Prof. Uday Prabhupatkar

Income from House Property

Section 22 to section 26 deal with the head Income from House Property.

Sec.22 deals with chargeability of income under this head. To bring the income to tax under this head, following conditions must be satisfied :

a) The property from which income is earned must be a House property,b) Assessee must be the owner of the House Propertyc) The property should not be used by assessee to carry out any business or

profession.

If all the above conditions are satisfied simultaneously, then only the income derived from house property can be brought to tax under this head of income.

The concept of “House property” must be understood keeping in mind following propositions:

House property generally comprises of a building along with the land beneath the structure and also land appurtenant to such building.

Building means a structure constructed from wood, cement, bricks, metal, rocks, mud or any other kind of building material, may or may not have door & windows but definitely has a roof and used for inhabitance of human beings.

A vacant plot of land can not be considered as house property.

The concept of “Owner “ as well should be understood in a proper perspective. With reference to the income from house property, owner means legal owner as well as deemed owner under specified circumstances.

Legal owner means a person in whose name the title to the property is registered. However, deemed ownership is recognized under the following circumstances:

A person who transfers the house property to his/her spouse (transfer not being a transfer in connection with an agreement to live apart) or to his /her minor child (not being a married daughter) without adequate consideration for such transfer is deemed to be the owner for taxing income in his hands, derecognizing such transfer for the aforesaid limited purpose.

The holder or the person having possession of an impartible estate is a deemed owner. A member of a Co-op. Housing society who is occupying the flat allotted to him is

recognized as deemed owner. A transferee in possession of the house property pending conveyance in his favour but

having fulfilled conditions as laid down u/s.53A of Transfer of Property Act. Lessee of the house property who has obtained such property on lease for a period of

not less than for 12 years, is deemed owner for computation of income in his hands under this head of income.

Different types of transactions in relation to house property are brought to tax under this head. We can see few such instances, where in the income is taxed under this head.

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Prof. Uday Prabhupatkar

a) House property situated in foreign country – In case of resident & ordinary resident the income from property situated any where (whether in India or abroad) is taxable in India under this head. However, in case of Resident but not ordinarily resident & Non Resident, the income from house property located abroad is held taxable under this head only if income is received in India.

b) Property having disputed title – under such circumstances, the income tax authorities will decide about the taxability in the hands of one of the parties claiming title irrespective of the outcome of pending court case for title & the eventuality / uncertainty of returning the income assessed in the hands to the other claimant of the title.

c) Property owned by co-owners – if the share in the property is identifiable or clearly defined then in such case, share of the income will be held assessable in the hands of each such co-owner. In any case, it will not be treated as income of an AOP (association of persons i.e. co-owners collectively).

d) Property held as stock in trade – if the house properties are held as stock in trade say in case of corporate, builders etc. still it will not be assessed under the head of profits & gains of business or profession but will be held taxable under the head income from house property only.

However, if the house property is let-out which is incidental & subservient to the main business or if the unit is let-out along with plant & machinery, furniture etc. which is not separable from the unit then the income will be taxed as profits & gains of business or profession.

The concept of Income from House property can be well understood in case of house being let-out by the Owner/land lord to a tenant for Rent. The Rent received in such instance will be considered as income from house property.

However, in case of only one house being owned by an assessee, what could be the amount that can be attributed as income from house property?

To seek clarity about this aspect, we need to understand that in case of income from house property what is being brought to tax is “Annual Value” of the house property and not the house property itself which is under consideration. Gross Annual value is defined u/s. 23(1) of the Income tax Act. i.e. the inherent capacity of the house property to fetch income to it’s owner. Accordingly in case of self occupied property or the house property which is owned but not (let-out ) or used for own residence, the notional value is taken in to account as income.

At this juncture, it would be appropriate for us to understand different types of House property as contemplated under the Income Tax Act. There are three types of property as envisaged under the Act:

a) Self Occupied House Propertyb) Let-out House Property &c) Deemed to be let out House Property.

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Prof. Uday Prabhupatkar

Self occupied house property is that property which is owned & occupied by the owner for his own residence i.e himself + members of his family. When assessee owns more than one house property then only one house property which he occupies for self & his family members is considered as “self-occupied House property” & the other house properties owned by him are considered to be “deemed to be let-out” house properties, provided no other benefit (direct or indirect) is derived by him from such properties.

Let-out house property is such house property which is owned by the assessee but which is let-out to a tenant on rent. The concept of the let-out property is fairly easy to understand in that sense.

Having understood different types of House properties, let us try to understand how to compute income from house property under each such category.

A) Annual Value of Self-occupied House Property:

By virtue of proviso to Sec.23(2)(a)(i), it is specified that Gross annual value of only one house property (at the choice of the assess), owned & occupied by him during the previous year, will be deemed to be NIL.

The deduction u/s 24(b) i.e. interest paid / payable on housing loan would however be applicable in the case with a ceiling of Rs.30,000/- or Rs.1,50,000/- per annum, as the case may be as explained below under the heading Deductions from income from House Property.

B) Annual Value of Let-out House Property:

Following methodology to be adopted to work out gross annual value of let-out house property.

I) Find out Reasonable Expected Rent – It would be higher of a) Municipal valuation or b) fair rent for the house property. Further compare it with c) standard rent as per Rent control Act (if applicable).

Accordingly, Reasonable Expected Rent will be higher of a or b subject to c.

Here, Municipal valuation means valuation adopted by the local Municipality to work out ratable value for assessment & collection of annual municipal tax.

Fair Rent means the rent fetched by a similar property having same amenities, locational advantage etc. & situated in the vicinity of the property under evaluation or situated in the same or similar locality.

Standard Rent is the concept of Rent Control Act. To establish control on the rent being charged by landlords to the tenants, government has passed Rent Control Act having territorial jurisdiction over certain local area confined in the metropolitan limits of metro cities – say Bombay Rent Control Act. Accordingly standard rent means rent as determined under the provisions of such local rent control Act.

II) Work out Rent actually received/receivable from the tenant.

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Prof. Uday Prabhupatkar

III) Gross Annual value is Higher of Reasonable Expected Rent or Rent actually Received / receivable.

IV) If however, the rent received/receivable is less than the reasonable expected rent and such lower rent is attributable to: a) the house property is vacant for part of the year, b) the decline in rent received is solely due to vacancy & no other factor then following methodology is applicable

Rent realized is solely because of vacancy, then rent actually received is taken to be Gross Annual Value. If rent realized is partly due to vacancy & partly due to other factors then Reasonable expected rent less loss of rent due to vacancy will be treated as Gross Annual value. If rent realized is less than the reasonable expected rent and such reduction is on account of other factors then Reasonable expected Rent is treated as Gross Annual Value.

The typical schematics for computation of income from let-out House Property is as follows:

Gross Annual Value xxxxxxx

Less: Municipal Taxes paid by the owner xxxxxxx

Net Annual Value (NAV) xxxxxxx

Less :

Standard Deduction @ 30% of NAV u/s 24(a) xxxxxxx

Interest paid/payable on sum borrowed forAcquisition/construction of House Property xxxxxxx

Taxable income from House Property xxxxxx

If the taxable income under the head income from House Property is positive, it will be included in Gross total income of the assessee and will be assessed to tax accordingly.

However, if the resultant income from house property is negative (i.e. Loss) it is available for set-off to the assessee and can be set-off against the positive income under any other head of income during the same previous year in terms of Sec.71.

If the loss under this head can not be so set-off against income under any other head within the same previous year, then the from A.Y. 1999-2000, such unabsorbed loss can be carried forward to the subsequent years (up to 8 A.Y.s) and would be available for set-off against income from house property only.

C) Annual value of Deemed Let-out House Property:

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Prof. Uday Prabhupatkar

Gross Annual value of deemed let-out House Property is same as that of let-out house property except for one element i.e. the amount of rent received/receivable is missing & is not available for comparison while determining the gross annual value of such house property.

Since deemed let-out means the owner has not actually let-out the house property to a tenant for rent to be received but actually the property is kept vacant or under lock & key and no other direct or indirect benefit is derived by the owner in respect of such house property.

Accordingly, as per the discussion narrated at let-out house property above, ideally a) or b) whichever is higher subject to c i.e. standard rent wherever applicable would turn out to be the Gross annual value of deemed let-out house property.

Deductions available under the head Income from House Property:

1. Municipal taxes paid by the owner are allowed as deduction from Gross annual value while arriving at Net annual value. It is quite important to note that this deduction is allowed to the owner and purely on the payment basis i.e deduction is permissible only if paid within the financial year (previous year).

2. Standard Deduction u/s 24(a):

30% of Net Annual value of house property is allowed as deduction while calculating income under this head. The logic behind granting this deduction is apart from Municipal taxes, the owner has to incur various other expenses like repairs, maintenance & up-keep of house property, insurance, ground rent, rent collection charges etc. to meet the cost of such expenses which other wise the owner might have to incur the same are consolidated under this head and allowed as a deduction in a standardized manner.

3. Interest on Borrowed capital u/s 24(b):

If assessee has obtained any loan from a bank, a public financial institution, a limited company incorporated with the object of providing loan for acquiring house property or from his employer for the purpose of acquisition or construction of house property or for carrying out repairs to the house property owned by such assessee. The interest paid /payable in respect of such loan is allowed as deduction from computation of income under the head income from house property.

Following points are worth noting while claiming this deduction:

In case of one self occupied house property owned & occupied by the assessee, while calculating deduction in respect of interest on borrowed capital, following limit would be applicable -

If the loan is sanctioned & disbursed prior to 01.04.1999 then the amount deductible on this account is Rs.30,000/- per annuam.

If the loan is sanction prior to 01.04 1999 but disbursed there after or sanctioned & disbursed after 01.04.1999 the amount deductible on this account is Rs.1,50,000/- pear annum.

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Prof. Uday Prabhupatkar

In case of Let-out House property, however, the aforesaid limit of Rs.30,000/- or Rs.1,50,000/- in respect of interest payable on borrowed capital is not applicable.

In case of interest paid during the construction period, since the house property in question is not in existence, assessee would not get any deduction on this account. However from the previous year in which construction is complete and possession is obtained by the assessee, the accumulated interest for under construction period is allowed as a deduction to the extent of 1/5th of such accumulated interest in the year of possession & for subsequent four years.

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