Tuesday, May 07, 2013

For June 2013 ICWAI Stage I Examination: Fast track notes on Income under the head House Property


Sec. 22: Chargeability under Income from house property
Building(Roof Must)  or Land Appurtenant thereto + Ownership including deemed owner + Not used for business or profession.
Remember: The property of the assessee which constitutes stock in trade of a business will be taxable under the head “Income from house property”.It makes no difference if the business of the assessee is to let out house properties or the property of the assessee constitutes stock in trade of a business.
**********************************************

Sec. 23: Annual value(AV) how determined
Sec. 23.1.(a). Expected rental value(ERV); or [ here ERV is higher of MRV or FRV but limited upto SRV].
Sec. 23.1.(b). If rent recceived or receivable is more than clause (a), then such rent received or receivable is AV.
Sec.  23.1.(c). If actual rent received or receivable is less than ERV due to vacancy, then such rent.

Sec.23.2.(a). If House Property is self occupied OR
Sec.23.2.(b). House property can not be self occupied by reason of employment or business out of the city then AV is NIL
Remember:In case the house property is used for business purpose then the GAV is considered ‘NIL’.

Sec. 23.3.(a). Section 23.2. if not applicable if house or part of the house is actually let during the whole or any part of the P/Y.
Sec. 23.3.(b). Any other benefit is derived by the owner from the house.

Sec. 23.4.(a). One self occupied house is exempted.
Sec. 23.4.(b). AV of 2nd selfoccupied house is calculated as per sec. 23.1.

Municipal or Local taxes
Municipal and Local taxes such as fire tax, water tax, conservancy tax, education cess etc. must be deducted to find our AV.
Conditions: > PAID during P/Y. > by the OWNER > irrespective of period and place.

IN SHORT
1. Expected Rental Value                                                                                            xxxx
2. Or Actual rent received or receivable                                                                       xxxx
3. Higher of 1 or 2 is Gross Annual Value                                                                    xxxx
4. Less: Municipal tax                                                                                                  xxxx
5. Net Annual Value (AV)[ 3 – 4]                                                                                xxxx
Remember: If the proterty is let out for a part of the year because it is either purchased or constructed during the previous year, then AV is calculated for that period only for which the house property is owned by the assessee.
**********************************************

Sec. 24: Deductions from income from house property

In case of Let out/ Deemed to be let out house property
Sec. 24 (a). Standard Deduction @ 30% on Positive AV
Sec. 24 (b). Interest on Money borrowed without any limit.
Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP)interest. PCP started from the date of borrowing and ended on 31st mar immediately preceeding (Before) the year of completion.

In Case of Self Occupied House Property
Sec. 24 (a). Not Applicable
Sec. 24.(b). Max. Rs. 150000 if the following three conditions are satisfied
Ø  Loan taken after 1 – 4 – 99
Ø  For construction/purchase (Capital expenditure) of house
Ø  Construction completed within 3years from the end of financial year in which loan is borrowed.
Ø  Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000
Remember: Interest is allowed as deduction on accrual basis not on cash basis. Interest on Loan taken to repay the original loan is also allowed as deduction. But penalty or interest on delayed payment is not allowed.
**********************************************

Sec. 25: Amounts deductible/not deductible from income from house property
If any rent is unrealised during P/Y (not earlier years), the amount of unrealised rent shall be deducted out of actual rent received subject to the following conditions:
Ø  Tenancy is bonafide
Ø  Defaulter vacated the house or steps taken to vacate the house
Ø  Defaulter is not in occupation of any other house
Ø  Efforts to realise rent have failed or the assessing officer is satisfied about the non recovery.

Sec. 25. Interest on loan payable outside India is disallowed if tax on it is not deducted.

Sec. 25A: unrealized rent allowed as deduction in A/Y is recovered subsequently then it is charged to tax without making any deductions. It is not necessary that assessee is the owner of house property in that previous year.

Sec. 25AA: Unrealised rent received subsequently to be charged to income-tax unrealized rent of A/Y collected subsequently. The amount so realized to the extent it has not been included in the annual value earlier shall be deemed to be the income under house property.
For this section divide the calculation in two parts: 1st part if no urnrealised rent and 2nd part if there is unrealised rent. When rent is recovered, theamount on which tax is saved in the year of default is taxable in the year of realisation subject to maximum of realised rent.

Sec. 25B: Deemed income but after deducting 30% standard deduction. Taxable even if assessee is not the owner.
**********************************************

Sec. 26: Property owned by co-owners
If the share of co-owners if determinate, the income of such house property is calculated as one house and income is divided amongst co-owners. They shall be entitled to relief u/s 23(2) as if they are individually owners of such property.
**********************************************
Sec. 27: “Owner of house property”
(i)      If transfer otherwise than for adequate consideration to his or her spouse [ not being a transfer to live apart or to a minor child not being a married daughter.
(ii)    Holder of impartiable assets.
(iii)   Member of co-operative society to whom building is alotted or leased under a house building scheme.
**********************************************
Some other points
Exempted income from house property:
a.       Agricultural house property
b.      House property held for charitable purposes
c.       Self occupied but vacant house
d.      House property unsed for business or profession
e.      House property of registered trade union, local authority, political party, hospital (social service), scientific research institution, not trading schools or educational institution.
f.        One house property of an ex-ruler.
g.       One self occupied house

Set off, carry forward of losses
Ø  Can be set off from any other head
Ø  Can be carry forward for 8 years

Disputed about ownership:
Ø  In case of dispute, receiver of rent liable to pay tax.
Ø  If long time lease is taken, then the person who takes the lease is the owner
Ø  In case of mortgage loan, mortgager is the owner.
Ø  Property in the name of partnership, firm is the owner.
Ø  A person whose property is vested in the custodian to evacuee property is not the owner.
Ø  Subletting rent is treated as income from other sources.
**********************************************