Tax on commercial property: Tax on capital gains, rent and more explained

[ecis2016.org] What are the taxes applicable on commercial properties that are used for the owner’s business, or if it is let out or sold? We examine the implications, in each case

Property has been one of the oldest investment avenues in India, which existed before the advent of various financial products like direct equity and mutual funds. If you have given commercial space for rent, you have to pay taxes on the income thus generated.

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Taxation of rented commercial property

Rentals received from any property owned by you, is generally taxed under the head ‘income from house property‘ in your hands. This applies to all properties, whether residential or commercial. The higher of the rent that is actually received or the rent that is reasonably expected to be fetched by such a property in the market, is the basis of taxation of rental income. In case the property is not owned by you and is sublet by you, the income from such sub-letting of commercial property will be taxed under the head ‘income from other sources’.

In case you are running a business centre on the property owned by you, along with providing other services, the same can be treated as business income, provided the other services along with letting out of the space constitute a significant portion. Except in such cases, all the income arising to you with respect to property owned by you, will become taxable under the head specifically provided for property income, by whatever name the income is called. As the income from letting out of such property becomes taxable under the head ‘income from house property’, no deductions can be claimed against the rental income, except those specifically provided by the law. It is advisable not to show your genuine rental income under the head ‘profits and gains of business of profession’, just to claim other expenses.

GST on commercial property

If you have let out your property for commercial purpose and earn Rs 20 lakhs or more as your annual income, applicability of GST will also come into the picture. In such a scenario, 18% of your annual income will have to be paid as GST on rent.

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Deductions from rental income received from rented property

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For computing income under the head ‘income from house property’, the income tax laws allow certain deductions against the rent received by you. The first deduction available is in the form of a standard deduction, at the rate of 30 per cent of the rent received or receivable for such property. This standard deduction, for a commercial or residential property which is let out, or for a self-occupied residential property which is treated as let out, is available irrespective of the amount spent by you on such property.

In addition to the above standard deduction to cover repairs, etc., the tax laws allow for deduction with respect to the interest paid for any money borrowed for the purpose of purchase, construction, repair or reconstruction of your commercial property. 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 prepayment charges paid to any financial institution, for availing of the loan, can also be claimed as interest. You can avail of the interest deduction for money borrowed not only from banks but also from your friends and relatives.

With respect to commercial property that is let out, although you can claim the full interest against the rental income after standard deduction, there is a restriction of Rs two lakhs for the amount of loss as computed under the head ‘income from house property’ for all the properties taken together, which can be set off against your other incomes during the year. Any loss as computed under this head can be carried forward for set off against the income under the same head, for the next eight years. The deduction for interest paid during the construction period for an under construction property can be claimed, only after possession is obtained and that too in five equal annual instalments, beginning from the year in which you take the possession.

Taxation of commercial property used for own business or profession

For commercial properties that are partly or fully used for your business or profession, the corresponding share of such property that is used in the business, is not taxable in your hand. So, you also cannot claim any notional rent, with respect to such commercial property against your business income. However, you can claim the expenses incurred for repair and maintenance of such property, against your business income. You can also claim the full interest as business expenditure, without there being any limit. Please note that no deduction is available under Section 80C for home loan taken for such commercial property, for repayment of the principal amount, as this is available only for residential property.

Taxation of profits on sale of commercial property

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With respect to any commercial property owned by you and used for your own business, the profits arising from the sale of such property becomes taxable as short-term capital gains, provided no property is left under the same category of asset, irrespective of the period of your holding. However, you can claim exemption under Section 54F, by investing the net consideration in a residential house property, if the same has been held for more than 24 months as per some of the judicial pronouncements. Alternatively, you can invest the indexed capital gains in capital gain bonds of specified institutions and claim exemption under Section 54EC.

In case of commercial property which is let out, the profit on sale of such commercial property will become capital gains. The same shall be long-term, if the property is held for more than 24 months and will be taxed at a flat rate of 20 per cent, irrespective of the quantum. You have the option to save on taxes by either investing in a residential house under Section 54F or by investing in capital gains bonds under Section 54EC, as explained above. However, if the property is sold before 24 months, the same becomes taxable as short-term capital gains and is taxed as normal income.

FAQs

(The author is a tax and investment expert, with 35 years’ experience)

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