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.
year.
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.
• No specific • Specific
provision
provision
included.
Impact
• Will
increase
taxable
income.
• Tax on
services
will be
deductible.
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.