DEDUCTION FROM INCOME – I T ORDINANCE 2001 Allowable deductions · Ordinance 2001 & Rules 2002

Income from Property

Income from Property

For landlords earning rent from land, houses, shops or offices. Sections 15, 15A and 16

In short

  • Rent you receive from land or a building is taxed under this head, after the deductions below (section 15A).
  • Rent for a building let out WITH plant and machinery, and charges for amenities / utilities, are taxed under "Income from Other Sources" instead.
  • If you charge less than the fair market rent, you can be taxed on the fair market rent.

Deductions allowed from rent

Repairs allowance – one-fifth (20%) of rent

Section 15A(1)(a)
  • You get a flat 20% of the rent as a repairs allowance, worked out on the full rent before other deductions.
  • No bills are needed, and you cannot claim actual repairs on top of it.
What your team should check (2)
  1. Has the repairs allowance been computed at one-fifth of gross rent (before other deductions)?
  2. Have actual repair costs NOT been claimed in addition to the allowance?

Keep on file: Rent agreement, rent receipts

Building insurance premium

Section 15A(1)(b)
  • Premium paid or payable in the year to insure the building against damage or destruction.
What your team should check (3)
  1. Does the policy insure this rented building against damage / destruction?
  2. Does the premium relate to the tax year being claimed?
  3. Are the policy and premium receipt on file?

Keep on file: Insurance policy, premium receipt

Property tax and local charges

Section 15A(1)(c)
  • Property tax, local rates, charges or cess paid to a local authority or government on the property or its rent.
  • Income tax itself is NOT deductible.
What your team should check (3)
  1. Is the amount a local / provincial rate, tax, charge or cess on this property or its rent?
  2. Has income tax been excluded from the claim?
  3. Are challans / receipts on file?

Keep on file: Property tax challans

Ground rent paid

Section 15A(1)(d)
  • Ground rent you pay for the land on which the property stands.
What your team should check (1)
  1. Is the ground rent paid / payable for this property in the tax year, with receipts on file?

Keep on file: Ground rent receipts

Profit / interest on loan or mortgage for the property

Section 15A(1)(e), (f) and (g)
  • Profit or interest on money borrowed (including mortgage) to buy, build, renovate, extend or rebuild the rented property.
  • Rent-share and appreciation-share paid to HBFC or a bank under a rent-sharing scheme (not the return of capital).
  • Do not also claim the house-loan tax credit (section 63A) for the same profit.
What your team should check (4)
  1. Was the loan used to acquire, construct, renovate, extend or reconstruct THIS rented property?
  2. Has only profit / interest (not principal or return of capital) been claimed?
  3. Has the same profit NOT been claimed as a tax credit under section 63A?
  4. Is the lender's certificate of profit paid on file?

Keep on file: Loan agreement, bank profit certificate

Rent collection and administration costs – up to 4% of rent

Section 15A(1)(h)
  • Expenses spent only to earn the rent (e.g. rent collector, management, admin) are allowed up to 4% of gross rent.
What your team should check (3)
  1. Were the expenses wholly and exclusively for earning this rent?
  2. Has the claim been capped at 4% of gross rent?
  3. Are bills / payment proofs on file?

Keep on file: Bills, payment proofs

Unpaid rent that cannot be recovered

Section 15A(1)(j) and 15A(2)
  • Allowed only if: the tenancy was genuine; the tenant has left (or eviction steps were taken) and is not in another of your properties; you took or reasonably could not take legal action; and that rent was earlier taxed in your hands.
  • If you recover it later, it becomes taxable in the year of recovery.
What your team should check (5)
  1. Was the tenancy bona fide?
  2. Has the defaulting tenant vacated, or have steps been taken to evict, and is the tenant not occupying another of your properties?
  3. Have legal proceedings been started (or is there a reasonable basis that they would be useless)?
  4. Was the unpaid rent included in taxable income, and tax paid, in the year it fell due?
  5. Is there a system to offer any later recovery to tax?

Keep on file: Tenancy agreement, legal notices, earlier return

Watch-outs (common reasons a claim is disallowed)

Expenses left unpaid for 3 years are added back

Section 15A(3) and (4)
  • If a deducted expense is still unpaid three years after the year of claim, it is added back to income. You get the deduction again when you finally pay it.
What your team should check (1)
  1. Have all expenses claimed in earlier years been paid within three years, or added back if not?

Keep on file: Ageing of payables

Business disallowance rules also apply

Section 15A(6) read with section 21
  • Section 21 rules apply here too: e.g. personal expenses, fines, and payments where required withholding tax was not deducted are not allowed.
  • The same expense cannot be claimed under another head as well (section 15A(5)).
What your team should check (3)
  1. Has withholding tax been deducted and paid wherever required on payments claimed?
  2. Have personal expenses and fines / penalties been excluded?
  3. Has each expense been claimed under one head only?

Keep on file: WHT challans, ledger

Non-adjustable advance / deposit from tenant

Section 16
  • A non-refundable / non-adjustable amount received from a tenant is taxed as rent spread equally over 10 years.
What your team should check (1)
  1. Have non-adjustable amounts from tenants been spread over 10 years and offered to tax?

Keep on file: Tenancy agreement

Good to know

  • Tax deducted by a tenant under section 155 is adjusted against your final tax liability; keep the tenant's certificate.
  • Rule 31(2) requires you to keep the tenancy agreement (and any termination agreement), rent receipts, and evidence of every deduction claimed.
  • A business loss cannot be set off against income from property (section 56).
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