obtained from the property.

The income tax laws allow certain deductions against the rent you receive to calculate income under the head ‘house property income’. The first deduction available for such property is in the form of a standard deduction at a rate of 30% of the rent received or receivable. This standard deduction is accessible for a let-out commercial or residential estate, or for a self-occupied housing estate that is regarded as let out, regardless of how much you spend on such assets.

In relation to the above standard deduction to cover renovations, etc., tax regulations enable deduction in regard of interest paid for any cash borrowed for the purpose of purchasing, constructing, repairing or rebuilding your commercial assets. The deduction for interest available under Section 24(b) of the Income Tax Act, is available for all types of properties, whether residential or commercial. Processing fees and prepaid fees paid to any financial institution can also be claimed as interest for the use of the loan. You can take advantage of the interest deduction for money not only borrowed from banks, but also from friends and relatives.

Tax under commercial property; Self-used for Business or Profession.

The respective share of such assets used in the business is not taxable in your hand for commercial assets that are partially or fully used for your company or profession. Also, you can not assert any notional rent against your company revenue in regard to such commercial assets. However, against your company revenue, you can assert the costs paid for repairing and maintaining such assets. Also, as company spending, you can assert the complete interest without any restriction. Please note that no deduction for home loans taken for such commercial property is available under Section 80C for repayment of the principal amount, since this is only available for residential property.

Deduction from profits earned on the sale of Commercial Property.

With regard to any commercial property owned by you and used for your own business, the profits resulting from the sale of such property become taxable as short-term capital gains, provided that no property remains under the same asset category, regardless of the period of your holding. However, by investing the net value in a residential home estate, you can request an exemption under Section 54F if the same has been kept for more than 24 months as in some of the statutory statements. Alternatively, you may invest indexed capital gains in designated institutions’ capital gain bonds and request exemption under Section 54EC.

The profit on the sale of such commercial property will become capital gains in the event of commercial property that is let out. The same is true for the long term if the property is held for more than 24 months and is taxed at a flat rate of 20% regardless of the quantum. You have the choice to save on taxes either by investing in a housing property under Section 54F or by engaging in section 54EC investment capital gains bonds, as described above. However, if the property is sold prior to 24 months, the same will become taxable as short-term capital gains and will be taxed as normal income.