Chanderprabhu Jain College of Higher Studies

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School of Law
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E-Notes

CLASS : B.A.LL.B/BBA LL.B VII SEM

SUBJECT NAME : Tax Law
SUBJECT CODE : LLB 403

Unit-III

Income from House property

What is house property?

House property means any building of which the assessee is the owner. Ownership
of the building is must, in case of calculation of income from house property.

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School of Law
An ISO 9001:2015 Certified Quality Institute
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Sec- 22 of Income Tax Act 1961

Income from house property- The annual value of property consisting of any
buildings or lands appurtenant thereto of which the assessee is the owner, other
than such portions of such property as he may occupy for the purposes of any
business or profession carried on by him the profits of which are chargeable to
income-tax, shall be chargeable to income-tax under the head “Income from house
property.”

Meaning of Annual Value: - annual value of house property means the sum
which might reasonably be expected to fetch if the property is let from year to
year.

Incomes not to be treated as income from house property: Following are some
incomes which are not the part of income from house property:-

1. House property used for business purpose.

2. Rent received from vacant land.

3. Income from house property in the immediate vicinity of agricultural land and is
used as a store house or dwelling house etc. by the cultivators.

4. Any unrealized rent shall not be included in income from house property.

Incomes to be treated as income from house property: - Followings are some

incomes which are to included in the income from house property:-
1. Rental Income from any farm house or agriculture land for any purpose
other than agriculture.

2. Any arrears of rent, which has not been taxed, received in subsequent year,
shall be taxable as income from house property in the year of receipt.

3. Any unrealized rent received in subsequent year, will be added in rental

income without any deduction.
Ownership (Section 27)
The word ‘owner’ means a legal owner.

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In certain cases the legal ownership may vest with one person whereas the
taxability is cast on another person who is deemed to be the owner.
In the following situations the ownership shall be deemed for taxing income from
house property in view of Section 27 of the Act:
1. When house property is transferred to spouse (otherwise than in connection
with an agreement to live apart) or minor child (not being a married
daughter) without adequate consideration (Section 2 7(i))

2. In the case of holder of an impartible estate (Section 27(ii)).A member of a

cooperative society, company etc. to whom a building or part thereof has
been allotted or leased under a house building scheme (Section 27(iii)).
Thus, when a flat is allotted by a cooperative society or a company to its
members/shareholders who enjoy the flat, technically the co-operative
society/company may be the owner. However, in such situations the allottees
are deemed to be owners and it is the allottees who will be taxed under this
head.
3. 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, is deemed as the owner of that
building (or part thereof) [Sec. 27 (iiia)].
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) [i.e. if a person takes a house on lease for a period of 12 months
or more, is deemed as the owner of that building or part thereof] [Sec. 27 (iiib)].

Computation (Sec- 23)

All the building properties are divided into the following four categories for the
purpose of computation.
Let-out property Self-occupied property partly let-out and partly only one house
owned Self occupied property &kept vacant
1. Let- out property (Sec-23(1) –
In the case of a let out property the procedure for determining taxable income is as
follows:-
i. Find out gross annual value.

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ii. Annual rent is the actual rent received or receivable by the assessee
during the relevant previous year.
Deduct Municipal Taxes- Deduction of municipal taxes is permissible in respect
of property taxes subject to the following two conditions.

i. It should be borne by the assessee.

ii. It should be actually paid during the previous year.

Deduction from income from house property:-Section 24 allows two deductions

from Net Annual Value. [A] Statutory Deduction – 30% of Net Annual Value. [B]
Interest on borrowed capital –
Where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of any 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 of not paid during the
year.

2. Self Occupied Property (sec- 23 (2))-

As per sec. 23(2) (a), a house property shall be termed as self occupied property,
where such property or part thereof:

• Is in the occupation of the owner for the purpose of his own residence;
• Is not actually let out during the whole or any part of the previous year; and
• No other benefit there from is derived by the owner.

Deemed Let-out Property- If an assessee occupies more than one house property
as self- occupied, he is allowed to treat only one house as self- occupied at his
option. The remaining self-occupied house properties shall be treated as” Deemed
to be let-out.

3. Partly Let-out and Partly Self-occupied (sec- 23(2))-

Where a house property is let out for part of the year and self- occupied for
remaining part of the year, or any other benefit there from is derived by the owner,
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then such a property will come under this category. Similarly, where one portion of
a unit is let out and the remaining portion is self occupied, and then also it shall be
regarded as falling under this category.
For the purpose of computing income from a house property which is partly let out
and partly self- occupied, the following points should be remembered :-

➢ The gross annual value has to be determined for the entire property as if the
whole property has been let out throughout the previous year.

➢ Municipal taxes actually paid can be claimed.

➢ Net annual value attributable to the self- occupied portion and/ or period
should be excluded.

➢ Deductions under section 24 can be claimed with reference to the entire

property.

4. Only one house owned and kept vacant (sec- 23(3)- In the case of an assessee
who owns only one house property which is kept vacant as he has to reside at some
other place in a building not belonging to him due to his employment, profession
or business, the annual value should be taken as nil.

Deductions from income from house Property [Sec.24]

Income chargeable under the head “Income from house property” shall be
computed after making the following deductions, namely:-
(As amended by Finance Act, 2013)

i. Standard deductions: From the net annual value computed, the assessee
shall be allowed a standard deduction of a sum equal to 30% of the net
annual value.

ii. Interest on borrowed capital:-Where the property has been acquired,

constructed, repaired, renewed or reconstructed with borrowed capital, the
amount of any interest payable on such capital is allowed as a deduction.

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iii. 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
the 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

iv. Acquisition /construction were completed. 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.

Deductions permitted from Income from house property [Sec. 24]

Amount left after deduction of municipal taxes is net annual value. Following
permissible deductions are allowed from Annual Value in cases of let out
properties (Section 24).
i. Deduction equal to 30% of the annual value, irrespective of any
expenditure incurred by the taxpayer (s.24 (a)). No other allowance for
depreciation, repairs, maintenance etc. would be allowable.

ii. Interest on borrowed capital (s.24 (b)). Interest on borrowed capital is

allowable as deduction on accrual basis (even if account books are kept
on cash basis) if capital is borrowed for the purpose of purchase,
construction, repair, renewal or reconstruction of the house property.

Interest when not deductible from “Income from House Property” [Sec.25]
Interest on borrowed money which is payable outside India shall not be allowed as
deduction u/s 24(b), unless the tax on the same has been paid or deducted at source
and in respect of which there is no person in India, who may be treated as an agent
of the recipient for such purpose.

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Unrealised rent received subsequently to be charged to income-tax [Sec.25AA]

Where the assessee could not realize rent from a property let to a tenant and the
same was allowed as deduction and, subsequently, the assessee has realised any
amount in respect of such rent, the amount so realized 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
realized, whether or not the assessee is the owner of that property in the previous
year.

Section 25B of Income Tax Act "Special provision for arrears of rent
received"
25B. Where the assessee— (a) is the owner of any property consisting of any
buildings or lands appurtenant thereto which has been let to a tenant; and (b) 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.

Section 26 of Income Tax Act "Property owned by co-owners"

26. Where property consisting of buildings or buildings and lands appurtenant
thereto is owned by two or more persons and their respective shares are definite
and ascertainable, such persons shall not in respect of such property be assessed
as an association of persons, but the share of each such person in the income from
the property as computed in accordance with sections 22 to 25 shall be included
in his total income.
Explanation.—For the purposes of this section, in applying the provisions of sub-
section (2) of section 23 for computing the share of each such person as is
referred to in this section, such share shall be computed, as if each such person is
individually entitled to the relief provided in that sub-section.

Profit and Gains of Business & Profession

Sec. 2(13) Business: Business means the purchase and sale or manufacture of a
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commodity with a view to make profit. It includes any trade, commerce or

manufacture or any adventure (Doing activity for the first time without knowing
the outcome) or concern in the nature of trade, commerce and manufacture.

To judge a transaction as business transaction, following points should be

considered –
1. Nature of commodity
2. Nature of transaction (Whether incidental to a business or not)
3. Intention of the related party 4. Duration of transaction 5. Effort applied in
transaction.

Sec. 2(36) Profession: Profession means the activities for earning livelihood
which require intellectual skill or manual skill, e.g. the work of a lawyer, doctor,
auditor, engineer and so on are in the nature of profession. Profession includes
vocation.
Vocation: Vocation implies natural ability of a person to do some particular work
e.g. singing, dancing, etc. Here, no training or no qualification is required but
having natural ability.
Profits: Excess income over expenditure.
Gains: Any incidental revenue from business.
As the rules for the assessment of business, profession or vocation are the same,
there is no importance of making any distinction between them for income tax
purposes.
Sec. 28 : Basis of Charge: The following incomes are chargeable to income tax
under the head ‘PGBP’:

I. Revenue Profits from Business or Profession: The profits and gains of

any business or profession which was carried on by the assesses at any time
during the previous year;

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An ISO 9001:2015 Certified Quality Institute
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II. Any Compensation due to or received by an agent: Any compensation

or other payment due to or received by an agent, managing the whole or
substantially the whole of the affairs of any person, at the termination his
management or modification of the terms and conditions relating thereto.

III. Income of trade association, etc: Income derived by a trade, professional

or similar association from specific services performed for its members.

IV. Receipts in connection with foreign trade:

a) Profit on sale of import license.
b) Duty Draw back / Duty remission (decrease) scheme / Duty free
replenishment (refill) certificate.
c) Cash Assistance.
d) Profit on sale of Duty Entitlement Passbook.
e) Repayment of any customs or excise duty to any person against exports.

V. Value of any benefit or Perquisite from business or profession: The

value of any benefit or perquisite whether convertible into money or not,
arising from business or the exercise of profession.

VI. Remuneration to partner from the firm: Any interest, salary, bonus,
commission or remuneration due to or received by a partner of a firm from
the firm provided that it has been allowed as deduction in computing the
taxable profits of such firm.

VII.Amount received or receivable for certain agreement:

a) Not carrying out any activity in relation to any business or
b) Not sharing any know-how, patent, copyright, trade mark, license,

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An ISO 9001:2015 Certified Quality Institute
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franchise or any other business or commercial right of similar nature or

information or technique.
VIII. Keyman Insurance Policy: Any sum received under a keyman insurance
policy including the sum allocated by way of bonus on such policy.

IX. Interest on securities: Interest on securities, if the business of the assessee

is to invest in securities, otherwise interest on securities shall be chargeable
to income tax under the head Income from other sources’.

X. Recovery against certain capital assets covered u/s 35AD: Any sum
received on account of any capital asset (other than land or goodwill or
financial instrument) being demolished, destroyed, discarded or transferred,
if the whole of the expenditure on such capital asset has been allowed as
deduction u/s 35AD..
XI. Income from speculative transaction.

Capital Gains Tax

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a
capital gain. This gain or profit is comes under the category ‘income’, and hence
you will need to pay tax for that amount in the year in which the transfer of the
capital asset takes place. This is called capital gains tax, which can be short-term
or long-term. Capital gains are not applicable to an inherited property as there is
no sale, only a transfer of ownership. The Income Tax Act has specifically
exempted assets received as gifts by way of an inheritance or will. However, if
the person who inherited the asset decides to sell it, capital gains tax will be
applicable.

Defining Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights,
machinery, and jewellery are a few examples of capital assets. This includes
having rights in or in relation to an Indian company. It also includes the rights of
management or control or any other legal right.
The following do not come under the category of capital asset:
a. Any stock, consumables or raw material, held for the purpose of business or
profession
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An ISO 9001:2015 Certified Quality Institute
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b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold
bonds (1980) issued by the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit
certificates issued under the Gold Monetisation Scheme, 2015
Definition of rural area (from AY 2014-15) – Any area which is outside the
jurisdiction of a municipality or cantonment board, having a population of 10,000
or more is considered a rural area. Also, it should not fall within a distance (to be
measured aerially) given below – (population is as per the last census).

Distance Population

2 kms from local limit of If the population of the municipality/cantonment

municipality or cantonment board is more than 10,000 but not more than 1 lakh
board

6 kms from local limit of If the population of the municipality/cantonment

municipality or cantonment board is more than 1 lakh but not more than 10 lakh
board

8 kms from local limit of If the population of the municipality/cantonment

municipality or cantonment board is more than 10 lakh
board

Types of Capital Assets

1. STCG (Short-term capital asset) an asset held for a period of 36 months

or less is a short-term capital asset. The criteria of 36 months have been
reduced to 24 months for immovable properties such as land, building and
house property from FY 2017-18. For instance, if you sell house property
after holding it for a period of 24 months, any income arising will be
treated as long-term capital gain provided that property is sold after 31st
March 2017.
2. LTCG (Long-term capital asset) an asset that is held for more than 36
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School of Law
An ISO 9001:2015 Certified Quality Institute
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months is a long-term capital asset. The reduced period of the

aforementioned 24 months is not applicable to movable property such as
jewellery, debt-oriented mutual funds etc. They will be classified as a long-
term capital asset if held for more than 36 months as earlier. Some assets
are considered short-term capital assets when these are held for 12 months
or less. This rule is applicable if the date of transfer is after 10th July 2014
(irrespective of what the date of purchase is). The assets are:
a. Equity or preference shares in a company listed on a recognized stock
exchange in India
b. Securities (like debentures, bonds, govt securities etc.) listed on a
recognized stock exchange in India
c. Units of UTI, whether quoted or not
d. Units of equity oriented mutual fund, whether quoted or not
e. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they
are considered as long-term capital asset. In case an asset is acquired by gift, will,
succession or inheritance, the period for which the asset was held by the previous
owner is also included when determining whether it’s a short term or a long-term
capital asset. In the case of bonus shares or rights shares, the period of holding is
counted from the date of allotment of bonus shares or rights shares respectively.

Tax on Short-Term and Long-Term Capital Gains

Tax Type Condition Tax applicable

Long-term capital Except on sale of 20%

gains tax equity shares/ units
of equity oriented
fund

Long-term capital On sale of Equity 10% over and above Rs 1 lakh

gains tax shares/ units of
equity oriented fund

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Short-term capital When securities The short-term capital gain is

gains tax transaction tax is not added to your income tax return
applicable and the taxpayer is taxed
according to his income tax slab.

Short-term capital When securities 15%.

gains tax transaction tax is
applicable

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for
those held over a shorter period.

Terms You Need to Know:

Full value consideration The consideration received or to be received by the
seller as a result of transfer of his capital assets. Capital gains are chargeable to
tax in the year of transfer, even if no consideration has been received. Cost of
acquisition The value for which the capital asset was acquired by the seller. Cost
of improvement Expenses of a capital nature incurred in making any additions or
alterations to the capital asset by the seller. Note that improvements made before
April 1, 2001, is never taken into consideration. NOTE: In certain cases where the
capital asset becomes the property of the taxpayer otherwise than by an outright
purchase by the taxpayer, the cost of acquisition and cost of improvement
incurred by the previous owner would also be included.

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration
Step 2: Deduct the following:

▪Expenditure incurred wholly and exclusively in connection

with such transfer
▪ Cost of acquisition
▪ Cost of improvement
Step 3: This amount is a short-term capital gain Short term capital gain = Full
value consideration Less expenses incurred exclusively for such transfer Less cost

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An ISO 9001:2015 Certified Quality Institute
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of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration
Step 2: Deduct the following:
▪ Expenditure incurred wholly and exclusively in connection
with such transfer
▪ Indexed cost of acquisition
▪ Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections
54, 54EC, 54F, and 54B Long-term capital gain = Full value
consideration Less: Expenses incurred exclusively for such transfer Less: Indexed
cost of acquisition Less: Indexed cost of improvement Less:expenses that can be
deducted from full value for consideration* (*Expenses from sale proceeds from
a capital asset, that wholly and directly relate to the sale or transfer of the capital
asset are allowed to be deducted. These are the expenses which are necessary for
the transfer to take place.)

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