Dibrugarh University B. Com 5th Semester Direct Tax Notes Unit-3

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.

(f) Palace of ex-ruler: The annual value of any one palace in the occupation of an ex-ruler shall be exempted from tax.

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