Dr.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY

LAW OF TAXATION

SYNOPSIS

Submitted to: Submitted by:

Dr. Bhanu Pratap Sigh Utkarsh

200101148

(Assistant Professor) VIIth Semester

B.A. LLB (Hons.)

 Exploring Interest Deduction on Income from house Property and
handling Unrealized Rent, Arrears of Rent and their subsequent
receipt.
Introduction

Income is taxable under the head ‘house property’ if it arises from a property consisting of any
building or lands appurtenant thereto. For computation of income under this head, a house
property is classified into three categories – let-out, self-occupied and deemed let-out house
property.

The income from a house property is computed on basis of its annual value. Various factors such
as municipal valuation, fair rent, standard rent and actual rent are considered to arrive at annual
value. Even if a property is not actually let-out during the year, annual value of a property is
computed on notional basis and, accordingly, charged to tax. However, if property is self-
occupied or cannot be occupied by the owner due to his employment, business or profession at
any other place, then the annual value of any two of such properties is taken as ‘nil‘.

The present article aims to highlight the computation and deductions of tax with respect income
accrued from house property. Additionally the project also explores how unrealized rent and
arrears of rent are treated, computed and taxed.

Scope

The scope of the project is limited to computation of tax on income from house property and
interest deductions on income from house property. And how unrealized rent and arrears of rent
are treated. The project is limited to the taxability and chargeability of such income rather than
discussing at length as to what specifically falls under income from house property or what falls
under the category of unrealized rent or arrears. Furthermore, the project does not explore
interest and its deduction on borrowed capital.
 Income from House Property

For computation of income from house property, a house property has to be classified into
following categories:1

(a) Let-out

This is the property that has been rented out by an assessee for monetary consideration.
The rent earned is considered income from housing property. There is no upper limit for
claiming interest on a mortgage on a let-out property. If the taxpayer borrowed a home
loan against rented property, he must pay interest on the loan. If the sum of the standard
deduction plus loan interest exceeds the Net Annual Value of the home property, there
will be a loss from leasing out the house property.

(b) Self-occupied

A self-occupied property means a property owned by the taxpayer which is occupied

throughout the year by the owner for the purposes of his own residence and is not
actually let out during the whole or any part of the year. Thus, a property not occupied by
the owner for his residence cannot be treated as a self-occupied property. However, there
is one exception to this rule. If the following conditions are satisfied, then the property
can be treated as self-occupied and the annual value of a property will be “Nil”, even
though the property is not occupied by the owner throughout the year for his residence:

 The taxpayer owns a property;

 Such property cannot actually be occupied by him owing to his employment,

business or profession carried on at any other place and he has to reside at that
other place in a building not owned to him;

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  The property mentioned in (a) above (or part thereof) is not actually let out at any
time during the year;

 No other benefit is derived from such property.

(c) Deemed let-out

Income from house property is taxable in the hands of its owner. However, in the
following cases, legal owner is not considered as the real owner of the property and
someone else is considered as the deemed owner of the property to pay tax on income
earned from such house property:

 An individual, who transfers otherwise than for adequate consideration any house
property to his or her spouse, not being a transfer in connection with an agreement
to live apart, or to a minor child not being a married daughter, shall be deemed to
be the owner of the house property so transferred;

 The holder of an impartible estate shall be deemed to be the individual owner of

all the properties comprised in the estate;

 A member of a co-operative society, company or other association of persons to

whom a building or part thereof is allotted or leased under a house building
scheme shall be deemed to be the owner of that building or part thereof;

 A person who is allowed to take or retain possession of any building or part

thereof in part performance of a contract of the nature referred to in Section 53A
of the Transfer of Property Act, 1882 shall be deemed to be the owner of that
building or part thereof;

 A person who acquires any rights (excluding any rights by way of a lease from
month to month or for a period not exceeding one year) in or with respect to any
building or part thereof, by virtue of any such transaction as is referred to in
 section 269UA (f), shall be deemed to be the owner of that building or part
thereof

Computation of Income from house property

The income from such house property is computed in following manner:2

Amount
Particulars (`)

Gross Annual Value XXX

Less: Municipal Taxes paid by assessee during the year (XXX)

Net Annual Value (NAV) XXX

Less: Deduction under section 24

(a) Standard deduction @ 30% of NAV [Section 24(a)] (XXX)

(b) Interest on Borrowed Capital [Section 24(b)] (XXX) (XXX)

Taxable Income from House property XXX

Interest Deductions available in computation of house property taxable

Income

Description Nature of Deductions

Municipal Taxes Municipal taxes including service-taxes levied by any local authority in

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 respect of house property is allowed as deduction, if:

 Taxes are borne by the owner; and

 Taxes are actually paid by him during the year

Standard Deduction 30% of net annual value of the house property is allowed as deduction
under Section 24(a) if property is letout during the previous year.
Interest on  For let-out property
Borrowed Capital
under section In respect of let-out property, actual interest incurred on capital

Section 24(b) borrowed for the purpose of acquisition, construction, repairing,

re-construction shall be allowed as deduction

 For self-occupied property

In respect of self-occupied residential house property, interest

incurred on capital borrowed for the purpose of acquisition or
construction of house property shall be allowed as deduction up
to ₹. 2 lakhs. The deduction shall be allowed if capital is
borrowed on or after 01-04-1999 and acquisition or
construction of house property is completed within 5 years.

Furthermore, interest incurred on capital borrowed for the

purpose of reconstruction, repairs or renewals of a house
property shall be allowed as deduction up to ₹.30,000.

Deduction in respect of interest on housing loan in case of self-occupied property

The provisions relating to deduction under section 24(b) on account of interest on housing loan
in case of self-occupied property are same as applicable in case of let-out property. In other
words, deduction available to taxpayer under section 24(b) in respect of self-occupied property
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will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to
post-construction period (if any) under the provisions of section 24(b).

However, in the case of self-occupied property, deduction under section 24(b) cannot exceed
Rs.2,00,000 or Rs. 30,000 (as the case may be). If all the following conditions are satisfied, then
the limit in respect of interest on borrowed capital will be ₹.2,00,000:

 Capital is borrowed on or after 1st April 1999.

 Capital is borrowed for the purpose of acquisition or construction (i.e., not for repair,
renewal, reconstruction).

 Acquisition or construction is completed within 5 years (3 years up to 2016-17) from the

end of the financial year in which the capital was borrowed.

 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 acquisition or construction
of the property.

If any of the above conditions are not satisfied, then the limit of ₹. 2,00,000 will be reduced to
₹.30,000.4

Deduction for interest paid on housing loan taken for affordable housing under Section
80EEA

With an objective to provide an impetus to the ‘Housing for all’ initiative of the Government and
to enable the home buyer to have low-cost funds at his disposal, the Finance (No. 2) Act, 2019
has inserted a new Section 80EEA under the Income-tax Act for those individuals who are not
eligible to claim deduction under Section 80EE. An individual can claim deduction of up to Rs.
150,000 under Section 80EEA subject to following conditions:

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(a) Loan should be sanctioned by the financial institution during the period beginning on 01-04-
2019 and ending on the 31-03-2022;

(b) Stamp duty value of residential house property should not exceed Rs. 45 lakhs;

(c) The assessee should not own any residential house property on the date of sanction of loan;
and

(d) The assessee should not be eligible to claim deduction under Section 80EE.

Hence, an individual who does not meet the criteria of Section 80EE shall now be eligible to
claim deduction under Section 80EEA of up to Rs.150,000 in addition to deduction under section
24(b).5

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HOUSE-PROPERTY.pdf
 Treatment of unrealized rent

Unrealized rent refers to the amount of rent payable but not paid by the tenant and not
realized by the owner from the tenant.

Tax Treatment Of unrealized Rent

The unrealized rent is deducted from the actual rent receivable from the property before
computing income from that property, subject to fulfilment of following conditions
prescribed under Rule 4 of the Income Tax Rules, 1962:

The tenancy is bona fide.

 The defaulting tenant has vacated or the assessee has taken steps to compel the
defaulting tenant to vacate the property.
 The defaulting tenant is not in occupation of any other property owned by the
assessee.
 The assessee has taken all reasonable steps for recovery of unrealized rent or satisfies
the assessing officer that such steps would be useless. 6

Recovery

The section 25A provides the following as regards recovery of unrealized rent:

 It is chargeable under the head “Income from House Property”.

 It is taxable in the year of actual receipt.
 It will be taxable in the hands of assessee, even if he does not own the property to
which such rent pertains.
 The standard deduction under section 24(a) is allowed @ 30% of such receipt. 7

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 Arrears of Rent

Arrears refers to being overdue on payment owed to your landlord. Often, this payment is in the
form of monthly rent. The monthly rent payment is considered in arrears when the payment date
passes. Some leases include a five-day grade period. If this is part of your lease agreement, then
payment is considered in arrears once that grace period date passes.

Section 25A, 25AA and Section 25B deal with arrears of rent its subsequent receipt. 8

As per section 25A, amount received in respect of arrears of rent or any subsequent recovery of
unrealized rent shall be deemed to be the income of taxpayer under the head "Income from house
property" in the year in which such rent is realized or received (whether or not the assessee is the
owner of that property in that year). Further, 30% of such rent shall be allowed as deduction.9

Furthermore, Section 25B states that, where the assesse

 is the owner of any property consisting of any buildings or lands appurtenant thereto
which has been let to a tenant; and

 has received any amount, by way of arrears of rent from such property, not charged to
income-tax for any previous year,

the amount so received, after deducting (a sum equal to thirty per cent of such amount), shall be
deemed to be the income chargeable under the head “Income from house property” and
accordingly charged to income-tax as the income of that previous year in which such rent is
received, whether the assessee is the owner of that property in that year or not.

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9
Income Tax Act
 Conclusion

The income from a house property is computed on basis of its annual value. Various factors such
as municipal valuation, fair rent, standard rent and actual rent are considered to arrive at annual
value. Even if a property is not actually let-out during the year, annual value of a property is
computed on notional basis and, accordingly, charged to tax. However, if property is self-
occupied or cannot be occupied by the owner due to his employment, business or profession at
any other place, then the annual value of any two of such properties is taken as ‘nil‘.
 References

 https://www.taxmann.com/post/blog/income-from-house-property
 https://icmai.in/TaxationPortal/upload/DT/Article/10.pdf
 Taxmann’s Income Tax Act.
 https://incometaxindia.gov.in/Booklets%20%20Pamphlets/e-Pdf__COMPUTATION-
OF-INCOME-FROM-HOUSE-PROPERTY.pdf
 https://incometaxindia.gov.in/Pages/tools/income-from-house-property.aspx