Calculate Income from House Property
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This PPT explains each and every concept of Income from House Property under Direct taxes. It is most suitable for students of BCOM(H) and CA.
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Calculate Income from House Property
- 1. INCOME FROM HOUSE PROPERTY By Kshitij gupta Naman Seth Sarthak Agarwal Sagun Arora Apurva Chandra BFIA – 3rd Semester ACCF
- 2. 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.
- 3. 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.
- 4. 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.
- 5. 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.
- 6. 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
- 7. 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”.
- 8. 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”.
- 9. 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
- 10. 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.
- 11. 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.
- 12. 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
- 13. 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.
- 14. 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.
- 15. (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
- 16. 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.
- 17. 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.
- 18. 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.
- 19. 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”.
- 20. 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 *******
- 21. 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.
- 22. (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.
- 23. (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:
- 24. (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.
- 25. (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.
- 26. 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.
- 27. 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.
- 28. 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.
- 29. 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.
- 30. (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.
- 31. 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.
- 32. 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:
- 33. 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*
- 34. 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
- 35. 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 ***********
Editor's Notes
- The annual value is the amount for which the property might reasonably be expected to let from year to year.
- The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be subject to Income tax under the head income from house property after claiming deduction under section 24 provided such property or any portion of such property is not used by the assessee for the purposes of any business or profession, carried on by him, the profits of which are chargeable to income tax. Buildings or lands appurtenant thereto The term “building” includes residential houses, bungalows, office buildings, warehouses, docks, factory buildings, music halls, lecture halls, auditorium etc. The appurtenant lands in respect of a residential building may be in the form of approach roads to and from public streets, compounds, 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 to another department, playgrounds for the benefit of the employees etc. Land appurtenant means land attached or situated in the vicinity of building. If any income is derived form vacant land then this income would not be taxed under the head house property because there is no building. If the land appurtenant thereto yields any independent and commercial income such income shall not be taxable under the head house property. (Example: potable water spring which becomes a perennial source of potable water). It will be taxable either as business income or as income from other sources. Ownership of the property It is only the owner of house property who is liable to tax on the income under this head. Owner can be an individual, firm, company, cooperative society or an association of persons. The assessee needs to be an owner in the previous year only. Income from subletting is not taxable under this head since the person who sublets is not the owner of the property. Ownership needs to be of the superstructure . It is not necessary for the assessee to own the land also. When a partnership firm owns a house property, it is the firm which is assessable and not the individual partners. Owner to be given a literal and grammatical meaning. It is only in the hands of the owner of the property that the annual value of the property can be assessed. On the principle of the tax being levied where the income is found, it cannot be assessed in the hands of the person who is in receipt of the income, if he does not happen at the same time to be the owner of the property. Owner is a person who is entitled to receive income from the property in his own right. The requirement of registration of sale deed is not warranted. If the title of the ownership of the property is under dispute in a court of law, the decision who will be the owner and chargeable to income tax will be of the IT department till the court gives its decision to the suit filed in respect of such property. The fact that the house property in respect of which the assessment is levied is not owned in the year of assessment is immaterial, what is to be looked at is whether the assessee is the owner during the previous year. Use of house Property The purpose for which the building is being used is not material. Thus house property may be let by the assessee for residential purposes or for any commercial purpose. The income derived from letting out of such house property will always be taxable under this head. Even if it is the business of the assessee to own and give houses on rent or to trade in houses, the annual value of the houses owned by him during the previous year would be taxable as income from house property. House owning, however profitable, is neither trade nor business for the purpose of the Act. Income from a commercial complex is only rental income even though the construction of the commercial complex was on leasehold plot and that receipts was from shops and stalls. Whether a particular letting of building is business or not has to be decided in circumstances of each case and each case has to be looked from businessman’s point of view to find out whether the letting was for doing of business or exploitation of property by owner as business asset. If the assessee is doing business of letting out of property and the same was part of the objects of the company, the rental income shall be taxable under the head of house property.
- Where the individual transfers cash to his/her spouse or minor child and the transferee acquires a house property out of such cash, the transferor shall not be deemed owner of the house property. Such a transaction will however, attract clubbing provisions.
- A person who has acquired a property under a power of attorney transaction, by satisfying the conditions of Sec 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. The impartible estate, is a property which is not legally divisible. It is an estate to which the assessee has succeeded by the rule of primogeniture prevailing in the family governed by the Mitakshara law.
- Rent from putting up hoardings on top of the building is not income from house property. It will be taxed under the head income from other sources.
- Actual rent received or receivable Actual rent received/receivable is an imp. factor in determining the annual value of the property though this is not the only decisive factor. The actual rent could be dependent upon various considerations. There could be circumstances where the owner agrees to bear certain obligations of tenant e.g. the water and electricity bills of the tenant may be payable by the owner. In this case, the de facto rent will be calculated by stepping down the rent received/receivable by the amount spent by the owner on meeting the obligations of the tenant. On the other hand, if any obligation of the owner is met by the tenant, the de facto rent will be computed by stepping up the rent received/receivable by the amount spent by the tenant in discharging the obligation of the landlord. Where the repair expenses are contractually borne by the tenant, the rent received/receivable should not be stepped up to calculate the de facto rent. Municipal Value This is the value as determined by the municipal authorities for levying municipal taxes on house property. Fair rent of the Property Fair rent is the rent which a similar property can fetch in the same or similar locality, if it is let from year to year. Standard Rent The standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the rent fixed under the Rent Control Act.
- Although the expected rent as per section 23(1)(a) cannot exceed standard rent but it can be lower than standard rent.
- Deduction for municipal taxes levied by any local authority is allowed only if they are borne and actually paid by the owner. It must be noted that the taxes are allowed as a deduction only in the previous year in which these are paid. Municipal taxes, due but not paid, shall not be allowed as a deduction. However, municipal taxes paid during the previous year are allowable even if they relate to past years or future years. Even where the property is situated outside the country, taxes levied by local authority in that country are deductible in deciding the annual value of the property.
- Can Net Annual Value be negative? The net annual value can be negative only when the municipal taxes paid by the owner are more than the gross annual value.
- If a house property consists of two or more independent residential units, one of which is self occupied for own residential purposes and other units are let out, income from the different units is to be calculated separately. The income from the unit which is self occupied for residential purposes will be taken as NIL and only interest on borrowed capital will be deductible up to the maximum limit of Rs 150,000 or Rs 30,000, as the case may be. The income from the let out units 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 annual value of the house property will be computed as if the property is let out.
- Rules for unrealized rent The amount of rent which the owner cannot realize shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where: (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 to institute legal proceedings for the recovery of the unpaid rent or satisfies the AO that legal proceedings would be useless. Example: Municipal Value = Rs 200,000 Fair rent = Rs 240,000 Actual rent = Rs 25,000 p.m. Municipal tax paid during the year = Rs 20,000 The owner could not realize the rent for 2 months due to the death of the tenant. Calculate Annual value of the property. Answer: Expected rent = Rs 240000 (Municipal rent or fair rent, whichever is higher) Actual rent received/receivable = 300,000 (25000*12) Less: Unrealized rent = Rs 50,000 Actual rent received/receivable = 250,000 Gross Annual value is higher of Actual rent and Expected rent. Hence, gross annual value is Rs 250,000 Less: Municipal taxes paid = Rs 20,000 Net Annual Value = Rs 230,000
- The list of deduction under section 24 is exhaustive. In other words, no deduction can be claimed in respect of that expenditure which is not specified in section 24. For instance, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of liftman etc.
- The following points should also be kept in view: As the deduction is available on “accrual basis”, it should be claimed as a deduction on yearly basis, even if the interest is not actually paid during the year. 2) Interest on unpaid interest is not deductible. 3) No deduction is allowed for any brokerage or commission for arranging the loan. 4) Interest on fresh loan, taken to repay the original loan is allowable as a deduction. 5) 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. There should be nexus between the capital borrowed and the acquisition, construction, repairs, renewal or reconstruction of the property out of this borrowing and the interest paid on it.
- Interest will be aggregated from the date of borrowing till the end of the previous year prior to the previous year in which the house is completed and not till the date of completion of construction. For example, assessee took a loan on 01/04/2006 and the construction completed on 24/08/2010. The interest for the preconstruction will be calculated for the period: (From 01/04/2006 till 31/03/2010).
- Where the annual value of such house shall not be nil: The annual value of self occupied house shall not be nil: (i)If such house or part of the house is actually let during the whole or any part of the previous year; or (ii) any other benefit is derived by the owner from such house. In the above cases, the annual value of the property shall be determined as if it is a let out property. Annual value of one house away from work place Annual value of one house property, which is not actually occupied by the owner owing to employment or business/profession, carried on at any other place would be NIL, subject to the following conditions: 1)The assessee must be the owner of only one house property 2) He is not able to occupy the house property because of his employment, business etc. away form the place where the property is situated. 3) The property should not have been actually let out or any other benefit is derived therefrom. 4) He has to reside at the place of employment in a building not belonging to him.
- The assessee should exercise the option in such a manner that his taxable income is the minimum. Such option can be changed from year to year. If the assessee has a house property which consists of two or more residential units and all such units are self occupied, the annual value of the entire house property shall be taken as nil as there is only one house property though it has more than one residential units. The benefit of exemption of one self occupied property is available only to an individual/HUF.
- It may be noted that the deduction of interest of Rs 30,000 is allowed for purpose of repair or renewal or reconstruction of house property whereas the deduction to the maximum of Rs 150,000 is allowed only for acquisition or construction of house property, subject to other conditions being satisfied. Further, if capital is borrowed before 01/04/1999 or house is not completed within 3 years of the end of the financial year in which the capital is borrowed, deduction of interest shall be allowed to the maximum of Rs 30,000. *For getting deduction of interest of maximum of Rs 150,000, it will be necessary to obtain a certificate form the person to whom such interest is payable specifying the amount of interest payable by the assessee for the purpose of acquisition/construction of the property or conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan. The expression new loan means the whole or any part of a loan taken by the assessee subsequent to capital borrowed, for the purpose of repayment of such capital. It needs to be noted that for let out/deemed to be let out property, the entire interest is allowed as deduction whereas in case of one self-occupied property the interest shall be allowed to the maximum of Rs 30,000 or Rs 150,000 as the case may be. Maximum ceiling on interest of borrowed capital Interest on borrowed capital is deductible subject to a maximum ceiling given below: Maximum ceiling if capital is borrowed on or after 01/04/1999. If the following 3 conditions are satisfied, interest on borrowed capital is deductible up to Rs 150,000 1) Capital is borrowed on or after 01/04/1999 for acquiring or constructing property. 2) The acquisition or construction should be completed within 3 years from the end of the financial year in which the capital is borrowed, and 3) The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for such acquisition or construction. The following points should be noted: If capital is borrowed for any other purpose ( if capital is borrowed for reconstruction, repairs or renewals of a house property), then the maximum amount of deduction on account of interest is Rs 30,000 (and not Rs 150,000) There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before 01/04/1999 but, if the aforesaid 3 conditions are satisfied, the higher deduction of Rs 150,000 would be available. The loan taken prior to 01/04/1999 will carry deduction of interest up to Rs 30,000 only.
- Maximum ceiling in any other case: If the conditions are not satisfied, then interest on borrowed capital is deductible up to a maximum of Rs 30,000. In other words, in the following cases, interest on borrowed capital is deductible up to Rs 30,000. 1) If capital is borrowed before 01/04/1999 for purchase, construction, reconstruction, repairs or renewals of a house property 2) If capital is borrowed on or after 01/04/1999 for reconstruction, repairs or renewals of a house property.
- In the case of a self occupied property, only the deduction of interest on borrowed capital is allowed. Neither the municipal taxes are allowed to deducted since the Gross annual value is nil, nor the standard deduction @30% is allowed since the net annual value is nil.