Income From House Property
The process of computation of income under the head “Income from house property” starts with the determination of annual value of the The concept of annual value and the method of determination is laid down in section 23.
The annual value of any property comprising of buildings or lands appurtenant thereto of which the assessee is the owner is chargeable to tax under the head “Income from house property”.
Exceptions: Annual value of the following properties are chargeable under the head “Profits and gains of business or profession”-
Annual value is the amount for which the property might reasonably be expected to let from year to year.
Income from letting out of vacant land is, however, taxable under the head “Income from other sources” or “Profits and gains from business or profession”, as the case may be.
In case of recovery of unrealized rent and arrears of rent, ownership of that property is not relevant.
The property may be used for any purpose i.e., commercial or residential purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax.
The income earned by an assessee engaged in the business of letting out of properties on rent would be taxable as business income.
Annual value of house property will be charged under the head “Income from house property”, where it is held by the assessee as stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as NIL for a period of two years from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority, if such property is not let-out during such period [Section 23(5)].
Where the assessee is a builder/construction company, the house property would be its stock-in-trade and rental income therefrom would be assessable under the head “Income from House Property”. However, where the assessee is engaged in the business of letting out of properties, income therefrom would be assessable under the head “Profits and gains of business or profession”.
(i) Meaning of composite rent:
The owner of a property may sometimes receive rent in respect of building as well as –
The amount so received is known as “composite rent”.
Where composite rent includes rent of building and charges for different services (lifts, security etc.), the composite rent is has to be split up in the following manner-
If let out building and other assets are inseparable
Where composite rent is received from letting out of building and other assets (like furniture) and the two lettings are not separable i.e. the other party does not accept letting out of building without other assets, then the rent is taxable either as business income or income from other sources, the case may be.
This is applicable even if sum receivable for the two lettings is fixed separately.
Where composite rent is received from letting out of building and other assets and the two lettings are separable i.e. letting out of one is acceptable to the other party without letting out of the other, then
This is applicable even if a composite rent is received by the assessee from his tenant for the two lettings.
In case of a resident in India (resident and ordinarily resident in case of individuals and HUF), income from house property situated outside India is taxable, whether such income is brought into India or not.
In case of a non-resident or resident but not ordinarily resident in India, income from a property situated outside India is taxable only if it is received in India.
1. Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]
Where the property is let out for the whole year, then the GAV would be the higher of –
The Expected Rent (ER) is the higher of fair rent (FR) and municipal value (MV), but restricted to standard rent (SR).
For example, let us say the higher of FR and MV is X. Then ER = SR, if X>SR. However, if X<SR, ER = X.
Expected Rent (ER) as per section 23(1)(a) cannot exceed standard rent (SR) but it can be lower than standard rent, in a case where standard rent is more than the higher of MV and FR.
Municipal value is the value determined by the municipal authorities for levying municipal taxes on house property.
Fair rent means rent which similar property in the same locality would fetch.
The standard rent (SR) is fixed by the Rent Control Act.
From the GAV computed above, municipal taxes paid by the owner during the previous year are to be deducted to arrive at the NAV.
2. Where let out property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower than the ER, then the actual rent received or receivable will be the GAV of the property.
The expression “Unoccupied property” refers to a property which cannot be occupied by the owner by reason of his employment, business or profession at a different place and he resides at such other place in a building not belonging to him.
5. In case of deemed to be let out property [Section 23(4)]
7. In case of a house property, a portion let out and a portion self- occupied
The following are the circumstances where notional income is charged to tax instead of real income:
The Actual rent received/receivable should not include any amount of rent which is not capable of being realised.
However, the conditions prescribed in Rule 4 should be They are –
Property taxes are allowable as deduction from the GAV subject to the following two conditions:
If property taxes levied by a local authority for a particular previous year are not paid during that year, no deduction shall be allowed in the computation of income from house property for that year.
However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed as deduction in computation of income from house property for that year.
Thus, we find that irrespective of the previous year in which the liability to pay such taxes arises according to the method of accounting regularly employed by the owner, the deduction in respect of such taxes will be allowed only in the year of actual payment by the owner.
In case of property situated outside India, taxes levied by local authority of the country in which the property is situated is deductible.
In respect of self-occupied/unoccupied house property/properties for which “Nil” Annual Value benefit is claimed, deduction of municipal taxes paid is not allowable.
Deductions provided under section 24 are exhaustive.
This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
The assessee will not be entitled to deduction of 30%, in the following cases, as the annual value itself is nil.
Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction.
Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction.
Pre-construction period is the period prior to the previous year in which property is acquired or construction is completed.
Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed (Pre-construction interest) as reduced by any part thereof allowed as deduction under any other provision of the Act, can be claimed as deduction over a period of 5 years in equal annual installments commencing from the year of acquisition or completion of construction.
Interest relating to the year of completion of construction/ acquisition of property can be fully claimed in that year irrespective of the date of completion/ acquisition.
(1) Under default tax regime under section 115BAC
There would be no deduction on account of interest on loan under section 24(b) under default tax regime under section 115BAC in respect of the property referred to in section 23(2) i.e., self-occupied or unoccupied property.
In case assessee has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A), the assessee will be allowed a deduction on account of interest (including 1/5th of the accumulated interest of pre-construction period) as under –
|
Conditions |
Amount of Deduction |
|
(i) Where the property is acquired or constructed with capital borrowed on or after 1.4.1999 and such acquisition or construction is completed within 5 years from the end of the financial year in which the capital was borrowed. |
Actual interest payable in aggregate for one or two self-occupied properties, subject to maximum of ₹ 2,00,000, if certificate mentioned in (2) below is obtained. |
|
(ii) Where the property is repaired, renewed or reconstructed with capital borrowed on or after 1.4.1999. |
Actual interest payable in aggregate for one or two self-occupied properties, subject to a maximum of ₹ 30,000. |
Certificate to be furnished: For the purpose of claiming deduction of ₹ 2,00,000 as per (b)(i) in the table given above, the assessee should furnish a certificate from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property or conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.
The ceiling limit would not apply to let-out/deemed let-out property: The ceiling limit prescribed for self-occupied property as above in respect of interest on loan borrowed does not apply to a let out/ deemed let-out property irrespective of the regime under which he pays tax.
Interest allowable on accrual basis: Deduction under section 24(b) for interest is available on accrual basis. Therefore interest accrued but not paid during the year can also be claimed as deducation.
In case of let out/ deemed let out property, interest accrued is allowable as deduction without ceiling limit under both the tax regimes. However, in case of default tax regime u/s 115BAC, the resultant loss from house property cannot be set off against income under any other head, whereas, under the normal provisions of the Act, the resultant loss from house property can be set off against income from any other head to the extent of ₹ 2 lakhs.
Unpaid purchase price would be considered as capital borrowed: Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with interest due thereon, the seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the borrower. In such a case, unpaid purchase price can be treated as capital borrowed for acquiring property and interest paid thereon can be allowed as deduction under section 24.
Interest on unpaid interest is not deductible.
Deductions from Net Annual Value under default tax regime under section 115BAC
Deductions from Net Annual Value under optional tax regime (normal provisions of the Act)
| Particulars | Amount | |
| Computation of GAV | ||
| Step 1 Compute ER | ||
| ER = Higher of MV and FR, but restricted to SR | ||
| Step 2 Compute Actual rent received/receivable | ||
| Actual rent received/receivable less unrealized rent as per Rule 4 [See Note below for alternate view] | ||
| Step 3 Compare ER and Actual rent received/receivable | ||
| Step 4 GAV is the higher of ER and Actual rent received/ receivable | ||
| Gross Annual Value (GAV) | A | |
| Less: Municipal taxes (paid by the owner during the previous year) | B | |
| Net Annual Value (NAV) = (A-B) | C | |
| Less: Deductions u/s 24 | ||
| (a) 30% of NAV | D | |
| (b) Interest on borrowed capital (actual without any ceiling limit) | E | F |
| Income from house property (C-F) | G |
Note - The income-tax returns, however, permit deduction of unrealized rent from gross annual value. If this view is taken, the unrealized rent should be deducted only after computing gross annual value.
| Particulars | Amount | |
| Computation of GAV | ||
| Step 1 Compute ER | ||
| ER = Higher of MV and FR, but restricted to SR | ||
| Step 2 Compute Actual rent received/receivable | ||
| Actual rent received/receivable for let out period less unrealized rent as per Rule 4 [See Note below for alternate view] | ||
| Step 3 Compare ER and Actual rent received/receivable computed for the let-out period | ||
| Step 4 If Actual rent is lower than ER owing to vacancy, then Actual rent is the GAV. | ||
| If Actual rent is lower than ER due to other reasons, then ER is the GAV. | ||
| However, in spite of vacancy, if the actual rent is higher than the ER, then Actual rent is the GAV. | ||
| Gross Annual Value (GAV) | A | |
| Less: Municipal taxes (paid by the owner during the previous year) | B | |
| Net Annual Value (NAV) = (A-B) | C | |
| Less: Deductions under section 24 | ||
| (a) 30% of NAV | D | |
| (b) Interest on borrowed capital (actual without any ceiling limit) | E | F |
| Income from house property (C-F) | G |
Note - The income-tax returns, however, permit deduction of unrealized rent from gross annual value. If this view is taken, the unrealized rent should be deducted only after computing gross annual value.
| Particulars | Amount |
| Annual value under section 23(2) | Nil |
| Less: Deduction under section 24 | |
| Interest on borrowed capital [Allowable only in case the assessee exercises the option of shifting out of the default tax regime provided under section 115BAC(1A)] | E |
| (i) Interest on loan taken for acquisition or construction of house on or after 1.4.99 and same was completed within 5 years from the end of the financial year in which capital was borrowed, interest paid or payable in toto for one or two self-occupied properties subject to a maximum of ₹ 2,00,000 (including apportioned pre- construction interest). | |
| (ii) Interest on loan taken for repair, renovation or reconstruction on or after 1.4.99, interest paid or payable in toto for one or two self-occupied properties subject to a maximum of ₹ 30,000. | |
| Income from house property | -E |
| However, aggregate interest on borrowed capital allowable under (i) and (ii) cannot exceed ₹ 2,00,000 |
| Particulars | Amount | |
| Computation of GAV | ||
| Step 1 Compute ER for the whole year | ||
| ER = Higher of MV and FR, but restricted to SR | ||
| Step 2 Compute Actual rent received/receivable | ||
| Actual rent received/receivable for the period let out less unrealized rent as per Rule 4 [See Note below for alternate view] | ||
| Step 3 Compare ER for the whole year with the actual rent received/receivable for the let out period | ||
| Step 4 GAV is the higher of ER computed for the whole year and Actual rent received/receivable computed for the let-out period | ||
| Gross Annual Value (GAV) | A | |
| Less: Municipal taxes (paid by the owner during the previous year | B | |
| Net Annual Value (NAV) = (A-B) | C | |
| Less: Deductions under section 24 | ||
| (a) 30% of NAV | D | |
| (b) Interest on borrowed capital (actual without any ceiling limit) | E | F |
| Income from house property (C-F) | G |
Note - The income-tax returns, however, permit deduction of unrealized rent from gross annual value. If this view is taken, the unrealized rent should be deducted only after computing gross annual value.
| Particulars | Amount | |
| Gross Annual Value (GAV) | A | |
| ER is the GAV of house property | ||
| ER = Higher of MV and FR, but restricted to SR | ||
| Less: Municipal taxes (paid by the owner during the previous year) | B | |
| Net Annual Value (NAV) = (A-B) | C | |
| Less: Deductions under section 24 | ||
| (a) 30% of NAV | D | |
| (b) Interest on borrowed capital (actual without any ceiling limit) | E | F |
| Income from house property (C-F) | G |
(VI) HOUSE PROPERTY, A PORTION LET OUT AND A PORTION SELF- OCCUPIED
Interest chargeable under this Act which is payable outside India shall not be deducted if –
| Section 25A Arrears of Rent / Unrealised Rent | |
| (i) | Taxable in the year of receipt/realisation |
| (ii) | Deduction@30% of rent received/realised |
| (iii) | Taxable even if assessee is not the owner of the property in the financial year of receipt/realisation. |
However, the aggregate deduction of interest to each co-owner in respect of interest payable on loan taken for co-owned house property and interest, if any, payable on loan taken for another self-occupied property owned by him cannot exceed ₹ 30,000/ ₹ 2,00,000, as the case may be.
| Co-owned property [Section 26] | |
| Self-occupied property | Let-out property |
|
The annual value of the property of each co- owner will be Nil and each co-owner shall be entitled to a deduction of ₹30,000/ ₹ 2,00,000, as the case may be, on account of interest on borrowed capital if they exercise the option of shifting out of the default tax regime provided under section 115BAC(1A). However, if the co-owner owns another self- occupied/unoccupied property, the aggregate interest from the co-owned property and the other self-occupied property cannot exceed ₹30,000/₹ 2,00,000, as the case may be. As mentioned earlier, no interest deduction in respect of self-occupied property would be allowable to the co-owners under the default tax regime. |
The income from such property shall be computed as if the property is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their specific share. |
As per section 27, the following persons, though not legal owners of a property, are deemed to be the owners for the purposes of section 22 to 26.
(i) Transfer to a spouse [Section 27(i)] – In case of transfer of house property by an individual to his or her spouse otherwise than for adequate consideration, the transferor is deemed to be the owner of the transferred property.
Exception – In case of transfer to spouse in connection with an agreement to live apart, the transferor will not be deemed to be the owner. The transferee will be the owner of the house property.
(ii) Transfer to a minor child [Section 27(i)] – In case of transfer of house property by an individual to his or her minor child otherwise than for adequate consideration, the transferor would be deemed to be owner of the house property transferred.
Exception – In case of transfer to a minor married daughter, the transferor is not deemed to be the owner.
Note - Where cash is transferred to spouse/minor child and the transferee acquires property out of such cash, then, the transferor shall not be treated as deemed owner of the property. However, clubbing provisions will be attracted.
(iii) Holder of an impartible estate [Section 27(ii)] – The impartible estate is a property which is not legally divisible. The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate.
After enactment of the Hindu Succession Act, 1956, all the properties comprised in an impartible estate by custom is to be assessed in the status of a HUF. However, section 27(ii) will continue to be applicable in relation to impartible estates by grant or covenant.
(iv) Member of a co-operative society etc. [Section 27(iii)] – A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him although the co-operative society/company/ association is the legal owner of that building.
(v) Person in possession of a property [Section 27(iiia)] – A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be the deemed owner of that house This would include cases where the –
In all the above cases, the buyer would be deemed to be the owner of the property although it is not registered in his name.
(vi) Person having right in a property for a period not less than 12 years [Section 27(iiib)] – A person who acquires any rights in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that building or part thereof.
Exception – In case the person acquiring any rights by way of lease from month to month or for a period not exceeding one year, such person will not be deemed to be the owner.
Ruchika Saboo
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