The annual value of any property comprising of building or land attached to the vicinity of the building of which the assessee is the owner, is chargeable to tax under the head income from house property. But if the assessee occupies the building or land attached to the vicinity of the building for the purpose of business or profession carried on by him, then it is not chargeable to tax. For income to be taxed as income from house property the following points should be noted
1. Building or land attached thereto.
Building means a permanent constructed structure. Building includes residential house , bungalows, docks, warehouse, any block of bricks or stone work covered by a roof etc. The use of the building is immaterial. It may be let out for residential purpose, business purpose or for profession. The location of the building is also immaterial. It may be situated within India or abroad.
2. Annual value
The meaning of the word annual value is important, because the annual value of the building or land appurtenant thereto is to be taxed and not the rent received.
3. Assessee should be the owner of the property
It is only the owner of the house property who can be taxed under this head of income. In certain case the legal ownership may vest with one person whereas the tax liability is cast on another person who is deemed to be the owner. The following persons are considered as deemed owner.
- An individual who transfers house property to spouse without adequate consideration or without an agreement to live apart.
- An individual who transfers house property to minor child other than a married daughter.
- A member of a co operative housing society to whom a building is allotted under the house building scheme.
The basis for computation of income from house property is the annual value of the property. Annual value is defined under Sec 23 as follows
a) the sum for which the property might reasonably be expected to let from year to year; or
b) Where the property or any part of the property is let and the actual rent received or receivable by the owner.
c) Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and the actual rent received after considering the vacancy.
For the purpose of determining Annual Value following items are considered.
- Municipal Value
This is the value determined by the municipal/local authority for fixing the property tax. This is based on a survey.
- Fair rental value.
This is the reasonable amount of rent which a house property can fetch. It is based on the rent prevailing for similar type of property in same locality.
- Actual rent
This is the rent actually received by the owner of the house property from the tenant. Any amount of local tax paid by the tenant is not to be added. If rent consists of amount charged for rendering some common facilities, such amount is deducted from actual rent.
- Standard rent
In some states, government may fix rent as per Rent Control Act prevailing in that state. This rent is called Standard rent. It is the maximum rent an owner can claim from his tenant as rent.
Determination of Annual Value
1. Municipal value[MV] or Fair rent [FR]which ever is higher
2. First amount and Standard rent [SR]whichever is lower (if standard rent is fixed)
3. Second amount and actual rent[AR] whichever is higher
If any amount of rent is not capable of being realized, then such portion of rent shall not be included in computing the actual rent received or receivable. In order to exclude such unrealized rent, the conditions prescribed in the relevant rule should be satisfied. Exclusion of unrealized rent is permissible if the following conditions are satisfies.
a) The tenancy is bonafide
b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property
c) The defaulting tenant is not in occupation of any other property of the assessee.
d) The assessee has taken all reasonable steps to institute legal proceeding for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.
It is the period in which the house was vacant. The value for the vacancy period is calculated on the basis of annual rent and that amount is to be deducted annual value for the calculation of gross annual value.
House property income exempt from tax
The following rental incomes are not chargeable to tax
1. Annual value of any one palace of an ex-ruler
2. Property income of a local authority
3. Property income of an approved scientific research association
4. Property income of a games association
5. Property income of a trade union
6. House property held for charitable purpose
7. Property income of political parties
All the building properties are divided into the following three categories for the purpose of knowing the principles involved in computation.
a) Let out property [Sec 23(1)]
b) Self occupied property or unoccupied property [Sec 23 (2) and (3)}
c) Deemed let out property [Sec 23(4)
|Particulars||Let out& deemed let out||Self occupied|
|Gross Annual Value|
Less: municipal tax paid
Net Annual Value
Less: deductions under Sec 24
Income from House Property
- Gross annual value is taken as Nil for self occupied house property
- Municipal tax paid by the owner is allowed. Municipal tax due or paid by the tenant is not allowed
- If there are more than one self occupied house property, one house whose municipal value is higher should be taken as self occupied and all other houses as deemed to be let out
- Municipal tax, if to be calculated on % basis, it should be calculated on municipal valuation
- Joint expenses should be separated on Municipal Valuation.
Municipal tax paid by the assessee for the house property is deducted from gross annual value of the house property to determine the net annual value. Deduction is permissible in respect of taxes subject to the following conditions:
a) It should be borne by the assessee
b) It should be actually paid during the previous year.
Deductions [Sec 24]
The following deductions are allowed from net annual value for the computation of income from house property.
Standard Deduction – 30% of Net annual value.
30% of net annual value being allowed as deduction for repairs of let out and deemed let out house; it is automatic and does not depend on the quantum of actual expenditure incurred. This deduction is allowed even if no expenditure is incurred by the assessee. Assessee can avail this deduction even if tenant undertakes to do the repairs.
Interest on borrowed capital.
Interest payable on loans borrowed for the purpose of acquisition, construction, renovation, repairing or reconstruction can be claimed as deduction. Interest is allowed on accrual basis. No deduction is allowed for a brokerage or commission for arranging a loan.
Interest relating to the year of completion of construction can be fully claimed in that irrespective of the date of completion. Interest accrued during the construction period preceding the year of completion of construction can be accumulated and claimed as deduction over a period of 5 years in equal installments commencing from the year of completion of construction.
Any subsequent loan borrowed to repay the original loan shall also be entitled to the same treatment as the original loan. Therefore, the interest payable in respect of the second loan would also be admissible as deduction in the computation of income from house property. But interest on unpaid loan is not deductible.
Interest on borrowed capital for purchase or construction of self occupied house is also deductible subject to maximum ceiling given below.
- If capital is borrowed on or after 1-4-1999 and, acquisition or construction is completed within 3 years from the end of the financial year in which the capital was borrowed amount of interest deductible is Rs.1,50,000 or actual amount of interest whichever is less.
- In any other case interest is deductible up to a maximum of Rs.30, 000.
Interest on mortgage will be allowed only if the purpose of loan is relating to construction, repairs or renovation of house.
Interest on pre-construction or pre-completion period is allowed as deduction in 5 equal installments from the PY in which the property is acquired or constructed. While calculating the pre completion interest the following dates are considered;
- Date of loan[DOL]
- Date of repayment[DOR]
- Date of completion[DOC]
Always consider date of loan and take date of repayment or date of completion whichever is earlier to calculate the interest. If date of repayment is taken, consider the actual date and if date of completion is taken, consider the 31st March immediately preceding the date of completion.
If there is pre-completion interest
Current PY interest XXX
Add:1/5th of the pre-completion interest XXX
Total deductible interest XXX
Self occupied property or unoccupied property [Sec 23 (2) and (3)]
Where the property consists of one house in the occupation of the owner for his own residence, the annual value of such house shall be taken to be nil, if the following conditions are satisfied.
- The property is not actually let out during whole of the previous year
- No other benefits is derived there from
If an assessee occupies more than one property for own residential purposes, only one property selected by the assessee will be treated as self occupied and all other properties will be deemed as let out.
If the assessee owns only one residential house and he could not occupy the same because of his employment , business or profession elsewhere and resides in a house not belonging to him in that place, the annual value in respect of the house which he claims as self occupied shall be taken as nil.
When a part of the property is self occupied and other part is let out, the annual value of self occupied unit shall be taken as nil. Annual value of the unit let shall be computed in the normal way and taxable.
When a property is self occupied for a part of the year and let out for the other part of the year, no concession is available. If the assessee lets out his house to his employer company, which in turn allots the same to him as rent free quarters, then assessee is not entitled to take the benefit of self occupied house property.
Tax treatment in self occupied house property
|1. if the property is used by the owner for his own business or profession||Not taxable under the head house property|
|2. if property is used for his own residential purpose||Annual value of house is taken as Nil|
|3.when a part of the house is self occupied and the other part is let out||Self occupied portion is not taxable and the remaining let out portion is taxable|
|4.when house self occupied for the part of the year and let out for the other part of the year||House will be taken as let out for the whole year. No concession is available|
|5. if more than one property is self occupied for residential purpose||Only one property selected by the assessee will be treated as self occupied and the remaining houses will be treated as let out|
Recovery of unrealized rent
Where a deduction has been allowed in respect of unrealized rent in the AY 2001-02 or earlier years, and subsequently the assessee has realized any such unrealized rent, such amount will be chargeable to tax under the head income from house property. No deduction is allowed from such amount recovered and is taxable even if house is not owned by the assessee at the time of collection of unrealized rent.
Arrears of rent received
If an assessee receives any amount by way of arrear of rent which is not charged to income tax for any PY, the amount so received shall be deemed to be the income from house property and from that amount a standard deduction of 30% is allowed as deduction.
Arrears of rent received [Sec 25B]
If the assessee has received any amount, by way of arrears of rent from such property, not charged to income-tax for any previous year, the amount so received, after deducting standard deduction shall be deemed to be the income chargeable under the head Income from house property and accordingly charged to income-tax as the income of that previous year in which such rent is received, even though the assessee is not the owner of that property in the year of receipt.
Property owned by co-owners[Sec 26]
If the house property is owned by two or more persons and their respective shares are definite and ascertainable, the share of each such person in the income from the property shall be included in his total income. The concessional tax treatment in respect of self occupied property is applicable as if each such person is individually entitled to such relief.
When the owner of a building receives rent for letting the building along with furniture or machinery or for providing extra services like maintenance , lighting of stair case, water pool etc, such rent is called composite rent. If the rent of building is separable, rent is taxed under the head house property. The amount received for extra services less expenses is taxable as income from other sources. But if the rent is inseparable, then the whole amount is taxable under the head other sources.
Negative annual value
When the amount of municipal tax paid by the owner is more than the annual value then it becomes negative annual value. In such case only deduction of interest on loan is allowed as per the rules. Hence there will be loss from house property.
This loss can be set off from any income of the same year. With effect from assessment year 1999-2000 any loss under the head house property whether from let out or self occupied which remains unadjusted, can be carried forward for 8 succeeding previous years to be set off from income from house property only.
If somewhere expenses are given jointly for two or more house, these will be apportioned on some common basis. Generally municipal value is taken as the base