• Income tax on rent received by tenant by subletting

This is a question regarding the Income on house property. Person A lease his house H to his mother B. A doesnt lives in house H, but B lives in that house. There is nominal lease amount X. Now B gives part of the house H to grandson C on rent. C pays a hefty amount Y of rent to B. Now if B shows the income by rent Y under other income head while filing the tax, is their anything wrong? A will file income from property head for amount X only. in no way A is liable to pay tax for rent Y. correct? Also is it necessary that lease be made for more than 12 years between A and B, cant it be just rental agreement between A and B for house H.
Asked 7 years ago in Income Tax

Hi,

Income from sub-letting a house is taxable as Income from Other Sources or Profits/Gain from Business/Profession as the case may be. Since the Mother B is not carrying on any business, sub-letting Income is taxable as Income from Other Sources. She has to offer entire amount for tax as Income from Other Source. The benefit of 30% Standard Deduction is not applicable to her.

In the hands of owner A, the same is taxable as Income from House Property. He/She can claim 30% Standard Deduction and also Interest on Housing Loan, if any from the Rental Income.

It is always advisable to get a lease deed done for both original leasing (Owner A to the Tenant - Mother B without any prohibition of sub-letting) and also for sub-letting (Tenant B to sub-tenant - Grandson C). There is no such rule about 12 Years Lease for Income Tax purposes

Pradeep Bhat
CA, Bengaluru
542 Answers
94 Consultations

5.0 on 5.0

Hii

in your above mentioned case

Rental agreement for more than 12 years not mandatory

A show his income as income from house property and can take benefit of Standard deduction of 30%

B will show this income under income from other sources and can avail proportionate rent paid to A as exp.

but in this case be ready for clubbing provisions of Income tax Act 1961 , if significant difference in Rental value of X and Y , because apparently this seems be Tax Evasion or in your views tax planning to avoid tax burden in the hand of A

Lalit Bansal
CA, Delhi
773 Answers
61 Consultations

5.0 on 5.0

Hi,

I would suggest keep the Rent Y more or less similar to standard rent Z in the area for similar property. If you say Y is 4-5 times of Z, you are more or less certain to invite a Scrutiny. If Scrutiny comes, the whole income may be clubbed in the Hands of A and taxed in his Hands.

Pradeep Bhat
CA, Bengaluru
542 Answers
94 Consultations

5.0 on 5.0

1. B has to show income from other sources as sub lease amount received if as u told sub let option is available in main agreement.

2. If the case of B, if it is selected for scrutiny then there can be some problem.

Shyam Sunder Modani
CA, Hyderabad
1408 Answers
164 Consultations

5.0 on 5.0

Dear Sir,

1. B has to show income from other sources as sub lease amount received.

However, if the Y amount received by B is not commensurate with the market rates, it may attract scrutiny.

Please feel free to call/revert in case of any doubts

Thanks and Regards

Abhishek Dugar

CA CS B.Com

Abhishek Dugar
CA, Mumbai
3576 Answers
183 Consultations

4.8 on 5.0

As the question is answered by other experts, I will pass over the question, by just adding one point.

If C is paying rent which is not reasonable, such excess rent will be disallowed as expenditure, if he is claiming it as his business expenditure.

B Vijaya Kumar
CA, Hyderabad
1001 Answers
124 Consultations

5.0 on 5.0

Hello Sir,

If the AO, in any way finds out that the house is let for a petty consideration and is again sub let for a high value. He may add all the amount in the income of Mr. A saying that the property was let to a relative for inadequate consideration in order to avoid taxes and its gonna be pretty difficult justifying your case.

Trust this clarifies your query.

Feel free to call / get back in case of further clarifications.

Thanking You.

Regards,

Rohit R Sharma

BCOM, ACA, LLB-GEN, CERT. FAFP

Rohit R Sharma
CA, Mumbai
2104 Answers
95 Consultations

5.0 on 5.0

I think it all falls under legals based on the fact as sub letting through legal documentation and declaration of income is not a issue.

Vishrut Rajesh Shah
CA, Ahmedabad
928 Answers
38 Consultations

5.0 on 5.0

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