Income From House Property
According to Section 22 of the Act, house property does not include empty areas. Income received from an empty area is charged either under the head ‘Income from Business or Profession’ or under the head ‘Income from Other Sources’, based on the source of income. If an individual uses his property for his own business or profession, no tax is levied under the head of income from house property.
Table of Content
Rent and other income from any flat, building or supportive land are generally taxed under the head ‘Income from House Property’. Let us understand the above concept with the help of an example. Mr Ram has a house. It incorporates a large open area. The house has been let out at a rent of ` 1,00,000 per month, out of which a lease of ₹25,000 per month is attributable to the open area. In this situation, the whole rental wage is assessable under the head ‘house property’.
Basis of Charge (Section 22)
Section 22 of the Income Tax Act 1961, deals with the levying of tax on house property. As per Section 22 of the Income tax Act, 1961, “Annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax shall be chargeable to income tax under the head ‘Income from House Property’.”
According to this section, land, buildings and the lands that are attached to buildings are chargeable to tax, provided that such house property is not used for the purpose of business of the assessee’s own business, the income of which is chargeable to tax.
For taxing an income under the head, ‘Income from House Property’, three conditions must be fulfilled, which are as follows:
- 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, such as renting or letting out, but it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax. If the property is used for own business or profession, it shall not be chargeable to tax.
If the assessee is engaged in the business of letting out of property on rent, the income earned would be taxable as his business income. It should be noted that if the house property is held by an assessee as stock-in-trade of his business, then also the annual value of such house property shall be charged under the head ‘Income from house property’.
The process of computation of income from house property is explained in Table below:
| Step 1 | Determination of Gross Annual Value (GAV) |
| Step 2 | Less: Municipal taxes paid by the owner during the previous year |
| Step 3 | Net Annual Value (NAV) = Step 1 – Step 2 |
| Step 4 | Less: Deductions under Section 24 |
| 1. 30% of NAV | |
| 2. Interest on borrowed capital | |
| Step 5 | Income from House Property = Step 3 – Step 4 |
House Property Not Chargeable to Tax
Cases where income from house property is not chargeable to tax under the head ‘Income From House Property’ include:
- House property does not include the empty area within the property; therefore, any income received from such an empty area is charged either under the head ‘Income from Business or Profession’ or under the head ‘Income from Other Sources’.
- In case of rental income from a vacant plot; however, it can be charged under profits and gains of business or profession or under the income from other sources.
- In case the employer builds residential quarters for employees.
- Income from sub-letting is charged under profits and gains of business or profession or under the income from other sources.
- Income received as rent from furnishing and other facilities (A.C., lift, etc.) provided in a rented property.
- Warehousing charges received for keeping merchandise; it is assessable under the head ‘Income From Business Or Profession’.
- Income from letting out surplus area of a non-processing plant building including warehouses.
- Income from a building owned or occupied by an agriculturalist is not chargeable to tax if the building is located in the immediate vicinity of agricultural land.
- The income of property that is held for religious or charitable purposes is exempted from being taxed.
- Property that is used for own business or profession is taxable under the head ‘Income From Business or Profession’.
- No tax is charged on the self-occupied property of an assessee.
- House property of a registered trade union or authority is not charged to tax.
- Palaces of ex-rulers are exempted from being taxed.
Deemed Ownership (Section 27)
An owner is an individual under whose name the document of title of the property is registered. A deemed owner is an individual who does not have the property registered in his name, but is liable to pay tax for the income received from house property as per Section 27 of the Income Tax Act. Let us study various provisions as laid down in section 27 of the Act, which are as follows:
Following persons, though not legal owners, are deemed to be owners of house property for the purpose of chargeability under Sections 22 to 26.
- Transfer to spouse {Section 27(i)}: In case of transfer of house property by an individual to his or her spouse for inadequate consideration, the transferor shall be the deemed owner.
Exception – This section is not applicable where the transfer is made in connection with an agreement to live apart. - Transfer to minor child {Section 27(i)}: In case of transfer of house property by an individual to his or her minor child for inadequate consideration, the transferor shall be the deemed owner.
Exception – This section is not applicable where the transfer is made to a minor married daughter. - The holder of an impartible estate {Section 27(ii)}: The holder of an impartible estate shall be the deemed individual owner in respect of all properties comprised in the estate.
Impartible estate – It refers to a property that is not legally divisible. - Member of co-operative society/association {Section 27(iii)}: In case of allotment or lease of building/part thereof under House Building Scheme of a co-operative society/association to its member, the member shall be the deemed owner. Although the legal owner of such building/part thereof is the co-operative society/association.
- A person possessing a property {Section 27(iiia)}: A buyer who is allowed to take possession of a building/part thereof in part performance of the contract under Section 53A shall be deemed to be the owner. For example, this may happen when the sale consideration is paid by the buyer to the seller, although the property is not yet registered in the buyer’s name.
- A person having rights in the property for 12 years or more {Section 27(iiib)}: A person who acquires rights of a building/part thereof by virtue of transfer by way of lease of 12 years or more shall be the deemed owner.
Composite Rent
At times, the house owner rents out the property along with certain services or facilities, such as lift, A.C., furniture, electricity, water, etc. The amount received by the owner of the house in such a case is called composite rent. The composite rent is broken down into two components, namely income from house rent and income by way of providing various facilities. The first component is taxable under the head ‘Income From House Property’ and the second one is taxable under the head ‘Income From Other Sources’.
Annual Value of House Property (Section 23)
Annual value refers to the amount of money for which a property owner may rent his property from year to year. The annual value does not refer to the actual rent received for the property or the municipal value of the property. As stated earlier, annual value of the house property is the notional amount of rent that can be derived from the property. While determining the annual value of a house property, four factors are taken into consideration.
These are as follows:
- Actual Rent Received or Receivable (ARR): The annual value of the property is based on the actual rent received by the owner or the amount expected to be received by him/her.
- Municipal Value (MV): Municipal value refers to the value determined by local municipal authorities based on which it collects municipal taxes.
- Fair Rent of a Property (FR): Fair rent of a property refers to the amount of money that can be expected to be received in a year by letting a property of similar size in the same locality.
- Standard Rent (SR): Standard rent refers to the rent that is fixed under the Rent Control Act, 1958. Under this Act, the maximum rent has been prescribed for all the localities.
According to the Act, the annual value of a property is the value received after deduction of municipal taxes (if any) paid by the owner. At a broader level, the annual value of the property may be determined in just two steps as shown in Figure:
The net annual value obtained after deducting municipal taxes is considered to be the annual value of the house property for all purposes related to the Income Tax Act. The Gross Annual Value (GAV) is determined by following the steps mentioned in Table:
| Step 1 | Compare Fair Rental Value with Municipal Value, whichever is higher |
| Step 2 | Compare Standard Rent with Step 1 value. The lower of the two is the Expected Rent |
| Step 3 | Compare Expected Rent and Actual Rent |
| If Actual Rent > Expected Rent, Actual Rent is the GAV | |
| If Actual Rent < Expected Rent owing to the vacancy of the property, Actual Rent is the GAV | |
| If Actual Rent < Expected Rent owing to any other reason, Expected Rent is the GAV |
Illustration 1: Calculate the GAVs of the following houses:
| Particulars | House 1 | House 2 | House 3 |
|---|---|---|---|
| Municipal Value (₹) | 22,000 | 21,000 | 50,000 |
| Fair Rent (₹) | 24,000 | 21,000 | 52,000 |
| Standard Rent (₹) | N.A. | 16,000 | 45,000 |
| Actual Rent (₹) | 24,000 | 17,000 | 35,000 |
Solution: The GAVs of the given three houses are as follows:
| S. No. | Particulars | House 1 | House 2 | House 3 |
|---|---|---|---|---|
| 1. | Municipal Value (₹) | 22,000 | 21,000 | 50,000 |
| 2. | Fair Rent (₹) | 24,000 | 21,000 | 52,000 |
| 3. | Standard Rent (₹) | N.A. | 16,000 | 45,000 |
| 4. | Expected Realisable Rent (ERR) (higher of 1 or 2, but not more than 3) | 24,000 | 16,000 | 45,000 |
| 5. | Actual Rent Received (₹) | 24,000 | 17,000 | 35,000 |
| 6. | GAV (₹) (higher of 4 or 5) | 24,000 | 17,000 | 45,000 |
Therefore, the GAVs of House 1, House 2 and House 3 are ₹24,000; ₹17,000; and ₹45,000; respectively.
Illustration 2: Mr Ram owns three house properties in Delhi, the particulars of which are as under:
| Particulars | House 1 | House 2 | House 3 |
|---|---|---|---|
| Municipal Value (₹) | 1,20,000 | 1,50,000 | 1,80,000 |
| Fair Rent (₹) | 1,50,000 | 1,80,000 | 2,00,000 |
| Standard Rent (₹) | 1,30,000 | 2,00,000 | — |
| Actual Rent (₹ per month) | 10,000 | 14,000 | 25,000 |
| Period of Vacancy | Nil | 2 month | 3 month |
| Municipal Taxes for the Year | 20% of Municipal Value | 20,000 | 60,000 |
| Municipal Taxes Paid During the Year (₹) | 20,000 | 40,000 | 40,000 |
Calculate the GAV before deductions for each house property.
Solution: Let us calculate the GAV before deductions for each house property.
House 1: As the house property is let out throughout the previous year, the GAV shall be determined as per clauses (a) and (b) of Section 23(1) as follows:
| Particulars | Amount (₹) |
|---|---|
| Calculate the GAV (higher of a and b) | |
| a. Municipal Value or the Fair Rent, whichever is higher subject to maximum of Standard Rent | 1,20,000 or 1,50,000, whichever is higher subject to maximum of 1,30,000 = 1,30,000 |
| b. Actual rent received or receivable | = 10,000 × 12 = 1,20,000 |
| GAV | 1,30,000 |
House 2: As the house property is not let out throughout the previous year, the annual value shall be determined as per clauses (a) and (c) of Section 23(1) as follows:
| Particulars | Amount (₹) |
|---|---|
| Calculate the gross annual value (higher of a and b) | |
| a. Municipal Value or the Fair Rent, whichever is higher subject to maximum of Standard Rent (Municipal Value (1,50,000); Fair Rent (1,80,000); Standard Rent (2,00,000 | 1,80,000 |
| b. Actual rent received or receivable (14,000 × 10) | 1,40,000 |
| GAV | 1,40,000 |
House 3: As the house property is not let out throughout the previous year, the annual value shall be determined as per clauses (a) and (c) of Section 23(1) as follows:
| Particulars | Amount (₹) |
|---|---|
| Calculate the GAV (higher of a and b) | |
| a. Municipal value or the fair rent, whichever is higher subject to maximum of Standard Rent [Municipal Value (1,80,000)]; Fair Rent (2,00,000); Standard Rent (–) | 2,00,000 |
| b. Actual Rent Received or Receivable (ARR) (25,000 × 9) | 2,25,000 |
| GAV | 2,25,000 |
Deductions From House Property (Section 24)
For the income chargeable under the head ‘Income from House Property’, there are only two deductions, namely:
- Standard deduction: 30% of the net annual value of house property is allowed as standard deduction from the net annual value of house property. The 30% standard deduction is fixed even if the actual expenditure incurred by the house owner on the insurance, repairs, electricity, water supply for the house, etc., is higher or lower.
- Interest on borrowed capital: If an individual takes a (home) loan for purchasing, construction, repair, renewal or reconstruction of his/her house property, the interest paid by him/her is allowed as a deduction from the NAV of the house property. The deduction for interest is allowed on an accrual basis, i.e., it is immaterial whether the interest has been actually paid or not during the assessment year.
Interest Attributable to the Period Prior to Completion of Construction (Interest of Pre-Construction/Pre-Acquisition Period)
It is possible that an individual borrows money earlier in one year and the acquisition or construction of the house property is completed in the subsequent year. During this time, the interest for the house property becomes due. In such a case, the interest paid or payable for the period prior to the year in which the property is acquired or its construction is completed is aggregated and allowed to be deducted in five successive financial years starting from the year in which the acquisition/construction was completed.
In addition, 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. The deductions allowable from NAV while computing the income from house property are explained in Table:
| For let-out property or deemed to be let-out property, following deductions are allowed: | |||
|---|---|---|---|
| A | Standard Deduction | Under Section 24(a) | 30% of NAV |
| B | Interest on borrowed capital | Under Section 24(b) | Fully allowed without ceiling limit |
| For self-occupied property, only interest on borrowed capital under Section 24(b) is allowed as a deduction as below: | |||
| A | When the loan is taken for renewal, reconstruction or repair of house property | Interest on borrowed capital under Section 24(b) maximum up to ₹ 30,000 p.a. | |
| B | When the loan is taken for construction or acquisition of house property | The loan is taken prior to 1.4.99 The loan is taken on or after 1.4.99 | Interest on borrowed capital under Section 24(b) maximum up to ₹30,000 p.a. If the construction or acquisition of house property is completed within 5 years from the end of the financial year in which the capital was borrowed, and a certificate is obtained from the lender specifying the interest payable, then interest on borrowed capital under Section 24(b) is allowed maximum up to ₹2,00,000 p.a. Otherwise, interest on borrowed capital under Section 24(b) is allowed maximum up to ₹30,000 p.a. |
Pre-construction interest refers to interest for the period prior to the previous year in which property is acquired or construction is completed. The deduction of pre-construction interest is allowed in 5 equal installments beginning from the previous year of acquisition or completion of construction of house property.
Interest for the year in which construction/acquisition is completed and interest for the subsequent years can be fully claimed in their respective years. Most importantly, the ceiling limits of interest on borrowed capital, i.e., ₹30,000, ₹2,00,000 p.a. as specified in the table are inclusive of apportioned pre-construction interest. Hence, these are the maximum permissible limits of deduction.
Special Provisions of House Property
For computation of income from house property, some issues may arise in respect of arrears of rent received by the assessee at a later date, co-ownership of property by two or more persons, and determination of income of house property self-occupied by the owner.
Recovery of Arrears of Rent and Unrealised Rent (Section 25a)
While determining the gross annual value, the actual rent received or receivable shall not include the amount of unrealised rent (i.e., rent which is not capable of being realised from the tenant). However, this is true, provided the below conditions specified under Rule 4 are met:
- It is a bona fide tenancy.
- The defaulting tenant has vacated the property or compelling steps have been taken against him to vacate.
- The defaulting tenant does not occupy any other house property of the assessee.
- The assessee has taken reasonable steps for instituting legal proceedings to recover the amount of unpaid rent.
Any amount of unrealised rent subsequently realised from a tenant or any amount of rent received in arrears from a tenant shall be subjected to tax as follows:
- Recovery of such amount shall be taxable in the year of receipt or realisation.
- A deduction of 30% of the amount received or realised shall be allowed.
- The recovery is taxable even if the assessee is no longer an owner of the property during the financial year of receipt or realisation.
Property Owned by Co-owners (Section 26)
According to Section 26 of the Act, when a house property (property consisting of buildings or buildings and lands appurtenant thereto) is owned by two or more persons, those persons are known as coowners of the property if their share in the property is definite and ascertainable. In case the share is not definite, the co-owners shall be assessed as an Association of Persons (AOP).
In such cases, the share of each co-owner in the income of the property as determined under the head of income from house property shall be included in the total income of such persons. In such cases, each co-owner is entitled to get a benefit or relief of up to ₹30,000/ ₹1,50,000 as the case may be, if the house property is used for own residence.
Income From Self-occupied House Property
As per Section 23(2), the annual value of the house property shall be taken to be Nil in the following cases:
- House property is self-occupied by the assessee for his own residence; or
- House property is unoccupied throughout the previous year because of the assessee’s employment/business or profession being carried out at some other place. He resides at such other place in a building not belonging to him.
This benefit of Nil annual value can be taken only if no other benefit is derived by the owner from such house property. Section 23(4) states that if more than two house properties are self-occupied or unoccupied, then the assessee can avail the benefit of Nil annual value in respect of only two house properties chosen at his own option. The other house properties shall be deemed to be let out properties and GAV shall be computed with respect to the expected rent.
The deductions under Section 24 in case of self-occupied house property will be computed as explained in Table referred to in Section 4.4: Deductions from House Property. Please note that in case of let out or deemed to be let out property, the entire interest amount is allowed as deduction whereas in the case of self-occupied property, a maximum deduction of ₹30,000 or ₹2,00,000 is allowed depending upon the case.
If a house property is let out for a part of the year and self-occupied for the remaining part of the year, then the GAV will be determined as per normal rules as shown in Table. Expected rent for the whole year is compared with actual rent for the let-out period. If actual rent is more than the expected rent, actual rent shall be the GAV. If actual rent is less than the expected rent, expected rent shall be the GAV.
