What is the right approach for entering into a Rental Agreement?

 A rental agreement is a contract, usually written, between the owner of a property and a tenant who desires to have temporary possession of the property as distinguished from a lease which is more typically for a fixed term.  As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term.

There is typically an implied, explicit, or written rental agreement or contract involved to specify the terms of the rental, which are regulated and managed under Contract Law.

The parties involved in the contract, the landlord and the tenant are identified in the contract. A housing lease may specify whether the tenant is living alone, with family, children, roommate, visitors. A rental may delineate the rights and obligations of each of these.  This also applies to whether or not pets may be kept by the tenant. On the other hand, the tenant may also have specific rights against intrusions by the landlord or other tenants, except under emergency circumstances. The term of the rental may be for a night (e.g., a hotel room), weeks, months, or years. There may be statutory provisions requiring registration of any rental that could extend for more than a specified number of years (e.g., seven) in order to be enforceable against a new landlord.

A typical rental is either annual or month-to-month, and the amount of rent may be different for long-term renters (because of lower turnover costs). If a tenant stays beyond the end of a rental for a term of years (one or more), then the parties may agree that the lease will be automatically renewed, or it may simply convert to a tenancy at will (month-to-month) at the pro-rated monthly cost of the previous annual lease. If a tenant at will is given notice to quit the premises, and refuses to do so, the landlord then begins eviction proceedings. In many places it is completely illegal to change locks on doors, or remove personal belongings, let alone forcibly eject a person, without a court order of eviction. There may be strict rules of procedure, and stiff penalties (triple damages, plus attorneys’ fees) for violations.

Here are a few tips, wherein a tenant before signing and entering into a rental agreement, has bear in mind and then go ahead.

Background check of the owner: It is essential for one to know the track-record of the licensor and get an No Objection Certificate from the society. One must check, if there is any unauthorised construction done in the house or flat; also, check if there is any litigation pertaining to the property due to which you may land into trouble. It is also necessary to check if the premise has the occupation certificate and regular water supply. Therefore one has to be sure that the document of Leave and License is stamped and registered.

First-hand experience of the site:  Once the landlord has agreed to let the apartment on rent, the tenant must make sure to inspect any pre-existing damage before signing a rental agreement. If there is anything that the landlord has not agreed to fix from the first visit inspection such as tainted carpeting, broken blinds or missing tiles, the tenant must make sure this damage is documented in the agreement as pre-existing. By documenting such damage, a tenant is protected from impending charges to your security deposit.

Make a concrete agreement: Some rentals are inclusive of utilities like cable connection and parking within the monthly rental and some aren’t. This can have an effect on the monthly budget and make an otherwise affordable apartment, not so affordable. Most rent agreements are based on a parallel template, but words can vary between two contracts. Non-specific agreements can imply trouble and may leave out special requirements like extensions, move-in and move-out dates, and damage limits. A tenant has to always make sure that the agreement unambiguously declares the address of the property, the name of the landlord, contact information for the landlord and maintenance persons, deposit and rent total and expected utilities.

Terms and conditions implied: A tenant has to ensure the appropriate documentation is registered. Review the agreement thoroughly to make sure that it includes a lock-in period, release clause and is clear by way of any annual increments to the rent.  tenant should also understand any additional charges that could be their responsibility during the rental period. A tenant should also ensure that they take the metre reading of the electric and gas metre on the date of possession; charges to be levied in case of repair or damage and clarity on timeline of payments and other monetary exchanges.

Understand local and state laws: A tenant has to essentially look out for illegal clauses and keep a track of late payments and penalties. Laws vary from state to state; what may be legal in one state may not be in another. Two very important documents that should be read completely before renting are: the rental agreement and the state’s rental right laws.

Include a severability clause:  A severability clause is the best bet in a rental agreement. This part protects a tenant by keeping the contract intact, even if one part turns out to be unlawful or unenforceable.

 Checklist on pet provisions: Even if advertisements state that some pets are allowed, double check the same with the owner. One should know that landlords are allowed to charge extra for pets. The fees however, may be negotiable.

There are two fundamental things that should always be kept in mind, rent can’t go up until the contract expires, and you can’t be evicted without breaching the contract.

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P2P LENDING: A PERSPECTIVE AND COMPARISON WITH REITS

P2P or peer to peer lending has emerged as one of the key sources of procuring capital in recent years.

P2P is based on the principle of raising finance from “n” number of people who pool their resources together. There is no proper definition of P2P lending. One can define it as a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. It can be also explained as a financial innovation introduced with an objective to provide funding to people by connecting borrowers directly with lenders through an internet platform.

This system reinforces the power of crowd funding.  The reasons for want of funds can range from professional to personal reasons like commencement of business, expansion or diversification of business, wedding, purchase of property, education fund, etc..

The need for P2P lending structure arose because Banks and financial institutions could not or felt reluctant to grant unsecured and small amount of funds. Although the demand for such unsecured and small funds remains high, moneylenders or individual bankers are the only ones catering to this sector who charge an exorbitant rate of interest being a monopoly.

The working concept of P2P is similar to a marketplace where buyers and lenders meet to enter into a debt financing agreement. This lending structure makes use of technology and online media to maintain communication between the parties, known as P2P platform.

The terms and conditions including the interest rate and duration are either mutually decided by the parties or by P2P platforms with the approval of the parties. The role of P2P platform is to introduce creditworthy borrowers to cash rich individuals who cannot be accessed by the individual borrowers generally.

Lenders make use of Reverse auction model, that is, the lender bids for the rate at which he/she wishes to lend a specific amount of money and Buyer shall have the right to choose among the Bidders, from whom they wish to borrow. Naturally, the lender with the lowest bid rate is preferred by the borrower. Prior to investment, the Lender can verify the credit score of borrowers at P2P platform without any actual interaction with the other party. These platforms have their own criteria’s of assessing the credibility of individuals and may physically verify the personal details of the borrowers. At the time of entering into debt agreement, post dated cheques may be taken from the Borrower to secure the repayment to Lender. All the transactions are made directly through bank accounts of the parties, which ensures that one round of customer verification is done through KYC norms of Banking institutions.

The P2P platform functions in the following manner:

1.      Application of loan by Borrowers is made online on P2P platform.

2.      Next is, evaluation of Borrowers to grant credit scores through data analytics. The method of assessment of borrowers depends upon the policies and practices of P2P platform.

3.      Approved loan requests are then assigned a credit grade, which serves as a platform-specific rating system that reflects a distinct interest rate and affiliated levels of risk.

4.      If the borrower agrees to the terms of the loan, then the platform uploads the borrower’s details onto the online marketplace as a distinct profile for the investors to review.

5.      Multiple investors can invest in a single piece of loan for portfolio diversification and risk distribution.

6.      Once the borrower and investor agree upon the interest rates and other terms and conditions, the agreement is vetted by the P2P platform.

7.      The amount is deposited to the account of P2P platform by the investor which is further directed to the borrower’s account.

8.      The entire process of lending and timely payment of returns is monitored by the platform.

9.      The platform receives a fee on the loan for their services.

The major benefit of P2P is the availability of right amount of fund at the right time. While returns from fixed deposit can never beat inflation and equity returns can never be assured, P2P gives assured and timely risk adjusted returns. No lock in period is applicable here as the returns start at periodic intervals like monthly or bi-monthly payment. These periodic returns can be further reinvested in other investment vehicles or at the same P2P platform for earning revenue at compounding rates. P2P is thus, not only a better source of financing but investment too.

For an orderly growth of P2P lending in India, RBI has recently released a consultation paper on its regulation inviting suggestions from public. Once regulated, more people will start using the platform. At the same time, the fear of overregulation looms over the participants of P2P lending.

As the name suggests, any direct lending from one person to another can be categorized as peer to peer lending. It can be safely deduced that it is not a recent phenomenon but it was the Bank which had replaced such individual financing system in the past.

The revival of P2P lending system can be attributed to its digital makeover. In 2005, Zopa an online platform for peer to peer lending was introduced in UK. Based on this concept, several online platforms came up worldwide.

Within few years, P2P online platforms became popular in Indian capital market as well. At present, around 30 startups are in the P2P lending business.

As goes for any innovation in financial market, there is always a comparison for superior returns. Similarly, the comparison of Real estate Investment Trusts (REITs) and P2P lending by investors is inevitable. Both are new formats of investment capable of investing in real estate. However, there are various factors to look out for before choosing an investment vehicle. Hereinbelow is a snapshot of the differences between the two investment structures:-

 

Growth of P2P lending in real estate is not surprising, given the different client base of this system. The client assessment for P2P lending is totally different from banks and financial institutions as they do not reject borrowers on sole factor of financials and prefer credibility for shortlisting borrowers. Applying this concept to real estate, there is a large segment of medium- income population in need of homes. Banks lend money to this segment only if they give security and agree to a high rate of interest. In such scenario, P2P lending is a boon to the Indian economy.

Budget 2016 – Service Tax

Budget 2016 has proposed to impose a Cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services. The new effective service tax could henceforth be 15%.

The service tax was increased to 14% in Budget 2015. There was an additional 0.5% cess added to this service tax named Swachh Bharat Cess. Therefore the effective rate of Service Tax is currently at 14.5% with effect from 15th Nov 2015. Experts feel that the rate is slowly increased to bring service tax closer to the expected goods and services tax (GST) rate of 17-18%.

Service tax is levied by the government on service providers on certain service transactions, and is actually borne by the customers. It is an Indirect Tax under the Finance Act, 1994.

The proceeds of Krishi Kalyan Cess introduced will be used for financing initiatives relating to improvement of agriculture and welfare of farmers effective 1st June 2016.

The Krishi Kalyan Cess shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994, or under any other law for the time being in force.
The proceeds of the Krishi Kalyan Cess shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money of the Krishi Kalyan Cess for such specified purposes.
 

EPF and the tax debate

Let us look at what the Government is trying to do, when the EPF is getting taxed. While the salaried class is angered about the move, experts at IKIA think there are few pluses as well.

The EPF being an EEE scheme, with an 8.75% return is more attractive than any other schemes of investment and hence the most preferred by the salaried class. Successive Governments have continuously squeezed the salaried class making it difficult for the average person to manage a decent retirement corpus; the Government has not done much about the EPS (pension scheme) which is a part of the EPF.

The EPS scheme is ineffective, with monthly pensions not even equaling 1% of the last drawn salary of the employee, the current move will totally take EPF out of the preferred saving option.

On the brighter side, funds blocked in EPF, which are not withdrawn / unclaimed, will now, be claimed by the respective account holders. The delay in processing EPF by various departments/ officials which was often highlighted as inefficiency and red tapism on the part of the EPF employees will come into focus. The paid holidays for them are now over.

The unattractive Pension Scheme of the EPF may also be sidelined unless the Government revamps it. The unfairness in the whole process may just pave way to more evasion of tax through unforeseen channels. There is more than Rs 27000 crore of unclaimed money in the EPF, and hopefully this move will ensure that at least some of it is claimed or withdrawn.

The centres offer to contribute to the EPF of those employees earning less than Rs 15000 pm will lead small organisations into organised framework and will ease the employer’s burden considerably. But this will not address the changes that need to be addressed to get the scheme functioning like a well oiled machine.

Last but not the least, the Government is trying to resolve its own inefficiencies through reforms and taxation, and hopefully it will realize its folly in the move to tax the retirement corpus and roll back the policy and at the same time take measure to ensure that EPF is accessible and processing/feedback /updates to each of its members on status of their account is given ensuring that the savings are withdrawn/utilized or reinvested effectively.

 

Budget 2016 – Tips for house owners

For a first time home buyer, an additional deduction if Rs 50,000 can be availed on home loans apart from the Rs 2 lakh deduction that exists.  The additional benefit will help individuals taking loan during April1, 2016 – 31 March 2017, provided the value of the loan does not exceed Rs 50 lakh.

It may be cheaper to book an under construction apartment to enable one to claim the interest paid during pre-delivery period. The claimable amount will be Rs 2 lakh for loan taken before April 2016 and Rs 2.5 lakhs for loans disbursed after 1 April 2016.

The in event one is transferred from his base city to another city, his own property is considered as self-occupied and is eligible for deduction in housing loan interest. Also opting to purchase a second home is a tier 2 town, while staying in a rented house also makes the buyer eligible for deduction in housing loan.

Self-occupied property is considered non income yielding and hence considered a loss, which can be set off against any other income including salary, reducing tax liability. The loss can be carried forward for 8 years, but in subsequent years can be set off only against income from house property.

Here again, loans taken jointly by the husband and wife to purchase property, entitles each to a deduction of Rs 2 lakh to Rs 2.5 lakhs. Similar is the case if there are 3 joint owners, subject to given conditions.

Repayment of principal of housing loan is allowed as deduction from gross total income subject to overall cap with other eligible investments of Rs 1.5 lakhs, provided the loan is from approved banks or LIC.

More on this in our next blog….

 

 

Higher TDS for NRI investors – norms eased

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Capital Gains, Income Tax on house property, NRI, Real Estate, Real Estate India, Real Estate India News, Real Estate Investment, Real Estate News, TDS

Non-resident investors who do not provide permanent account number will no longer have to face higher tax deduction at source.  Currently nonresident investors are charged 20% tax deduction at source or TDS on their interest earnings, royalty or technical fee. They would require furnishing some personal details and taxing residency certificate from their home country and a few other easily available documents.

Provisions of Sec 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset. Section 206AA of I-T Act provides that if an investor does not have permanent account number or PAN, he or she will be liable to withholding taxes on payments at the rate of 20% or as per tax treaty with the country where investor is resident, whichever is higher.

Under the new rules 37BC, investors will instead need to provide their personal details such as e-mail and contact number, residential address and tax residency certificate from the government of their home country. The investor can provide tax identification number or any other unique identification number, in case a tax residency certificate is not available.

Exchange old property for new

People are increasingly looking at exchanging their old property for new ones, while others are looking at upgrading their existing houses to bigger and better ones.

Exchanging property is now possible. This happens with small and emerging developers, depending on the age of the property. In this innovative concept, developers buy land/houses in the suburbs and develop residential units. This is a way out the combat the current lean period in the residential market.

The tax and legal implications enlist the following regulations for such exchanges – The transaction gives rise to capital gains as there is an exchange of assets. However, if the property to be offered in exchange is a house and is held by the individual for more than three years then the entire gains arising on such an exchange could be claimed as exempt under Section 54 of the Income Tax Act, 1961. Possession of the new house must be obtained within two years and the value of the new property should be higher than the amount of capital gain.

If the property to be offered in exchange is a plot of land and is held by the individual for more than three years then the gains can be claimed exempt under Section 54F, if the individual does not own more than one house at the time of exchange. In either case, if the property offered for exchange is held for a period up to three years then the difference between its market value (at the time of exchange) and its cost would be taxable as short term capital gains.

It is advisable to get one’s property valued from a government certified valuation expert and get a certificate. If there is difference in value, the amount should be taken from the developer or additional goodies or facilities should be negotiated. Try exchanging with a property which is ready-to-move-in. However, if the property with which the house is being exchanged is under construction, exchange only on the basis of Agreement to Sell. Do not register the property in favour of the developer till the property with which you have exchanged your unit is registered/handed over to you – says experts at Ikia consulting services.

Rate cuts not on RBI’s agenda yet …..

This week’s monetary policy announcement clearly indicated that RBI is unwilling to fall in line with the Government’s demand. The RBI has taken a stance that challenges the Government, sending clear signals to the Government and its citizens that it has to work hard to tame inflation. RBI is looking at seeing more resilient levels of inflation before deciding on the rate cuts, which many sectors are looking forward to.

Home loan rates currently are in the range of 10-10.25% and would continue to remain there. Lending rates maintain status quo till February 2015 and that is when the RBi will announce the last monetary policy for the fiscal, and might cut rates outside policy review.

The global oil prices are easing and with import restrictions on gold removed, inflation is expected to go down further giving a cushion effect to the economy.

In days to come the interest rates on housing loan may come down to as low as 8%, similar to 2006-2007 period.  This period as experts at Ikia Consulting Services feel, is the right time to switch to floating interest rate loans – since over the next few years banks and financial institutions will be happy to pass on lower interest rates benefit to their clients.

Source : The HIndu

Calculating tax on house property income

The notional income of a person derived from house property is taxable under the Income tax act. Property here refers to any building, factory, hall, shop, auditorium and the land attached to the building which can be a compound, garden, parking space, gymkhana or a playground. The taxability is on the potential income that the property can earn and not on the actual rent earnings.

The taxable value is calculated on the annual value of the property (inclusive of the building and the land) which is used by the owner for business/profession.

The tax advisory experts at Ikia Consulting services explains that Gross Annual Value of the property is required, to calculate the annual value of the property, which is higher of

– The reasonable earnings from the property and in cases where there is a fixed income the sum cannot exceed the GAV. If the property has been vacant for a long period of time, then the amount of rent actually received is taken as GAV.

– Where the actual rent received/receivable is more that the GAV, then that amount is taken as the annual value.

The following is excluded from determining GAV

-Municipal tax realized from tenant

-Notional interest on the amount received towards rent/security deposit

-Repairs carried out by tenant

The Annual Value is considered nil in the following cases:

– Self occupied property

-Owner having one residential house and unable to occupy it due to employment

Net Annual Value is arrived at by deducting municipal taxes and unrealized rent.  Receipt of any unrealized rent shall be chargeable to tax in the year of receipt.

If the owner has more than one house then the only one can be considered as self-occupied and the others are considered as let out and hence it is advisable to choose a property with less tax liability.

Calculating capital gains tax

Capital gains is the profit earned from sale of Capital assets (Shares, property and other capital assets). The taxes imposed on these by the Income Tax department is called Capital gains tax. If an asset sold has been in the possession of the seller for 3 years or lesse then short term capital gains tax is applicable else a long term capital gain tax is levied. The Short term capital gains tax is as per prevailing income tax and the long term capital gains tax is 20%.

Let us see how this is calculated. Let us consider a 10 lakh worth property purchased in the year 2000 and sold in 2012 for 12 lakh.

The calculation is as given below

Cost of property – 10,00,000 / Year of purchase – 2000/ Selling Price – 25,00,000/ Year of sale – 2012

Cost Inflation Index (CII) in yr 2000: 389

Cost Inflation Index (CII) in yr 2012 :785

Calculate Indexed purchase price =) Purchase price*CII of the yea of sale )/ CII for the year of purchase = (1000000*785)/389 = 20,17,995

Capital gain : 04,82,005

Apply 20% tax rate = 96,401

The points to note here  –

Capital gain = Selling price-indexed purchase price

Cost inflation index is published by income tax considering 1982 as base year. So though the property was sold at 25,00,00 the CII price was around Rs 20 lakh at the time of selling and hence tax will be applicable on the difference amount (2500000-201799).

The amount invested by the owner to repair the property  has to be indexed  as per the CII calculation and added to Indexed purchase price. In case of property purchased before 1982 the same has to be valued from registered valuer and indexed accordingly.

With regard to Long term capital gains tax, under section 54 the seller of the property can claim tax exemption if he uses the entire proceeds received out of sale to buy another house, with 2 years of the sale or build a house within 3 years of the sale. He also has an option of buying a house one year prior to the sale and claiming tax relief. if after selling the property, the seller has not identified a new property, he may park his resources in a special account called the capital gain accounting scheme and after 3 years the whole amount will be taxed under the long term capital gains tax.

The tax advisory experts at Ikia Consulting Services say that the other options available to the seller to claim exemption from paying tax is to invest in bonds issued by National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC) to claim exemption upto Rs 50 lakhs. The STCG will then be added to the income of the person and exposed to income tax slabs.