Introduction This lesson deals with income, which falls under the head ‘Income from house property’. The scope of income charged under this head is defined by section 22 of the Income Tax Act and the computation of income falling under this head is governed by sections 23 to 27. All the provisions relating to tax treatment of income from house property are explained in this lesson. Objectives After going through this lesson, you will be able to understand: The meaning of house property Who is treated as owner of house property?
The treatment of rental income from properties under different circumstances Determination of the annual value of a house property The expenses deductible from rental/notional income from house property Special treatment given to self-occupied house property Treatment of income/loss from house property. Basis of Charge (Section 22) The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from house property’.
However, if a house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head. Thus, three conditions are to be satisfied for property income to be taxable under this head. The property should consist of buildings or lands appurtenant thereto. The assessee should be the owner of the property. The property 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 income-tax.
Applicability of Section 22 Buildings or lands appurtenant thereto approach roads to and from public streets, compounds, courtyards, backyards, playgrounds, kitchen garden, motor garage, stable or coach home, cattle-shed etc, attached to and forming part of the building. In respect of non-residential buildings, the appurtenant lands may be in the form of car-parking spaces, roads connecting one department with another department, playgrounds for the benefit of employees, etc. Ownership of house property Deemed Owner.
If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes. However, if an individual transfers cash to his or her spouse or minor child, and the transferee acquires a house property out of the gifted amount, the transferor shall not be treated as the deemed owner of the house property. The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.
A member of a co-operative society, company or association of persons, to whom a property (or a part thereof) is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property. A person who has acquired a property under a power of attorney transaction, by satisfying the conditions of section 53A of the Transfer of Property Act, that is under a written agreement, the purchaser has paid the consideration or is ready to pay the consideration and has taken the possession of the property, is the deemed owner of the property, although he may not be the registered owner.
A person who has acquired a right in a building (under clause (f) of section 269UA), by way of a lease for a term of not less than 12 years (whether fixed originally or extended through a provision in the agreement), is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year. Property Used For Own Business or Profession The owner of a house property is not liable to tax under this head if the property is used by him for his own business or profession. But the business or profession should be such whose income is chargeable to tax.
Chargeability to tax does not mean that the income is actually taxed. It is possible that in a particular year the profits are not sufficient enough to attract tax liability. What it means is that the income from such business or profession is not exempt from tax. If an employer builds quarters for residential use by his employees and the letting out of these quarters is considered as incidental to his business, the income from such property is not taxable under this head, because the property in this case is considered to be used by the owner for his own business. It shall, therefore, be taxed as business income.
The above position will not change even if the buildings are let out to government authorities for locating their undertakings like Banks, Post Office, Police Station, Central Excise Office, etc. , provided the dominant purpose of letting out the accommodation is to enable the assessee to carry on his business more efficiently and smoothly. Also, income from paying-guest accommodation is taxable as income from business. Where house property owned by a partner is used by the firm (neither it is let out to the firm nor any rent is obtained for it) for its business purposes, the partner is entitled to the exemption.
The reason for this exemption is that the notional rent of property is not allowable as a permissible deduction while computing business income, if a person carries on the business or profession in his own house property. Composite Rent In some cases, the owner obtains rent of other assets (like furniture) or he charges for different services provided in the building (for instance, charges for lift, security, air conditioning, etc. ), apart from obtaining the rent of the building. The amount so recovered is known as composite rent.
If the owner of a house property gets a composite rent for the property as well as for services rendered to the tenants, composite rent is to be split up and the sum which is attributable to the use of property is to be assessed in the form of annual value under section 22. The amount which relates to rendition of the services (such as electricity supply, provisions of lifts, supply of water, watch and ward facilities, etc. ) is charged to tax under the head ‘Profits and gains of business or profession’ or under the head ‘Income from other sources’.
If there is letting of machinery, plant and furniture and also letting of the building and the two lettings form part and parcel of the same transaction or the two lettings are inseparable, then such income is taxable either as business income or income from other sources. This happens in the case of letting out of hotel rooms, theatres, auditoriums, etc. It is commonly understood that the charges per day for a room in a hotel are not specifically for the room only. In fact, a major portion of room tariff is for the amenities and services provided in the hotel.
Similar is the case where a cinema house is let out at composite rent charged for the building, furniture, machines, equipment, staff, power consumption, etc. In all such cases, the composite rent received by the owner of the property is not to be split up and nothing is taxable as income from house property. Rental Income of A Dealer in House Property If a person is engaged in the business of purchasing house properties with the purpose of letting them on high rents and disposing off those properties which are not profitable for this purpose, the rental income from such property will not be taxed as business income.
Any rent from house property, whether received by a dealer or a landlord, is taxable under the head ‘Income from house property’. It will remain so even if the property is held by the assessee as stock-in-trade of a business or if the assessee is a company which is incorporated for the purpose of building houses and letting them on rent. Disputed Ownership If the title of ownership of a house property is disputed in a court of law, the decision as to who is the owner rests with the Income-tax Department. Mere existence of dispute as to title cannot hold up an assessment even if a suit has been filed.
Generally the recipient of rental income or the person who is in possession of the property is treated as owner. House Property in a Foreign Country A resident assessee is taxable under section 22 in respect of annual value of a property in a foreign country. A resident but not ordinarily resident or a nonresident is, however, chargeable under section 22 in respect of income of a house property situated aboard, provided income is received in India during the previous year. If tax incidence is attracted under section 22 in respect of a house property situated abroad, its annual value will be computed as if the property is situated in India.
Property Incomes Exempt From Tax Some incomes from house property are exempt from tax. They are neither taxable nor included in the total income of the assessee for the rate purposes. These are: Income from a farm house [section 2(1A) (c) and section 10(1)]. Annual value of one palace in the occupation of an ex-ruler [section 10(19A)]. Property income of a local authority [section 10(20)]. Property income of an approved scientific research association [section 10(21)]. Property income of an educational institution and hospital [section 10(23C)].
Property income of a registered trade union [section 10(24)]. Income from property held for charitable purposes [section 11]. Property income of a political party [section 13A]. Income from property used for own business or profession [section 22]. Annual value of oneself occupied property [section 23(2)]. Computation of Income from Let Out House Property Income from house property is determined as under: Determination of Annual Value Gross Annual Value [Section 23(1)] The following four factors have to be taken into consideration while determining the Gross Annual Value of the property: Rent payable by the tenant (actual rent).
Municipal valuation of the property. Fair rental value (market value of a similar property in the same area). Standard rent payable under the Rent Control Act. Actual Rent It is the most important factor in determining the annual value of a let out house property. It does not include rent for the period during which the property remains vacant. Moreover, it does not include the rent that the tax payer is unable to realize, if certain conditions are satisfied. Sometimes a tenant pays a composite rent for the property as well as certain benefits provided by the landlord.
Such composite rent is to be disintegrated and only that part of it which is attributable to the letting out of the house property is to be considered in the determination of the annual value. Municipal Valuation Municipal or local authorities charge house tax on properties situated in the urban areas. For this purpose, they have to determine the income earning capacity of the property so as to calculate the amount of house tax to be paid by the owner of the property. But this valuation cannot be treated as a conclusive evidence of the rental value of the property, although such valuation is given due consideration by the Assessing Officer.
Fair Rental Value It is the rent normally charged for similar house properties in the same locality. Although two properties cannot be alike in every respect, the evidence provided by transactions of other parties in the matter of other properties in the neighborhood, more or less comparable to the property in question, is relevant in arriving at reasonable expected rent. Standard Rent Standard Rent is the maximum rent which a person can legally recover from his tenant under a Rent Control Act.
This rule is applicable even if a tenant has lost his right to apply for fixation of the standard rent. This means that if a property is covered under the Rent Control Act, its reasonable expected rent cannot exceed the standard rent. The Gross Annual Value is the municipal value, the actual rent (whether received or receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the gross annual value cannot exceed the standard rent under the Rent Control Act, or the actual rent, whichever is higher.
If the property is let out but remains vacant during any part or whole of the year and due to such vacancy, the rent received is less than the reasonable expected rent, such lesser amount shall be the Annual value. For the purpose of determining the Annual value, the actual rent shall not include the rent which cannot be realized by the owner. However, the following conditions need to be satisfied for this: The tenancy is bona fide; The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.
The defaulting tenant is not in occupation of any other property of the assessee; The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfied the Assessing Officer that legal proceedings would be useless. ILLUSTRATION: Find the Gross Annual Value in the case of the following properties: Solution: Since Rent Control Act is not applicable, GAV will be the highest of municipal value, fair rent and actual rent. Hence, the GAV will be Rs. 60,000. GAV cannot exceed the standard rent or actual rent, whichever is higher.
Therefore, GAV will be Rs. 95,000. Actual rent receivable will be reduced by the amount of unrealized rent i. e. Rs. 72,000 – Rs. 5,000 = Rs. 67,000. Now, GAV will be the highest of municipal value, fair rent and actual rent, subject to the maximum of standard rent. Hence, GAV will be Rs. 68,000. GAV will be the actual rent receivable adjusted by the loss due to vacancy i. e. Rs. 72,000 – Rs. 48,000 = Rs. 24,000. Actual rent receivable will be reduced by the amount of unrealized rent and loss due to vacancy i. e. Rs. 1, 68,000 – Rs. 42,000 – Rs. 14,000 = Rs. 1, 12,000.
Now, we will take the highest of municipal value, fair rent and actual rent, subject to the maximum of standard rent. So, GAV will be Rs. 1, 75,000 reduced by the loss due to vacancy i. e. Rs. 1, 75,000 – Rs. 14,000 = Rs. 1, 61,000. Deduction of Municipal Taxes From the annual value as determined above municipal taxes are to be deducted if the following conditions are fulfilled: The property is let out during the whole or any part of the previous year The Municipal taxes must be borne by the landlord (If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed).
The Municipal taxes must be paid during the year (Where the municipal taxes become due but have not been actually paid, it will not be allowed. Similarly, the year to which the taxes relate to, is also immaterial). Deductions under Section 24 Statutory Deduction 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred. Interest on Borrowed Capital.
The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. Amount of interest payable for the relevant year should be calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the year or not. However, there should be a clear link between the borrowal and the construction/purchase etc. , of the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
The following points are to be kept in mind while claiming deduction on account of interest on borrowed capital: In case the property is let out, the entire amount of interest accrued during the year is deductible. The borrowal may be for construction/acquisition or repairs/renewals. A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction etc. , of the property. In such a case also, the interest on the fresh loan will be allowable. Interest payable on interest will not be allowed. Brokerage or commission paid to arrange a loan for house construction will not be allowed.
When interest is payable outside India, no deduction will be allowed unless tax is deducted at source or someone in India is treated as agent of the non-resident. Interest attributable to period prior to construction or acquisition Money may be borrowed prior to the acquisition or construction of the property. In such a case, the period commencing from the date of borrowing and ending on the date of repayment of loan or on March 31 immediately preceding the date of acquisition or completion of construction, whichever is earlier, is termed as the pre-construction period.
The interest paid/payable for the pre-construction period is to be aggregated and claimed as deduction in five equal installments during five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilized for repairs, renewal or reconstruction. Solution: Computation of Income from Self – Occupied House Property The annual value of one self-occupied house property, which has not been actually let out at any time during the previous year, is taken as ‘Nil’ [Section 23(2) (a)].
From the annual value, only the interest on borrowed capital is allowed as a deduction under section 24. The amount of deduction will be: Either the actual amount accrued or Rs. 30,000/- whichever is less When borrowal of money or acquisition of the property is after 31. 3. 1999 – deduction is Rs. 1, 50,000/- applicable to A. Y 2002-03 and onwards. However, if the borrowal is for repairs, renewals or reconstruction, the deduction is restricted to Rs. 30, 000. If the borrowal is for construction/acquisition, higher deduction as noted above is available.
If a person owns more than one house property, using all of them for self occupation, he is entitled to exercise an option in terms of which, the annual value of one house property as specified by him will be taken at Nil. The other self occupied house property/is will be deemed to be let out and their annual value will be determined on notional basis as if they had been let out. Annual Value of One House Away from Work Place [Section 23(2) (b)] A person may own a house property, for example, in Bangalore, which he normally uses for his residence.
He is transferred to Chennai, where he does not own any house property and stays in a rental accommodation. In such a case, the house property in Bangalore cannot be used for self-occupation and notional income, therefore, would normally have been chargeable although he derives no benefit from the property. To save the tax payer from hardship in such situations, it has been specifically provided that the annual value of such a property would be taken to be nil subjects to the following conditions:
The assessee must be the owner of only one house property. He is not able to occupy the house property because of his employment, business etc., away from the place where the property is situated. The property should not have been actually let or any benefit is derived there from. He has to reside at the place of employment in a building not belonging to him. If a house property consists of two or more independent residential units, one of which is self – occupied and the other unit(s) is let out, the income from the different units is to be calculated separately.
The income from the unit which is self – occupied for residential purposes is to be calculated as per the provisions of Section 23(2)(a) i.e. the annual value will be taken as nil and only interest on borrowed capital will be deductible up to the maximum limit of Rs. 1,50,000 or Rs. 30,000, as the case may be. The income from the let out unit(s) will be calculated in the same manner as the income from any let out house property. If a house property is self – occupied for a part of the year and let out for the remaining part of the year, the benefit of Section 23(2) (a) is not available and the income from the property will be calculated as if it is let out.
ILLUSTRATION: X owns two houses. The relevant details are as follows: Calculate income for house property for the assessment year 2006-2007. Solution: Some Special Provisions Taxability of Unrealized Rent recovered later (Section 25A) Where any rent cannot be realized, 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. We have seen earlier that the basic requirement for assessment of this income is the ownership of the property.
However, in the cases where unrealized rent is subsequently realized, it is not necessary that the assessee continues to be the owner of the property in the year of receipt also. Assessment of arrears of rent received (Section 25B) When the owner of a property receives arrears of rent from such a property, the same shall be deemed to be the income from house property in the year of receipt. 30% of the receipt shall be allowed as deduction towards repairs, collection charges etc. No other deduction will be allowed.
As in the case of unrealized rent, the assessee need not be the owner of the property in the year of receipt. House property owned by co-owners (section 26) Loss from House Property The loss from one house property can be set off against the income from another house property. The remaining loss, if any, can be set off against incomes under any other head like salary. In case the loss does not get wiped out completely, the balance will be carried forward to the next assessment year to be set off against the income from house property of that year.
However, such carry forward is restricted to eight assessment years only. Conclusion Under section 22 of the Income Tax Act, the annual value of house property, consisting of buildings and lands appurtenant thereto, is taxable under the head ‘Income from House Property’, in the hands of the owner (or deemed owner) of the property, provided that the property is not used by the assessee for the purpose of his own business or profession.
For determining the annual value of the house property, the actual rent received or receivable from the property, the municipal valuation, the fair rental value and the standard rent under the Rent Control Act are taken into account. From the Gross Annual Value of the property, the Municipal Taxes are deducted to arrive at the Net Annual Value. Section 24 of the Income Tax Act provides that 30% of the NAV and the interest on borrowed capital shall be deducted from the NAV to obtain the taxable income from house property.
As per Section 23(2) of the Income Tax Act, the annual value of oneself occupied house property is taken to be nil. No deductions are permissible from the annual value of such property, except the interest on borrowed capital, subject to the maximum limit of Rs. 1, 50,000 or Rs. 30, 000 as the case may be. The above provisions may result in loss from house property, which may be set off against income from another house property or against incomes under the other heads. The balance loss may be carried forward, to be set off against the income from house property, up to a maximum of eight assessment years.