Income from House Property-CS Executive Income Tax

INCOME FROM HOUSE PROPERTY

Section 22 to Section 27 of Income Tax Act, 1961 deals with the provisions of this head.

This head is really very interesting because in this head even unearned income may become taxable means that income which is actually not earned by the assessee; you can say notional income.

Before starting this head, we must know two things:

  1. What is the meaning of House Property?
  2. Which income is taxable under this head?

Meaning of House Property

Section 22 is the charging section for this head. According to this section “the 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”.”

Thus according to Section 22, house property means

  • any property consisting of one or more buildings

and includes

  • land forming part of such property.

It should be noted that ‘stand-alone vacant land’ is outside the meaning and scope of house property. Therefore, any income generated to the assessee from any ‘stand-alone vacant land’ shall not be taxable under this head.

Section 22 is silent about the type or structure of building. Thus, the meaning of house property should be considered in wide sense.

Therefore, the building

  • may be a residential buildings or commercial buildings
  • may have permanent structure or temporary structure (like structures made of tin, sheds and wood)
  • may have covered roof or open roof (like cricket stadium)
  • may have walls on all sides or may have no wall at all
  • may be fixed or moving

Land appurtenant to building
As discussed, vacant land is outside the scope and meaning of house property. It means income from vacant land is not taxable under this head even if such income is rental income. But any land forming part of a building shall be considered within the scope or meaning of a building.

Thus garden, lawn, swimming pool, empty backyards and connecting roads within the boundaries of the house property shall be considered as the part of the house property.

Income taxable under the head “Income from House Property”

By using any house property we can generate mainly 3 types of income.

  1. Rental income
  2. Business or Professional income
  3. Capital gain

If a person generates rental income by letting out any building of which such person is the owner then such income is taxable under the head Income from house property.

If a person generates rental income by letting out any building of which such person is not the owner then such income is taxable under the head other source.

If a person generate any business or professional income by using any house property then such income is taxable under the head profit and gain from business or profession.

If a person generates capital gain by selling any house then such gain taxable under the head capital gains.

Thus only rental income is taxable under this head; further such rental income shall accrue or arise to the owner of the property.

Following points shall be notes:-

  1. Place or location of the house property is immaterial for charging rental income of such property under this head.
  2. Use of house property is also immaterial for charging rental income of such house property under this head.

Section 22 to 27 of Income Tax Act, 1961 deal with taxability of income under this head. Section 22 is the chargeability section for this head. It tells us which income is taxable under this head. According to Section 22, the 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”.

Thus according to Section 22:

  • Annual value of property is taxable under this head.
  • Property shall consist of one or more buildings or lands appurtenant thereto
  • Assessee shall be the owner of the property as per the provisions of Income Tax Laws.
  • If Assessee is using such property for the purpose of any business or profession (profit of which chargeable to income tax) than income from such property is not taxable under this head.

Now the questions are:-

  • What is annual value of property?
  • What is the meaning and scope of house property?
  • What is the meaning and scope of ownership under this head as per income tax laws?

Ownership of the property

According to Section 22 income from house property shall be taxable under this head only if the assessee is the owner of the property. Any income derived by an assessee from a property of which assessee is not the owner shall not be taxable under this head even if such income is rental income.

Suppose I take house on rent for Rs. 10,000 per month and let out such house to someone else for Rs. 15000 per month. This is known as subletting. Here, although I am earning rental income, but such income is not taxable under this head as I am not the owner of the property.

Under income tax laws, for the purpose of this head, ownership includes free hold as well as lease hold ownership. Further, Section 27 of Income Tax Act (1961) specifies certain persons who, though not the legal owners of the property, are deemed to be the owners of the property under this head.

Use of the property

For charging Income tax under this head use of property by the tenant is immaterial. But according to section 22 if assessee itself uses the property for any business or profession carried on by him then the income from such property is not taxable under this head.

Suppose I am running a Paying guest accommodation in a building owned by me. Where I provide space to students on monthly rent basis. This is my business therefore this income is taxable under the head profit and gain from business or profession.

Now suppose I give my building on rent to someone else who is running paying guest accommodation in my building. Here I am earning pure rental income which is taxable under this head.

Annual value

Meaning of Annual value
According to Section 22, annual value of a property is taxable.
Our law makers have used the words “Annual Value” instead of “rental income”

In a Layman Language annual value of house property means “Annual rental income” for which the property might reasonably be expected to be let out for the complete year.

It may or may not be the actual rent received or receivable by the owner of the property. We have to determine the annual value as per the provisions of the section 23 of Income Tax Act (1961).

Determination of Annul value
For determining the annual value of any property we have to consider following factors.

  1. Actual rent received or receivable by the assessee
  2. Municipal value of the property
  3. Fair rent of the property
  4. Standard rent
  5. Unrealized rent

Actual rent received or receivable by the assessee
Under income tax laws income is taxable on due basis whether such income is received or not by the assessee. Similarly actual rent shall be considered on due basis, where such rent is received by the assessee or not.

  • Suppose I let out my house to Mr. Kachallu at the rent of Rs. 10,000 per month for whole year. Due to some personal concerns I take the rent of 10 months only. Here although I received rent of Rs. 1,00,000 but for the purpose of determination of annual value rent of whole year (Rs. 1,20,000) shall be considered.

Further we have to consider rent of property only. If assessee is getting any amount for providing any furniture or other facility (water, electricity etc) along with the rent of property then we have to deduct the amount related to such furniture or facility. Means we have to consider ‘de facto’ rent.

  • Suppose I let out my house to a teacher. He gives me Rs. 5000 per month only and teaches my child for free. For same coaching he charges Rs. 5,000 p.m. from other students. Here although, I actually receive rent of Rs. 5000 only. But for determination of annual value, rent of Rs. 10000 shall be considered as actual rent.

Municipal value
It is the value of the property determined by the municipality authority for imposing municipal tax on the property.

Fair Rent
It is the rent which a similar property can fetch in the same or similar locality.

Standard Rent
In certain cities to control the rent, Rent Control Act is applicable. In such cities owners of the properties cannot take rent higher than the standard rent, fixed under Rent Control Act.

Unrealized Rent
This is the rent in which owner of the property is unable to recover from the tenant after taking all the legal actions. Unrealized rent shall not be included in the actual rent if conditions specified in rule 4 of Income Tax Rules, 1962 are fulfilled.

According to Rule 4, amount of rent payable but not paid by a tenant of the assessee shall be considered as unrealized rent only if,—

  1. the tenancy is bona fide;
  2. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
  3. the defaulting tenant is not in occupation of owner’s any other property of the assessee;
  4. 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.

It means if the above 4 conditions are not fulfilled by the assessee,
unrecovered/unrealized rent shall not be eligible to be deducted from the actual rent received or receivable by the assessee.

Steps to compute annual value (Income from house property)

HOW TO COMPUTE “INCOME FROM HOUSE PROPERTY”
1.

Gross annual value i.e. expected rent/actual rent received or receivable, whichever is higher

However, in case of vacancy, if actual rent received or receivable, is lower than ER than AR shall be considered

 Rs…….
2.

Less:

a)      The amount of rent which could not be realized

b)      Taxes actually paid and borne by owner to local authority in India or outside India (where property is abroad)

 Rs…….
 Net annual value (NAV) Rs…….
3.

Less: Deduction allowed u/s 24

a)      Standard deduction @ 30% of NAV

b)      Interest on borrowed capital [Section 24 (1) (vi)]

Rs…….

Rs…….

 
 Total Rs…….
4.

Income Chargeable under the head

“Income from House Property” (2-3)

 Rs…….

Annual value how determined [Section 23]

  1. For the purposes of section 22, the annual value of any property shall be deemed to be—
    • the sum for which the property might reasonably be expected to let from year to year; or
    • 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; or
    • where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.
      Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
      Explanation: For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.
  2. Where the property consists of a house or part of a house which—
    • is in the occupation of the owner for the purposes of his own residence; or
    • 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.
  3. The provisions of sub-section (2) shall not apply if—
    • the house or part of the house is actually let during the whole or any part of the previous year; or
    • any other benefit therefrom is derived by the owner.
  4. Where the property referred to in sub-section (2) consists of more than two house—
    • the provisions of that sub-section shall apply only in respect of two of such houses, which the assessee may, at his option, specify in this behalf;
    • the annual value of the house or houses, other than the house/s in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.
  5. Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.

For the purpose of determination of annual value of property we can divide all the cases in five categories:

Case 1: House property which is let throughout the previous year

According to Section 23(1), the gross annual value of any property shall be deemed to be higher of following —

  • Expected Rent; or
  • Actual Rent received or receivable

Expected rent:

  • Municipal Rent or
  • Fair Rental Value

whichever is higher, subject to standard rent

It means expected rent can’t be higher than standard rent in any case.

Case 2: House property which is let and was vacant during the whole or any part of the previous year

According to Section 23(1)(a),

  • where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than expected rent, the amount actually received or receivable shall be the gross annual value.

Further,

  • where actual rent received or receivable by the owner in respect of such property is more than the expected rent, the amount so received or receivable shall be the gross annual value.

It means in every case we have to consider the amount actually received or receivable.

Case 3: House property which is let out part of the year and part of the year self-occupied

In such case, the gross annual value of any property shall be deemed to be higher of following —

  • Expected Rent (for whole year); or
  • Actual Rent received or receivable (for let out period)

Case 4: House Property is in the occupation of the owner for the purposes of his own residence only

Gross Annual Value in such case shall be NIL if any other benefit from such property is not derived by the owner.

This exemption is available only for 2 house property (w.e.f 1.04.2020). The annual value of the other house or houses shall be determined as stated in the above cases.

Case 5: House Property 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

Gross Annual Value in such case shall be NIL if any other benefit from such property is not derived by the owner.

This exemption is available only for 2 house property (w.e.f 1.04.2020). The annual value of the other house or houses shall be determined as stated in the above cases.

Deductions from income from house property

Standard Deduction
– 30% of net annual value

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 deduction subject to following conditions:

  1. Interest payable for pre-acquisition or pre-construction period:
    Such interest shall be aggregated from the date of borrowing till the end of previous year prior to the previous year in which the house is completed or acquired. Deduction of such interest is allowed in five equal instalments starting from the financial year in which the acquisition or construction is completed.
  2. Interest payable for period starting from the previous year in which acquisition or construction is completed
    Yearly interest is allowed as deduction

Deduction allowed in case of Self Occupied Property

Deduction of interest in respect of max. two self-occupied property where annual value is NIL:
Maximum allowed deduction:

Where the property is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within five years from the end of the financial year in which capital was borrowed

The amount of deduction or, as the case may be, the aggregate of the amounts of deduction shall not exceed 2 lakh rupees

In any other case like

  • Where capital was borrowed before the 1st day of April, 1999, or
  • Where capital was borrowed for repaired, renewed or reconstructed, or
  • Where acquisition or construction is not completed within five years as stated above

The amount of deduction or, as the case may be, the aggregate of the amounts of deduction shall not exceed 30,000 rupees

Where the assessee has opted for two or more houses to be treated as self-occupied, the combined total deduction of the amount of interest given above shall in aggregate remain maximum to Rs. 30,000 or Rs. 2,00,000 as the case may be.

Points to note:

  1. Interest on interest, fines and penalties due to non-payment or late payment of loan instalments is not deductible.
  2. Brokerage, processing fee or commission for arrangement of loan is not deductible.
  3. If a new housing loan is taken by the owner exclusively for repayment of old housing loan, interest on such new loan is deductible.
  4. Where the property is let out or deemed to be let out, the entire interest is eligible for deduction.
  5. Interest is to be calculated on yearly basis

Interest on borrowed money payable outside India (Section 25)

Any interest chargeable under this Act which is payable outside India, on which tax has not been paid or deducted at source and in respect of which there is no person in India who may be treated as an agent under section 163 shall not be deducted in computing the income chargeable under the head “Income from house property”.

Unrealised rent received subsequently to be charged to income-tax [Section 25A]

Where the assessee cannot realise rent from a property let to a tenant and subsequently the assessee has realised any amount in respect of such rent, the amount so realised shall be deemed to be income chargeable under the head “Income from house property” and accordingly charged to income-tax as the income of that previous year in which such rent is realised whether or not the assessee is the owner of that property in that previous year.

A sum equal to 30% (standard deduction) of such arrears of rent or the unrealised rent shall be allowed as deduction.

Property owned by co-owners (Section 26)

Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable,

  • such persons shall not in respect of such property be assessed as an association of persons (AOP).

In such case, the share of each such person in the income from such property shall be included in his total income.

Where such property is owned by two or more persons and their respective shares are not definite and unascertainable,

  • such persons shall (in respect of such property) be assessed as an AOP.

Deemed Ownership [Section 27]

(i)Transfer to a spouse or minor child
 a.an individual who transfers (otherwise than for adequate consideration) any house property to his or her spouse, or to a minor child, shall be deemed to be the owner of the house property so transferred;
 b.This case is not applicable in following cases:
  
  • transfer in connection with an agreement to live apart, or
  • transfer to a minor child not being a married daughter
(ii)Holder of an impartible estate
The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate
(iii)Member of a co-operative society
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 the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof;
(iv)Person in possession of a property
a person who is allowed to take or retain 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, 1882, shall be deemed to be the owner of that building or part thereof
(v)Person having right in a property for a period not less than 12 years
a person who acquires any rights in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof.

This case is not applicable where any rights are acquired by way of a lease from month to month or for a period not exceeding one year.

EXEMPTIONS

Items of income from house property which are exempt from Income-tax are:

  • Income from house property situated in the immediate vicinity of or on the agricultural land and used as a dwelling house, store-house or other out-house by the cultivator or receiver or rent-in-kind. [Section 2(1A) read with Section 10(1)].
  • Income from property held under trust for charitable or religious purposes (Section 11).
  • Income from house property belonging to a Registered Trade Union [Section 10(24)].
  • Income of an authority constituted under any law for the time being in force for the marketing of commodities; any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities [Section 10(29)].
  • The annual value of any one palace in the occupation of an ex-ruler [Section 10(19A)].
  • Income from house property belonging to a local authority [Section 10(20)].
  • Income from property of an authority constituted for the purpose of planning, development, or improvement of cities, towns and villages [Section 10(20A)].
  • Income from property of the approved scientific research association subject to fulfillment of certain conditions [Section 10(21)].
  • Income from property of a games association [Section 10(23)].
  • Income from property in the case of a person resident of Ladakh. [Section 10(26A)].
  • Income from property of a political party (Section 13A).

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