Understanding Section 27 of the Income Tax Act, 1961

Section 27 of the Income Tax Act, 1961 is a crucial provision that deals with the concept of “deemed ownership” for the purpose of taxing income from house property. It outlines various scenarios where a person, who may not be the legal owner of a property, is still considered as the owner for income tax purposes.

Additionally, it defines the term “annual charge” in relation to the taxation of house property income. Understanding these concepts is essential for taxpayers to accurately calculate their tax liabilities and comply with the law.

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Deemed Ownership under Section 27.

Section 27 defines the following situations where a person is considered as the deemed owner of a house property:

1. Transfer to Spouse [Section 27(i)].

If an individual transfers any house property to their spouse for inadequate consideration (except in connection with an agreement to live apart), the transferor is deemed to be the owner of the transferred property. However, if the property is transferred to a spouse as part of an agreement to live apart, the transferor will not be considered the deemed owner.

2. Transfer to Minor Child [Section 27(i)].

If an individual transfers house property to their minor child for inadequate consideration, the transferor is deemed to be the owner of the transferred property. This provision does not apply if the property is transferred to a minor married daughter.

3. Holder of an Impartible Estate [Section 27(ii)].

The holder of an impartible estate is deemed to be the individual owner of all properties comprised in the estate. An impartible estate is a property that cannot be legally divided or partitioned.

4. Member of a Co-operative Society [Section 27(iii)].

A member of a co-operative society, company, or association of persons to whom a building or part thereof is allotted or leased under a house building scheme is deemed to be the owner of that property. This applies even if the co-operative society, company, or association of persons is the legal owner of the property.

5. Person in Possession of a Property [Section 27(iiia)].

A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract under Section 53A of the Transfer of Property Act, 1882, is deemed to be the owner of that property. This covers situations where:

• The buyer has taken possession of the property
• The sale consideration has been paid or promised to be paid by the buyer
• The sale deed has not been executed in favor of the buyer, although other documents like power of attorney, agreement to sell, or will may have been executed

6. Person Having Right in a Property for a Period Not Less Than 12 Years [Section 27(iiib)].

A person who acquires any rights in or with respect to any building or part thereof by virtue of a transaction referred to in Section 269UA(f) for a period of 12 years or more is deemed to be the owner of that property. This does not apply to cases where the right is acquired by way of lease from month to month or for a period not exceeding one year.

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Annual Charge under Section 27.

Section 27 also defines the term “annual charge” in relation to the taxation of house property income. The annual charge refers to the tax levied on the annual value of a let-out property. The annual value is computed as the higher of the actual rent received or the potential rent that the property can generate.

It is crucial to note that the annual value is not equivalent to the actual rent received but is a value deemed to be the property’s potential rental income. The annual charge is calculated based on this annual value, and certain deductions can be claimed to reduce the taxable income from the property.

Deductions and Exemptions for Deemed Owners.

Deemed owners under Section 27 are eligible to claim deductions and exemptions available under the Income Tax Act for house properties. Some of the key deductions include:

1. Standard Deduction [Section 24(a)]: Deemed owners can claim a standard deduction of 30% of the net annual value of the property, which covers expenses associated with maintaining the property.
2. Interest on Home Loan [Section 24(b)]: If a deemed owner has taken a home loan to purchase the property, they can claim a deduction on the interest paid on the loan, up to a maximum amount of Rs. 2 lakhs per year for self-occupied properties and without any limit for let-out properties.
3. Municipal Taxes [Section 23]: Deemed owners can claim a deduction on the municipal taxes paid on the property.

Implications for Taxpayers.

Understanding the concept of deemed ownership under Section 27 is crucial for taxpayers to accurately calculate their tax liabilities and avail the deductions and exemptions available to them. Some key implications include:

1. Tax Liability: Deemed owners are liable to pay income tax on the rental income generated from the property, even if they are not the legal owners.
2. Inclusion in Total Income: The rental income from the deemed owned property must be included in the total income of the deemed owner and taxed under the head “Income from House Property”.
3. Compliance Requirements: Deemed owners must comply with all the provisions of the Income Tax Act related to filing returns, maintaining records, and providing necessary documentation.

Conclusion.

Section 27 of the Income Tax Act, 1961 plays a vital role in determining the tax liabilities of individuals who may not be the legal owners of a property but are considered deemed owners under specific circumstances. The concept of annual charge is also defined under this section, which refers to the tax levied on the annual value of a let-out property.

By understanding the provisions of Section 27, taxpayers can ensure compliance with the law, accurately calculate their tax obligations, and avail the deductions and exemptions available to them. It is essential for taxpayers to keep abreast of any amendments or clarifications issued by the Income Tax Department regarding Section 27 and consult with tax professionals to address any specific concerns or complexities in their cases.

Key Takeaways:

• Section 27 defines situations where a person is considered a deemed owner of a house property for income tax purposes, such as transfer to spouse or minor child, holding of impartible estate, membership in co-operative societies, possession under certain contracts, and acquisition of rights for 12 years or more.
• Annual charge refers to the tax levied on the annual value of a let-out property, which is computed as the higher of the actual rent received or the potential rent that the property can generate.
• Deemed owners are eligible to claim deductions and exemptions available under the Income Tax Act for house properties, such as standard deduction, interest on home loan, and municipal taxes.
• Deemed owners are liable to pay income tax on the rental income from the property and must comply with all relevant provisions of the Income Tax Act.
• Taxpayers must stay informed about amendments and clarifications related to Section 27 and seek professional advice when needed to ensure accurate tax compliance.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.