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How can I minimize tax on rental income?


My wife and I are co-owners of a house for which I had taken a home loan 10 years ago.  How should we take the rent now to minimize tax obligation? Also, who will get the rent?

—Name withheld on request 


As per the provisions of Section 26 of the Income-tax Act, 1961, if the property is owned by two or more persons and their respective shares are definite and ascertainable, share of each such person shall be included in their respective income tax return. Accordingly, the rental income earned is taxable in the hands of each co-owner, in proportion to the share owned.

Based on the facts available, we assume that the entire funds invested for purchase of property (including the repayment of housing loan) are from the husband’s sources. In view of the same, from a tax perspective, there is a view possible that the husband may still be considered as the deemed owner of the entire property and accordingly the entire rental income would be considered as taxable income in his hands. Further, standard deduction of  30% and the deduction for the payment of interest on housing loan and principal repayment of housing loan (under section 80c ) in such case, will be available to the husband only. However, documents will need to be reviewed in detail.


I invested a sum of 2 lakh in a liquid fund in 2019. I moved it to short term debt fund in 2020. Can I get the indexation benefit after completion of 3 years from the initial investment?


Based on the limited facts available, we understand that in 2019 you had made investment in the units of a liquid fund and subsequently switched to a short-term debt fund in 2020, within the same mutual fund company.

As per the provisions of the Income-tax Act, 1961, a unit of debt fund will be considered as Short-term Capital Asset (STCA) if the same is held for not more than 36 months before the date of its transfer. In case, such units of the debt fund are held for more than 36 months, it shall be considered as Long-term Capital Asset (LTCA) and is eligible for the benefit of indexation at the time of computing the Long-Term Capital Gain (LTCG).

It is important to note that as per section 2(47) of the Act, the term ‘transfer’ apart from sale of the asset, includes exchange or relinquishment of the asset as well. Where an investment made in the liquid fund is switched to short-term debt fund, essentially it involves exchange of units held in the liquid fund for the units of the short-term debt fund at the applicable Net Asset Value of the respective fund. 

Thus, the exchange would constitute as transfer and gain arising from the exchange of units would be subject to tax as STCG income (as the units were held for not more than 36 months) in the year in which the investments were switched from liquid fund to short-term debt fund.

Further, the units of short-term debt fund acquired in 2020 would qualify as LTCA and benefit of indexation would be available on their sale, only after completion of three years from the date of investments made in such short-term debt funds.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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