Basis of Charge:
Under section 22 of the income tax act, 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.
1) The property should consist of buildings or lands appurtenant thereto: The scope of this head of income is limited to the income from building or land appurtenant thereto. Land which is not appurtenant to any buildings does not come within the scope of this section.
2) The assessee should be the owner of the property: It is only the owner of the house property who can be tax under this head of income. The tax under this section is in respect of the legal or beneficial owner and not the occupation or possession of house property.
Again, the assessee who is deemed to be the owner of the house property is also is also chargeable to tax under this head. Under Section 27 of the Income Tax Act the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property:-
(a) 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.
(b) The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.
(c) 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.
(d) A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, 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.
3) 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. But where the profits of such business or profession are not chargeable to tax, the annual value of the house property is chargeable under this head.
Annual Value (Section 23)
The Annual Value of a house property is the inherent capacity of the property to earn income and it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.
The following four factors have to be taken into consideration while determining the Gross Annual Value of he property:
1. Rent payable by the tenant (actual rent)
2. Municipal valuation of the property.
3. Fair rental value (market value of a similar property in the same area).
4. Standard rent payable under the Rent Control Act.
The Annual Rental 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.
Steps for determination of Annual rental Value or Gross annual value: -
- Municipal valuation or fair market value. ‘which ever is higher’, subject to standard rent.
i) Actual rent received / receivable is more than option (a) then select option (b) (i).
ii) (Actual rent received / receivable- unrealized rent) is less (due any reason other than vacancy) than option (a) then select option (b)-which ever is high
iii) (Actual rent received / receivable-unrealized rent-vacancy) is less (due to reason of vacancy) than option the select option (iii)-which ever is less.
iv) (AR-UR-V) is less (due to partly reason of vacancy) then [option (a) - vacancy]
Deduction of Municipal Taxes from Annual Value
From the annual value municipal taxes are to be deducted if the following conditions are fulfilled:-
(a) The property is let out during the whole or any part of the previous year,
(b) 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.
(c) 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.
Deductions allowable Under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a) 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.
(b) 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. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Conditions for deduction:-
i) Interest on borrowed capital for Construction, repair, renewal, re-construction.
ii) Interest certificate is required to be furnished along with the return to avail the deduction.
iii) The construction must be completed within 3 years from end of financial year in which the capital is borrowed.
iv) If fresh loan has been raised for repayment of old loan then interest on such loan is also deductible.
Limit of deduction u/s 24(b)
There is no limit in case of Let-out or Deemed to be let-out house property. The limit for self-occupied is determine on basis of date of borrowing which is as under:-
For self occupied, the interest limit is Rs. 30000 if, the borrowed amount is before 1st Apr. 99.
For self occupied, the interest limit is Rs. 150000, if the amount borrowed after 1st Apr. 99 and the acquisition or construction completed within 3 years.
Calculation of Interest:
1. The interest consists of two parts. Interest = Current Year + Pre-Construction period
2. Pre-construction period means the period when the property is not owned by the assessee as it is under construction. But though property is not owned, the interest is charged from the date of borrowing. So the benefit of the interest of this pre-construction period is available in after the assessee is owner of the property.
3. Calculation of Pre-construction Period & deduction of interest available
Pre construction period = Date of borrowing to. 31st march preceding the date of completion or acquisition, which ever is earlier OR Date of repayment which ever is earlier.
Calculate the total pre construction interest with monthly or daily basis: - From the date of borrowing to the date [(a) or (b)] which is earlier.
Pre construction period Interest deduction
Pre construction period interest = Total pre-construction Interest
If the house property is sold out only interest is allowed as a deduction u/s-24(b).
Sec-25: - Interest on loan payable outside India is disallowed if tax on it is not deducted.
Chargeability in case of rent of quarters to company
In case of CIT Vs. Delhi Cloth & General Mills Ltd., it was stated that, the letting out activity is sub-servant and incidental to the main business, then it is not taxable u/s-22. the residential quarter’s let-out to the employees then such activity is incidental to main business and is not charged u/s-22.
Chargeability in case of foreign house property, disputed ownership & if property held for business purpose
House Property in a foreign country: - A resident assessee is taxable u/s-22, in respect of property situated in foreign country. The tax incidence will be computed as if the property situated in India.
Disputed ownership: - If there a dispute ownership regarding the title, the assessment can not be held up till the decision. It is income of the person who enjoys possession.
Property held as stock-in trade is not charged u/s-22
Treatment of composite rent
Case 1: When the rent includes, rent of building and charges for different services, then if it is separable then the building rent taxable u/s-22 and other rent u/s-56 or u/s-28.
Case 2: Where the rent is of letting out building or other assets then, If separable then, building rent u/s-22, other rent u/s-28 or u/s-56. It non-separable then, u/s-28 or u/s-56 (total rent received)
When House Property is owned by co-owner (Sec-26)
If the shares of co-owner are definite, then such share is included in the total income of that particular person. Co-owners are not taxable as AOP.
Properties exempted from tax under the head income from house property (Sec. 10)
1) Income from a farm house.
2) Annual value of one palace in the occupation of an ex-ruler.
3) Property income of a local authority.
4) Property income of an approved scientific research association.
5) Property income of an educational institution and hospital.
6) Property income of a registered trade union.
7) Income from property held for charitable purposes.
8) Property income of a political party.
9) Income from property used for own business or profession.
10) Annual value of one self occupied property.
Treatment of unrealized rent
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:
(a) The tenancy is bona fide;
(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.
(c) The defaulting tenant is not in occupation of any other property of the assessee;
(d) The assessee has taken all reasonable steps for the recovery of the unpaid rent or satisfied the assessing Officer that legal proceedings would be useless.
(e) Unrealised rent of earlier years is not deductible.
Treatment of unrealized rent recovered
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. 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.
Arrears of rent received Section 25 B
It is deemed to be income of the Assessee and chargeable to tax under the head income from house property if and only if it is not charged in the earlier years 70% of such arrear is need to be charged and 30 % shall be allowable as deduction.
1. It is the annual value of the property (not the actual rent received or receivable) considered for income from house property.
2. Rent from vacant land does not attract under the head.
3. House property used for OWN BUSINESS is not considered under this head.
*4.He/she should be the OWNER of the property. (need not be the owner of the land) eg.Owner of apartment.
*5.House property either rented to someone for commercial (including business) or for residential or for self occupation.
6. There must be a building. Building includes a large stadium with or without roof, rent from swimming pool, rent from godown, music hall, dance hall lecture hall, other public auditorium
*7. Residential building normally have roof. Non residential building need not have roof.
8. Building area includes adjacent area like approach roads, garage, garden, cattle shed etc.
*9.If property is transferred for inadequate consideration either to spouse or minor children the income from house property is calculated in the hands of the transferee(wife or minor children) but will be included in the hands of transferor under section 64(1).
10. If part payment is made after making a contract for sale for immovable property, and such house is occupied by the buyer it amounts to transfer even though the property is not registered (section 53A of the Transfer of property act).
11. If house property is rented to own employees where renting is not their business such income is under business, not under house property.
12. If house property is rented to non employees or activity which is not subservient and incidental to one’s own business then such income is from house property.
13. Rent from bank, post office, police station, central excise office, railway staff quarters which is for carrying on its business efficiently and smoothly, such income comes under income from business.
14. If house property is foreign country, annual property will be computed as if property is situated in India. Therefore municipal tax paid during the previous year in foreign country is also deductible.
15. Municipal taxes paid in the previous year and interest payable is deductible.
16. Interest payable outside India without deducting tax at source is not deductible.
17. Pre construction period means interest payable up to 31st March proceeding to the year of completion.
18. Pre-construction period interest is deductible only in the first five installments starting from 1st April of the year of completion.