INCOME FROM HOUSE PROPERTY

TRAINING BY K.KARTHIK

Basis of Charge
The basis of calculating income from house property is the annual value.

This is the inherent capacity of the property to earn income. The charge is not because of the receipt of any income but is on the inherent potential of the house property to generate income.

Conditions to be fulfilled for property income to be taxable under this head

The property must consist of buildings and lands appurtenant thereto. The assessee must be the owner of such house property. The property may be used for any purpose but should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.

Deemed Owner
It is the legal owner of a house property who is chargeable to tax in respect of property income. The following persons are deemed to be owners of the house property for the purpose of computing income from house property. An individual, who transfers house property otherwise than for adequate consideration to his or her spouse (not being a transfer in connection with an agreement to live apart) or to his minor child (not being a married daughter), is deemed owner of the house property.

Deemed Owner
The holder of an impartible estate is a deemed owner of all properties comprised in the estate. A member of a cooperative society, company or other association of persons, to whom a building or a part thereof is allotted or leased under a house building scheme of the society, company or association of persons, is deemed owner of the property.

Composite Rent
In certain cases, the owner charges rent from the tenant not only on account of rent for the house property but also on account of service charges for various facilities provided with the house. Such rent is known as composite rent. The said composite rent can fall under 2 categories: (a) Composite rent on account of rent for the property and service charges for various facilities provided along with the house like lift, gas, water, electricity, watch and ward, air conditioning etc. In this case such composite rent should be split

Composite Rent
up and the portion of rent attributable to the letting of the premises shall be assessable as Income from house property. The other portion of the composite rent received for rendering services shall be assessable as Income from other sources.

Composite Rent
(b) Composite rent on account of rent for the property and the hire charges of machinery, plant or furniture belonging to the owner. In this case if the letting of the property is separable from the letting of the other assets, then the portion of the rent attributable to the letting of the premises shall be assessable as Income from house property and the other portion of the composite rent for letting other assets shall be assessable either as business income or as other sources. On the other hand, if the letting of the property is inseparable from the letting of other assets like machinery, furniture, the entire income would be taxable as business income or as other sources.

When income from house property is not charged to tax

In the following cases income from property is not charged to tax: Income from any farm house forming part of agricultural income Annual value of any one palace in the occupation of an ex-ruler Income from house property to a local authority

When income from house property is not charged to tax

Income from a house property to an approved scientific research association, to a university or other educational institution, to philanthropic hospital or other medical institution. Property income of: (a)any registered trade union, (b) any political party. Income from house property held for any charitable purposes.

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.

Determining Annual Value

In determining the annual value there are four factors which are normally taken into consideration. These are: Actual rent received or receivable Municipal Value Fair rent of the property Standard rent

Computation of annual value of a property [Section 23(1)]

As per Income tax, annual value is the value after deduction of municipal taxes, if any, paid by the owner. Annual value may be determined in the following two steps: 1) Determine gross annual value 2) From gross annual value, deduct municipal taxes paid by the owner during previous year.

The balance shall be the net annual value which, as per the Income tax Act, is the annual value.

Different categories of properties

The annual value has to be determined for different categories of properties. These are: (A)House property which is let throughout the previous year (B) House property which is let and was vacant during whole or any part of previous year. (C) House property which is part of the year let and part of the year self occupied. (D) House property which is self occupied for residential purposes or could not actually be self occupied owing to employment in any other place.

(A)House property which is let throughout the previous year

The annual value of any such property shall be deemed to be: (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 in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable

Determination of Gross Annual Value

As per clause (a) above, the first step for determining the gross annual value is to calculate the sum for which the property might reasonably be expected to let from year to year. For estimation of the same, the higher of the following two is taken to be the expected rent. (i) Municipal Valuation (ii) Fair rent But, in case the property is governed by the Rent control Act, its annual value cannot exceed the standard rent.

Determination of Gross Annual Value

To conclude: The first step is to calculate the gross annual value which will be the maximum of Municipal value or fair rent, but restricted to the standard rent. However, if the actual rent received or receivable exceeds such amount then the actual rent so received/receivable shall be the Gross Annual value.

Municipal taxes paid

Step 2: Taxes levied by any local authority in respect of the property i.e. municipal taxes (including service taxes) to be deducted: Municipal taxes levied by local authority are to be deducted from the gross annual value, if the following conditions are satisfied: (a) The municipal taxes have been borne by the owner, and (b) These have been actually paid during the previous year.

Net Annual Value

The value arrived at after deducting the municipal taxes, if any, may be referred to as the Net Annual Value. From such net annual value, deductions permissible under section 24 (a) & (b) are allowed and the balance is the income under the head Income from house property.

Determination of Income from House Property

Gross Annual Value Less: Municipal Taxes Net Annual Value Less: Deduction under section 24 Standard Deduction (@30%) Interest on borrowed capital Income from House Property ******* ******* *******

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Example
Example: Municipal value of house is Rs 95,000, fair rent is Rs 130,000 and standard rent is Rs 110,000. The house property has been let for Rs 12000 p.m. Municipal taxes during the year were Rs 40,000. Compute annual value.

Example
Answer: (a) Expected rent shall be higher of municipal value (Rs 95,000) or fair rent (Rs 130,000) but restricted to standard rent (Rs 120,000) Hence, expected rent = Rs 120,000 (b) Actual rent received or receivable (12000*12) = 144,000. Gross Annual value shall be higher of expected rent (Rs 120,000) or actual rent received/receivable (Rs 144,000) Therefore, gross annual value shall be Rs 144,000 Less: Municipal taxes paid Rs 40,000 Net Annual Value Rs 104,000

(B) House which is let and was vacant during the whole or part of previous year
I. Gross annual value where the property is let and was vacant for part of the year and the actual rent received or receivable is more than the reasonable expected rent in spite of vacancy period: The gross annual value in this case shall be: (1) The sum for which the property might reasonably be expected to be let from year to year , or (2) actual rent received or receivable, whichever is HIGHER.

Example
Example: Municipal value of house is Rs 95,000, fair rent is Rs 130,000 and standard rent is Rs 110,000. The house property has been let for Rs 12000 p.m. and was vacant for one month during the previous year. Municipal taxes during the year were Rs 40000. Compute annual value.

Example
Answer: (a) Expected rent shall be higher of municipal value (Rs 95,000) or fair rent (Rs 130,000) but restricted to standard rent (Rs 120,000) Hence, expected rent = Rs 120,000 (b) Actual rent received or receivable (12000*11) = 132,000 Gross annual value = Higher of (a) or (b) Therefore, gross annual value shall be Rs 132,000 Less: Municipal taxes paid Rs 40,000 Net Annual Value Rs 92,000

(B) House which is let and was vacant during the whole or part of previous year
II. Gross annual value where the property is let and was vacant for the whole or part of the year and the actual rent received or receivable owing to such vacancy is less than the expected rent. The annual value of the property shall be determined under this situation if all the following 3 conditions are satisfied:

(B) House which is let and was vacant during the whole or part of previous year
(1) The property is let, (2) It was vacant during the whole or part of the previous year. (3) Owing to such vacancy, the actual rent received or receivable is less than the expected rent, In this case, the gross annual value shall be the actual rent received or receivable.

Example
Example: Municipal value of house is Rs 95,000, fair rent is Rs 130,000 and standard rent is Rs 110,000. The house property has been let for Rs 12000 p.m. and was vacant for three months during the previous year. Municipal taxes during the year were Rs 40000. Compute annual value.

Example
Answer: Expected rent Rs 110,000 Actual rent received/receivable (Rs 12,000*9) Rs 108,000 As the actual rent received or receivable owing to vacancy is less than the expected rent, the gross annual value will be actual rent received / receivable (i.e. Rs 108,000) Municipal taxes paid Rs 40,000 Net Annual Value (Rs 108,000 Rs 40,000) = Rs 68,000

(C). House property which is part of the year let and part of the year occupied for own residence
Where a house property is, part of the year let and part of the year occupied for own residence, its annual value shall be determined as per the provisions relating to let out property. In this case, the period of occupation of property for own residence shall be irrelevant and the annual value of such house property shall be determined as if it is let. Hence, the expected rent shall be taken for full year but the actual rent received or receivable shall be taken only for the period let.

Example
Example: Ajay owns a house property in Delhi whose municipal value is Rs 200,000 and the fair rent is Rs 240,000. The standard rent is Rs 220,000. It was self occupied from April to July and from August it was let out for Rs 18,000 p.m. Compute the annual value of the property if the municipal tax paid during the previous year was Rs 40,000.

Example
Answer: Gross annual value shall be higher of the two (a)Expected rent (Municipal value Rs 200,000 or Fair rent Rs 240,000, whichever is higher) but cannot exceed standard rent (Rs 220,000) Rs 220,000 (b) Actual rent received/receivable for let out period (Rs 18,000*8) Rs 144,000 Hence, Gross annual value is Rs 220,000 Less: Municipal tax paid is Rs 40,000 Net Annual value is Rs 180,000

Treatment of unrealized rent

The actual rent received or receivable shall not include the amount of rent which the owner cannot realize, subject to the rules made in this behalf.

Deduction from Income from House Property

Income chargeable under the head Income from house property shall be computed after making the following deductions: (a) Statutory deduction: From the net annual value computed, the assessee shall be allowed a statutory deduction of a sum equal to 30% of the net asset value. This deduction is allowed towards repairs and collection of rent for the property, irrespective of any expenditure incurred.

Deduction from income from House Property

(b) Interest on borrowed capital: Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of interest payable on such capital is allowed as a deduction. The amount of interest payable yearly should be calculated separately and claimed as a deduction every year. It is immaterial whether the interest has been actually paid or not paid during the year.

Interest on pre construction period

Interest attributable to the period prior to completion of construction: It may so happen that money is borrowed earlier and acquisition or completion of construction takes place in any subsequent year. Meanwhile interest becomes payable. In such a case interest paid/payable for the period prior to previous year in which the property is acquired/constructed will be aggregated and allowed in five successive financial years starting from the year in which the acquisition/construction was completed.

Example
Example: The assessee took a loan of Rs 600,000 on 01/04/2007 from a bank for construction of a house. The loan carries an interest @10% p.a. The construction is completed on 15/06/2009. The entire loan is outstanding. Compute the interest allowable for the assessment year 2010-11. Answer: (i) Interest for the previous year 2009-10 on Rs 600,000 @ 10% = Rs 60,000 (ii) Interest for the pre construction period i.e. from 01/04/2007 to 31/03/2009 (for 2 years) = Rs 120,000 1/5th is allowed for the year Total interest allowable = = Rs 24,000 Rs 84,000

(D). Computation of income of a property which is self occupied for residential purposes or could not actually be self occupied owing to employment
Where the annual value of such house shall be nil: Where the property consists of a house or a part of a house which: (a) is in the occupation of the owner for the purposes of his own residence and no other benefit is derived therefrom; 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 place in a building not belonging to him, The annual value of such a house or part of the house shall be taken to be NIL.

Where assessee has more than one house for self-occupation

If there are more than one residential houses, 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) shall be deemed to be let out and the annual value shall be the sum for which the property might reasonably be expected to let from year to year.

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 statutory 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:

Deduction in respect of one self-occupied house where annual value is Nil

(a) Where the property is acquired or constructed with capital borrowed on or after 01/04/1999 and such acquisition or construction is completed within 3 years of the end of the financial year in which the capital was borrowed: Actual interest payable subject to maximum of Rs 150,000 if relevant certificate is obtained*

Deduction in respect of one self-occupied house where annual value is Nil

(b) In any other case, i.e. borrowed for repairs or renewal or conditions mentioned in clause (a) are not satisfied: Actual interest payable subject to a maximum of Rs 30,000

Computation of Annual value of one self occupied property

In case of one property (which is not let out or put to any other use) used throughout the previous year by the owner for his residential purpose, income shall be determined as follows: Gross Annual Value NIL Less: Municipal Tax paid NIL NET ANNUAL VALUE NIL Less: Standard Deduction NIL Less: Interest on borrowed capital Deductible Income from Self occupied Property ***********

Special Provisions
Special provisions when unrealized rent is

realized subsequently Where any rent could not be realized and the same was allowed as deduction and subsequently if such amount is realized, such an amount will be deemed to be the income from house property of that year in which it is received. It is not necessary that the assessee continues to be the owner of the property in the year of receipt also.

Arrears of rent received

Arrears of rent received Where the owner of the house property receives arrears of rent from such a property, the same shall be deemed to the income from house property in the year of receipt. Standard deduction of 30% of the receipt shall be allowed as deduction towards repairs and collection charges. No other deduction will be allowed. The assessee need not be the owner of the house property in the year of receipt.

House property owned by Co- owners

If a house property is owned by two or more persons, then such persons are known as coowners. When the share of each co-owner is definite and ascertainable, it has been provided that each of the owners will be assessed individually in respect of share of income from the property. When each of the co-owners of a property uses it for his residence, each of them will also get the concessional treatment in respect of one self occupied property.

Property in a foreign country

In case of a resident in India, income from property situated in foreign country is taxable, whether such income is brought into India or not. However, if the assessee is a non-resident or resident but not ordinarily resident in India, income from a property situated in foreign country will be taxable in India only when it is received in India during the previous year.

Loss from house property

There can be loss under the head income from house property (i) In the case of a self-occupied property, the annual value is taken as nil. No deductions are allowed except for interest on borrowed capital up to a maximum of Rs 30,000 or Rs 150,000 . Naturally, therefore, there may be a loss in respect of such house property up to a maximum of Rs 30,000 or Rs 150,000, as the case may be.

Loss from house property

(ii) In respect of any other house property, namely a house property which is fully let out or part of the year let out etc., there are no restrictions on deductions and therefore, there can be loss under this head in respect of such properties due to municipal taxes as well as deductions. Similarly, deductions under section 24 in case of property deemed to be let out can be more than net annual value.

Expected changes in Direct Tax Code

Particulars Existing Provision Tax base Proposed Provision Impact Annual Gross rent is the New concept value is basis for taxation. of the basis Contractual rent presumptive for and presumptive rent taxation rent* form the introduced. basis for May result in determining inconsistency gross rent. where rateable *6% of (a) rateable value is not value fixed by the fixed. This municipality, or (b) may lead to cost of construction fixation of or acquisition, if no rent which is

Expected changes in Direct Tax Code

Particulars Existing Provision Proposed Provision Impact Definition Any Also Income of house buildings or includes earlier taxed property lands buildings under income income appurtenant along with from other expanded thereto machinery, sources shall plant, now be taxed furniture or as house any other property facility, if income letting of Fixed both is deduction inseparable. will be available as

Expected changes in Direct Tax Code

Particulars Existing Provision Property Annual value is acquired considered for during the the year. proportionate period. Proposed Impact Provision No Tax may provision to be apportion payable in presumptive respect of rent. entire year even if property is owned for a part of the year.

Expected changes in Direct Tax Code

Particulars Existing Provision Proposed Provision Impact

Unrealized Deductible No Tax may rent. while deduction be payable computing provided. on annual unrealized value. rent. Vacancy Income not Though Tax may allowance included contractual be payable for period rent factors even property is in vacancy, though no vacant for presumptive income is whole or rent does earned. part of the not do so.

Expected changes in Direct Tax Code

Particulars Existing Provision Statutory 30% of deduction. Gross annual value. Deduction for tax on services Proposed Provision 20% of gross rent. Impact Will increase taxable income. Tax on services will be deductible.

No specific Specific provision provision included.

Expected changes in Direct Tax Code

Particulars Existing Provision Interest on borrowed capital Proposed Provision Impact Allowed up to No Provision Rs 150,000 for deduction discriminatory self occupied available for in favor of property. self multiple home occupied owners. Allowed property. May result in without limit sham let out for let out Allowed deals. properties. without May limit for let discourage out investment in property. property by lower and

Expected changes in Direct Tax Code

Particulars Existing Provision Proposed Provision Impact

Income Taxable as Taxable as house Commercial from business property income. letting will business income (Except hotel, be taxable of letting convention centre, as house cold storage and property forms part of SEZ) income Fixed deductions even though as against actual in the expenses and nature of depreciation. business.