Unit – IV
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Syllabus Computation of income from House
property – Chargeability, Composite rent, Income from house property situated
outside India, Determination of Annual Value, Deduction from annual value,
Computation of Income from House Property for different categories of
Property Taxability of recovery of unrealized rent. Inadmissible deductions,
treatment of Income from co-owned Property, Deemed ownership, Exempted
Property Income. |
Income from house property
Chargeability [section 22]
The annual value of property consisting of any buildings or lands
appurtenant thereto of which the assessee 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 assessee 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 favour 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
assessee 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 assessee
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 assessee 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 assessee 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 assessee will not be entitled to
the standard deduction of 30%, as the annual value itself is nil. However, the
assessee 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 assessee 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
assessee 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 assessee under the head “Income from house property”, whether the
assessee 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 assessee.
3. Summary:
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Section 25A Arrears of Rent / Unrealized
Rent i. Taxable in the year of
receipt / realization ii. Deduction @ 30% of rent
received / realized iii. Taxable even if assessee
is not the owner of the property in the financial year of receipt /
realization. |
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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