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September 26, 2004

Taxable income from house property

Md. Zahidul Islam

The Income Tax Ordinance, 1984 enumerates seven heads of income under which all incomes are classified for the purpose of determination and computation of total income of a taxpayer. 'Income from house property' is one of those seven heads. The concept of income under this head deserves clarification for several reasons, one being that day by day it is turning as the major source of income as a natural consequence of rapid urbanisation. Both tenants and house owners are increasing everyday, so is doing the income from house property, but the collection of tax on the income is not increasing proportionally. Surely, lack of public awareness is a thing, which is one of the various reasons responsible for this. And no doubt, the sole aim of this write-up is arousing public awareness excepting clarifying the concept.

Concept of income from house property
Income from house property is not the actual income from the property but the notional income represented by the annual value. Annual value, in relating to any property let out, shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. However, if the annual rent is in excess of the annual value, then the annual rent shall be the annual value. The tax under this head is upon the owner, legal or beneficial, but not upon the occupant.

The concept of income from this head is confined to the income from 'buildings and lands appurtenant thereto'. Income derived from vacant plots of land does not fall to charged under this head. Even in respect of house property, no tax is payable under this head if the owner occupies the property for the purpose of his residence or if the property is used for the purposes of his business or profession the profits of which is otherwise assessable to tax.

Where two or more persons own property and their respective shares are definite and ascertainable, the co-owners will be assessed individually in respect of his share of the income from the house property.

Computation of income from (rental) house property
In computing the income from house property on rent the following allowances and deductions shall be made, namely-
*Any sum payable to Government as land development tax or rent on account of the land comprised in the property;
*The amount of any premium paid to insure the property against risk of damage or destruction;
*Where the property is subject to mortgage or other capital charge for the purpose of extension or reconstruction or improvement, the amount of any interest payable on such mortgage;
*Where the property is subject to an annual charge not being capital charge, the amount of such charge; the expression 'annual charge' used here includes any tax leviable by local authority or Government but not include the tax under the Ordinance;
*Where the property is subject to a ground rent, the amount of such rent;
*Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital;
*Where the property has been constructed with borrowed capital and no income was earned by letting out that property during the period of such construction, the interest payable during that period on such capital, in three equal proportionate instalments for subsequent first three years for which income is assessable from that property;
*An amount equal to one fourth of the annual value of the property in respect of expenditure for repairs, collection of rent, water and sewerage, electricity and salary of darwan, security guard, pump man, liftman and caretaker and all other expenditure related to maintenance and provision of basic services;
*Where, the whole of the property is let out and it was vacant during a part of the year, a sum equal to such portion of the annual value of the property as is proportionate to the period of the vacancy; and where, the property is let out in parts, a sum equal to such portion of the annual value appropriate to the vacant part as is proportionate to the period of the vacancy of such part.

However, no deduction shall be allowed in respect of any interest or annual charge (not meaning income tax) payable outside Bangladesh on which tax has not been paid or deducted as advance payment or deduction at source.

Deduction at source from house property
Deduction at source of rent from house property as advance payment of tax is possible under section 53A of the Income Tax Ordinance of 1984 and Rule 17B. Provision is as follows:

Where, the Government or any authority, corporation or body, including its units, the activities or the principal activities of which are authorised by any Act, Ordinance, order or instrument having the force of law in Bangladesh or any company as defined in clause (20) of section 2 of the Ordinance, or any banking company or any co-operative society bank established by or under any law for the time being in force or any non-governmental organisation run or supported by any foreign donation or assistance is a tenant in respect of a house property, the tenant shall deduct from the house rent paid or payable as advance tax such amount as may be prescribed.
Accordingly, Rule 17B prescribes as follows:
1. Where the monthly payment does not exceed taka 15,000 (fifteen thousand), the rate of deduction of tax at the time of making payment is Nil;
2. Where the monthly payment exceeds taka 15,000 (fifteen thousand) but does not exceed taka 35,000 (thirty five thousand), the rate of deduction of tax at the time of making payment is 3%; and
3. Where the monthly payment exceeds taka 35,000 (thirty five thousand), the rate of the same is 5%.

For the purpose above-mentioned, 'house rent' means any payment, by whatever name called, under any lease, tenancy or any other agreement or arrangement for the use of any building including any furniture, fittings and the land appurtenant thereto.

Where, after the assessment made for the relevant year, it is found that no tax was payable by the owner of the house property or the amount of tax deducted is in excess of the amount payable, the amount deducted shall be refunded in full or part accordingly.

A necessary explanation
It should be kept in mind that a man is charged on his total income though his income under each head may be well below the taxable limit. For example, the minimum taxable limit of the current financial year is taka one lakh. Suppose, Mr. Alim's annual income from salary is only taka 96,000. So, he is not liable to pay tax on this head of income. But Mr. Alim owns a two-storied house building from where his annual income (i.e. rent) is taka 90,000. Hence, his total income reaches taka 1,86,000 that is well enough for incurring tax-liability. Thus, even a little income from house property is not negligible for tax purpose.

Concluding remarks
Evading tax is a common trend of the country people. The house owners form a large part of those trendy people. All govt initiatives seem failing to prevent the evasion. Here are also some undeniable causes. Nevertheless, there is a duty of common people in this respect. They can also help improve the situation. As a matter of fact, as an ideal citizen, it is one's legal obligation to pay tax in exchange of the facilities one does have from the State. So is the obligation to be aware that others are not evading tax. One should always get alert that his/her ignorance or negligence is not harming the State's interest; not hampering the progress of the nation.

The Author is currently working as a member of the Research Team for Legal Affairs of Reforms in Revenue Administration (RIRA).