Here are some rules that specify when a tax deduction is available

Property is an important source of income. In case you own a residential property, it may either be self-occupied or rented out. If you rent out the residential property, a rental income is derived. Leasing out property and renting out property mean the same. The rental income earned is taxable in the hands of the recipient. It is taxable under the head 'Income from House Property'.

The tax liability is calculated according to the provisions of Sections 22 to 27, after allowing for the admissible deductions. No deductions are allowed except those specified by the Income Tax Act.

In case you have rented out your commercial property, the income earned from this source is also be taxable. It is taxable under the head 'Income from Business and Profession'. The lease rent earned through leasing out commercial property constitutes business income for the owner of the property. As such, it is taxed as business income.

The deductions allowed on business income are applicable here too. The expenses should pertain to earning the income from the commercial property.
In addition to the regular income from rent, you can also earn an income through capital appreciation. The owner may transfer or dispose off a residential property. In case the price realised is greater than the cost of the house, you earn a capital gain. This is taxable under the head 'Capital Gains'. In case the amount realised is reinvested in property or some specified securities, no amount is taxable.

What is taxed under the head 'House Property' is the inherent capacity of a property to earn an income called the 'annual value' of the property. This is taxed in the hands of the owner of the property. Gross annual value is the highest of rent received, fair market value or municipal valuation. If however, if the Rent Control Act is applicable, the gross annual value is the standard rent or rent received, whichever is higher.

In case the let-out property was vacant for any part of the previous year and owning to such vacancy the actual rent received is lesser than the sums mentioned, the amount actually received is taken into account while computing the gross annual value. Net value is the gross annual value less the municipal taxes paid by the owner, provided the taxes were paid during the year. Annual value is the net value less the deductions available under Section 24.

Deductions under Section 24

The Act specifies deductions that are exhaustive in nature. No deductions other than these are available. They include:

• Percentage of annual value

It is specified that 30 percent of the annual value of the property as computed is eligible for deduction.

• Interest on loan

Interest on money borrowed for acquisition, construction, or renovation of property is deductible on accrual basis. Interest paid during the pre-construction or acquisition period will be allowed in five successive financial years starting with the financial year in which construction or acquisition is completed. This deduction is also available for a self-occupied property and can be claimed up to a maximum of Rs 30,000.

The Finance Act, 2001 had provided that effective the annual year 2002-03, the amount of deduction available under this clause is Rs 1.5 lakhs in case the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition or construction is completed before April 1, 2003.

The Finance Act 2002 has removed the requirement of acquisition or construction being completed before April 1, 2003 and has simply provided that the acquisition or construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed

This explains what goodwill is and how it is applicable to property

Goodwill is an intangible asset. It cannot be seen or felt physically. However, it is not a fictitious asset. It has value, and can be sold and transferred. Sometimes, goodwill is more valuable than the tangible asset itself. A person making a sacrifice must be compensated for the loss through goodwill.

While purchasing property, especially commercial property, you have to invariably pay for the goodwill. Goodwill is easy to think of but very difficult to define. It is something which will bring to the purchaser profits in future almost without his own efforts. The efforts have already been made in the past. Goodwill is the ability to earn profits higher than others. It enables earning of excess profits over and above what generally firms earn. It arises only if the firm can earn super profits.

Goodwill is the probability that customers will patronise the old place or supplier. It enhances the capacity of the business to earn profits in the future. It is the benefit and advantage of the good name, reputation and connection of a business. It is something that distinguishes an old established business from a new business. It is the value of the reputation of a firm in respect of profits in future over and above the normal expected profits.

When a person pays for the goodwill, he pays for something which places him in the position of being able to earn more than he could have by his own unaided efforts.

The value of goodwill depends on the mutual agreement between the purchaser and the seller. There are a few accounting methods available to determine the quantum of goodwill. One of the methods is called the 'number of years' purchase of average profits'. Under this method, the past profits of a number of years are totalled up and average found out. The average profits are then multiplied by a certain number of years to arrive at the goodwill. The number of years is with reference to the future expected number of years for which the excess profits will continue.

Another method is the capitalisation method where the value of the business is ascertained on the basis of actual profits, which is capitalised at a predetermined rate. Builders charge goodwill for shops in the vicinity of residential societies as the purchaser gets access to a large consumer group. Similarly, cinema halls charge goodwill for opening eating places within the premises. Same is the case of hospitals charging goodwill for opening of chemist shops within the hospital premises.

The logic is simple. By virtue of having a chemist shop within the hospital premise, the chemist gets an assured supply of customers. The hospital needs to be compensated for the benefit being availed of the chemist by virtue of the location in the hospital premises.

Being an intangible asset, the rules of valuation differ from business to business and place to place.

Some factors that influence determination of goodwill:

• Location

If the business is located at a potential place, resulting in good sales or economies, the value of goodwill will be correspondingly higher. For example, a property in the central business district will command a higher goodwill than one in the outskirts.

• Significant factors

In some cases, if a place has historic significance, its goodwill will also be correspondingly higher. The people who live in the surrounding areas can increase the goodwill. Presence of large companies in the vicinity enhances the value of the property.

• Conveniences

Factors such as access to supplies make a difference. Also, if a firm enjoys a good reputation for the quality of its products, the value of its goodwill will be high.