Tax Deductions On Property & Education

The Income Tax Act, 1961, has certain provisions for deductions on income received from the sale of property, educational expenses and educational loans.

KEY POINTS:

• There are only two deductions on income received from the sale of property, viz. the cost of acquisition and the cost of improvement. If the property is held for 36 months or more before being sold, the cost of acquisition/improvement would have to be indexed based on the Cost of Index Indices published from time to time.
• Under Section 23(1) of the Income Tax Act, 1961, a deduction is available in respect of property taxes levied by a local authority, including the arrears thereof, provided the same are paid.
• Educational loans are entitled for deduction u/s 80E under Chapter VIA of the Income Tax Act, 1961. However, lodging, boarding and educational expenses are considered personal expenses, and are not allowed for deduction.
• Educational expenses including tuition fees (not being development fees, donation or payment of such nature) paid to any university, college, school or other educational institution situated in India for the purpose of full-time education of any two children is allowed as deduction u/s 80C.

Q) We are a trust and owned a property which was rented out. The municipal taxes on the said property had not been paid for many years. Now, the trust has sold the property and has paid out the arrears of municipal taxes from the said amount. Would the trust get a deduction of the municipal taxes so paid from its income from capital gains?

- Sonbai Lalji Trust
Danabunder, Mumbai

A) When property is sold, the capital asset is transferred and the income is taxable under the head ‘Income from Capital Gains’. There are only two deductions on such income, viz. the cost of acquisition and the cost of improvement. If the property is held for 36 months or more before being sold, the cost of acquisition/improvement would have to be indexed based on the Cost of Index Indices published from time to time. However, the municipal taxes would not be allowed as deduction under this head of income.

Under Section 23(1) of the Income Tax Act, 1961, a deduction is available in respect of property taxes levied by a local authority provided the same are paid. Thus, you can compute the income under the head ‘Income from House Property’ and claim a deduction in respect of the municipal taxes paid, including the arrears thereof. The resultant losses under that head of income can be set off against the long term capital gains in respect of the property sold.

Q) My son has gone abroad for higher education. To fund his education, I have taken a loan from a trust. The lodging, boarding and education expenses as well as the repayment of the loan excluding interest is about Rs 5 lakh. Will I get a deduction in respect thereof?

- Jayesh Chandriani,
Chowpatty, Mumbai

A) As regards the educational loan you have taken for your son’s education, you will be entitled for deduction u/s 80E under Chapter VIA of the Income Tax Act, 1961. However, you will not be able to claim deduction in respect of the lodging, boarding and educational expenses of your son. These are considered personal expenses, which are not allowed for deduction.

Educational expenses including tuition fees (not being development fees, donation or payment of such nature) paid to any university, college, school or other educational institution situated in India for the purpose of full-time education of any two children is allowed as deduction u/s 80C.

As your son is studying abroad, you will not be entitled to the said deduction u/s 80C of the said Act.