Unit-3
Income from house property
Chargeability [section 22]
The annual value
of property consisting of any buildings or lands appurtenant thereto of which
the assesse is the owner shall be subject to Income-tax under the head ‘Income
from house property’ after claiming deduction under section 24 provided such
property, or any portion of such property is not used by the assesse for the
purposes of any business or profession, carried on by him, the profits of which
are chargeable to Income-tax.
Basis of charges
The basis of
calculating income from house property is the annual value. This is the
inherent capacity of the property to earn income. Income from house property is
perhaps the only income that is charged to tax on a notional basis. The charge
is not because of the receipt of any income but is on the inherent potential of
house property to generate income. The annual value is the amount for which the
property might reasonably be expected to let from year to year.
Conditions for chargeability
The following
three conditions must be satisfied before the income of the property can be
taxed under the head “Income from House Property”:
(i) The property
must consist of buildings and lands appurtenant thereto.
(ii) The
assessee must be the owner of such house property.
(iii) The
property may be used for any purpose, but it should not be used by the owner
for the purpose of any business or profession carried on him, the profits of
which are chargeable to tax. If the property is used for own business or
profession, it shall not be chargeable to tax.
Deemed Ownership [Section 27]
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)]: If an individual transfers any house property to his
or her spouse otherwise than for adequate consideration, the transferor in that
case is deemed to be the owner of the property so transferred. This would,
however, not cover cases where a property is transferred to a souse in
connection with an agreement to live apart.
(ii) Transfer to
a minor child [section 27(i)]: If an individual transfers any house property to
his or her minor child otherwise than for adequate consideration, the
transferor in that case is deemed to be the owner of the property so
transferred. This would, however, not cover cases where a property is
transferred to a minor married daughter.
(iii) Holder of
an impartible estate [section 27(ii)]: The holder of an impartible estate shall
deemed to be the individual owner of all properties comprised in the estate.
The impartible estate, as the word itself suggests, is a property which is not
legally divisible.
(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.
(vi) 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 property. This would include cases
where the –
(1) Possession
of property has been handed over to the buyer
(2) Sale
consideration has been paid or promised to be paid to the seller by the buyer
(3) Sale deed
has not been executed in favor of the buyer, although certain other documents
like power of attorney/agreement to sell/will etc. have been executed.
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.
(vii) Person
having right in a property for a period not less than 12 years [section
27(iiib)]: A person who acquires any right 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. This will not cover the case
where any right by way of a lease is acquired from month to month basis or for
a period not exceeding one year.
Deduction from Income from House Property
Income
chargeable under the head “Income from House Property” shall be computed after
making the following deductions, namely:-
(i) Standard
deduction: From the net annual value computed, the assesse shall be allowed a
deduction of sum equal to 30% of the net annual value.
(ii) Interest on
borrowed capital: Where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any interest
payable on such capital is allowed as a deduction.
Interest for
pre-constructed period: Interest will be aggregated from the date of borrowing
till the end of the previous year prior to the previous year in which the house
is completed and not till the date of completion of construction.
(a) Let out
property: Whole of the amount of interest on borrowed capital payable during
the previous year and interest for pre-construction period. Without any ceiling
limit would be allowed as deduction.
(b)
Self-occupied property:
i. Loan taken on
or after 1.4.1999: Interest on loan taken for acquisition or construction of
house on or after 1.4.1999 and same was completed within 5 years from the end
of the financial year in which capital was borrowed, interest paid or payable
subject to a maximum of Rs. 2,00,000 (including apportioned pre-construction interest).
ii. Loan taken
before 1.4.1999: In case of loan for
acquisition or construction taken prior to 1.4.1999 or loan taken for repair,
renovation or reconstruction at any point of time, interest paid or payable
subject to a maximum of Rs. 30,000. (Including apportioned pre-construction
interest).
How to
compute taxable income from self occupied house property:
Computation of Income of a
property which is self-occupied [Section 23(2), (3) & (4)]
1. Where the annual value of
such house shall be nil [Section 23(2) (a) & (b)]: Where the property
consists of a house or part of a house which –
(a) is in the occupation of the
owner for the purposes of his own residence; or
(b) cannot actually be occupied
by the owner by reason of the fact that owing to his employment, business or
profession carried on at any other place, he has to reside at that other place
in a building not belonging to him, the annual value of such house or part of
the house shall be taken to be nil.
2. Where the annual value of
such house shall not be nil [Section 23(3)]: The annual value of self-occupied
house shall not be nil:
(a) if such house or part of the
house is actually let during the whole or any part of the previous year; or
(b) any other benefit there from
is derived by the owner from such house.
In the above cases, the annual
value shall be determined as per provisions applicable for let out properties
i.e. under clause (a), (b) or (c) of section 23(1).
3. Where the assesse has more
than one house for self occupation [Section 23(4)]: If there are more than one
residential house, which are in the occupation of the owner for his residential
purposes then he may exercise an option to treat any one of the houses to be
self-occupied. The other house(s) will be deemed to be let out and the annual
value of such house(s) will be determined as per section 23(1)(a) i.e. the sum
for which the property might reasonably be expected to let from year to year.
The assesse in this case, should exercise his option in such a manner that his
taxable income is the minimum. Such option may be changed from year to year.
However, if an assesse has a house property which consists of two or more
residential units and all such units are self-occupied, the annual value of the
entire house property shall be taken as nil as there is only one house property
thought it has more than one residential unit.
4. Deduction in respect of one
self-occupied house where annual value is nil: Where annual value of one
self-occupied house is nil, the assesse will not be entitled to the standard
deduction of 30%, as the annual value itself is nil. However, the assesse will
be allowed deduction on account of interest (including 1/5th of the
accumulated interest of pre-construction period) as under:-
a. Loan taken on
or after 1.4.1999: Interest on loan taken for acquisition or construction of
house on or after 1.4.1999 and same was completed within 5 years from the end
of the financial year in which capital was borrowed, interest paid or payable
subject to a maximum of Rs. 2,00,000 (including apportioned pre-construction
interest).
b. Loan taken
before 1.4.1999: In case of loan for
acquisition or construction taken prior to 1.4.1999 or loan taken for repair,
renovation or reconstruction at any point of time, interest paid or payable
subject to a maximum of Rs. 30,000. (Including apportioned pre-construction
interest).
What is Annual Value?
As per section
23(1)(a) the annual value of any property shall be the sum for which the
property might reasonably be expected to be let from year to year. It may
neither be the actual rent derived nor the municipal valuation of the property.
It is something like notional rent which could have been derived, had the
property been let. In determining the annual value there are four factors which
are normally taken into consideration. These are:
(a) Actual rent
received or receivable: Actual rent received / receivable is an important
factor in determining the annual value of a property though this is not the
only decisive factor. The actual rent could be dependent upon various
considerations.
(b) Municipal
value: This is the value as determined by the municipal authorities for levying
municipal taxes on house property. Municipal authorities normally charge house
tax / municipal taxes on the basis of annual letting value of such house
property, which is determined by it based upon many considerations.
(c) Fair rent of
the property: Fair rent is the rent which a similar property can fetch in the
same or similar locality, if it is let for a year.
(d) Standard
rent: The standard rent is fixed under the Rent Control Act. If the standard
rent has been fixed for any property under the Rent Control Act, the owner
cannot be expected to get a rent higher than the standard rent fixed under the
Rent Control Act. Therefore, this is also an important factor in determining
the annual value.
How to compute income
from a let out house property
As per the Income-tax Act annual
value is the value after deduction of municipal taxes, if any, paid by the
owner. The annual value may be determined in the following two steps:
Step 1.
Determine the gross annual value.
Step 2. From the
gross annual value computed in step 1, deduct municipal tax actually paid by
the owner during the previous year.
The balance shall be the net annual value
which, as per Income-tax Act is the annual value.
Computation of income from let out house property:
Unrealized
rent [Section 23(1)]:
As per the explanation, the
actual rent received or receivable mentioned in section 13(1)(b) and (c) shall
not include the amount of rent which the owner cannot realize, subject to the
rules made in this behalf, In other words, unrealized rent, if any should be
deducted from clause (b) or (c) of section 23(1)
Rules for unrealized rent:
The amount of rent which the
owner cannot realize shall be equal to the amount of rent payable but not paid
by tenant of the assessee and so proved to be lost and irrecoverable –
(a) the tenancy is bona fide;
(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 assesse has taken all
reasonable steps to institute legal proceedings for the recovery of the unpaid
rent or satisfies the Assessing Officer that legal proceedings would be
useless.
Provision
for arrears of rent and unrealized rent received subsequently [section 25A]
1. As per section 25A (1), the
amount of rent received in arrears from a tenant or the amount of unrealized
rent realized rent realized subsequently from a tenant by an assesse shall be
deemed to be income from house property in the financial year in which such
rent is received or realized, and shall be included in the total income of the
assesse under the head “Income from house property”, whether the assesse is the
owner of the property or not in that financial year.
2. Section 25A (2) provides a
deduction of 30% of arrears of rent or unrealized rent realized subsequently by
the assesse.
3. Summary:
Property
owned by Co-owners [section 26]
Sometimes the property
consisting of buildings or the buildings and lands appurtenant thereto is owned
by two or more persons, who are known as co-owners. In such cases, if their
respective shares are definite and ascertainable, such persons shall not be
assessed as an AOP in respect of such property, but the share of such person in
the income from the property, as computed in accordance with sections 22-25,
shall be included in his total income as under:
(a) Where house property is
self-occupied by each co-owner: Where the house property owned by the co-owners
is self occupied by each of the co-owner, the annual value of the property for
each of such co-owner shall be nil and each of the co-owner shall be entitled
to the maximum deduction of Rs. 30,000 / 1,50,000 under section 24(b) on
account of interest on borrowed money.
(b) Where the entire or part of
the property is le: As regards, the property or part of property which is owned
by co-owners is let out, the income from such property or part thereof shall be
first computed as if this property/ part is owned by one owner and thereafter
the income so compared shall be apportioned amongst each co-owner as per their
definite share.
Income
from house property is not charged to tax
In the following cases income
from house property is not charged to tax:
(a) Farm house: Income from any
building owned or occupied by an agriculturist or receiver of rent / revenue of
such land provided that the building is in the immediate vicinity of
agricultural land and is used as a dwelling house or as a store house or other
out-building.
(b) Property held for charitable
purposes: As per section 11, where the property is held for charitable or
religious purposes the income from such property is exempt from tax.
(c) House property used for own
business / profession: It falls under the head ‘Income from business and
profession’ and although no income will be derived but deductions / allowances
of such property shall be allowed under the head.
(d) Self-occupied house: Annual
value of one self-occupied house shall be taken as nil.
(e) House property of registered
trade union / local authority: The income from property held by a registered
trade union / local authority is not taxable.
