Income Tax – I: Income from House Property

INCOME FROM HOUSE PROPERTY

It is the second head of income. Rental income from house property is taxable under the
head income from house property. The base of charge is Annual Value of property.

Chargeability: Section 22
i. The process of computation of income under the head “Income from house
property” starts with the determination of annual value of the property. The concept
of annual value and the method of determination is laid down in section 23.
ii. The annual value of any property comprising of buildings or lands appurtenant
thereto of which the assessee is the owner is chargeable to tax under the head
“Income from house property”.

Property:
The term property includes buildings and land appurtenant (attached) there to. Buildings
include residential house, auditorium, warehouse, lecture halls etc.

Conditions for chargeability

1. Property should consist of any building or land appurtenant thereto.
2. Assessee must be the owner of the property (Legal owner or deemed owner).
3. The property may be used for any other purpose (no be used for his own
business/profession).

Following are the exceptions when the rental income of the building is not treated as
Income from house property.
1. House property let out to employees.
2. House property let out to Government authorities.
3. Composite letting out of building along with machinery/furniture.
4. Paying guest house.
5. Income from subletting of house property.
6. House property used by assessee for his own business/profession.

Categories of House Property on the basis on nature of occupation

1. Let out property for a residence or commercial purpose (LOP).

2. Self occupied property for residence (SOP).
3. Deemed to be let out property (LOP).
4. Part of the house is let out and remaining part is self occupied (LOP and SOP).
5. House let out for part of the year and self-occupied for remaining months (LOP).

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 Income Tax – I: Income from House Property

Meaning of important terms:

Annual value: Annual value is the amount arrived after deducting the municipal taxes
actually paid by the owner during the previous year from the Gross Annual Value (GAV).
Gross Annual Value: GAV is the sum for which the property might reasonable be expected
to let from year to year. The GAV can be determined by considering the municipal value,
reasonable rent, standard rent and actual rent.
Municipal value: MV of the property is the value of the property fixed by the local
authorities (municipality) for levy of municipality tax. Municipal tax is levied at certain
percentage of municipal value.
Fair rent: FR means rent fetched by the similar property in the same locality.
Standard rent: It is the maximum rent which a owner can legally collect from his tenant
under Rent Control Act.
Unrealized rent: If any amount of rent is not capable of being realized, is called unrealized
rent. Such portion of rent shall not be included in computing the actual rent received.
Municipal tax or Local Taxes: MT or LT are the taxes levied by the local authorities on the
value of property at a fixed percentage.
Composite rent: In some cases, the owner of the property let out other assets along with
the building like furniture, machinery etc. In such situation the owner receives rent for
building along with other assets; the amount so received is called as composite rent.

Determination of Annual Value u/s 23 and computation of Income from House Property
for different categories of property
1. LOP: The property is let out throughout/part of the previous year: Sec. 23(1)(a/b/c).
Municipal value XX
OR
Fair rental value/reasonable rent XX
Notional rent (higher of the above) XX
OR
Standard Rent XX
Expected Rent (lower of the above) XX
OR
Actual rent (Annual rent – unrealized rent) XX
Gross Annual Value XX
Less: Vacant Period rent (vacant months x rent per month) XX
Gross Annual Value (GAV XX
Less: Municipal Taxes paid by the owner during PY XX
Annual Value or Net Annual Value XX
Less: Deductions u/s 24
i. Standard deduction sec. 24(a) XX
(30% of Annual value)
ii. Interest on loan borrowed for XX XX
construction/purchase/repairs/renewal/reconstruction of
property sec. 24(b)
Income from House Property XX

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 Income Tax – I: Income from House Property

Important points;
a. Municipal tax paid by the owner during the previous year is allowed as deduction.
In other words municipal taxes paid by the tenant and municipal tax due but not
paid are not allowed to deduct.
b. If expected rent is more than actual rent, deduction for vacancy period rent is not
allowed.
c. If the owner of property incurred any expenses for amenities like water charges,
lift maintenance, electricity charges, gardeners’ salary etc such expenses should
be deducted from rent receivable/actual rent.
d. Standard deduction is not allowed in case of Self occupied property.
e. Any expenses incurred by the assessee like land revenues, collection charges,
ground rent, insurance, repairs, legal charges for purchase of property etc are
NOT ALLOWED.
2. SOP: Self-occupied properties or unoccupied properties Sec. 23(2)
Annual Value u/s 23(2) Nil
Less: Deduction u/s 24
i. Interest on loan borrowed for
construction/purchase/repairs/renewal/reconstruction of XX
property sec. 24(b)
Income/Loss from house property -XX
3. Deemed to be let-out property
If more than two properties are self-occupied/unoccupied, the assessee may claim
benefit of nil annual value in respect of any two properties at his option. The other
property(s) would be deemed to be let out, in respect of which Expected Rent would be
the GAV. Income from house property of deemed to be let out property is calculated
same as of income from let out property.

4. Part of the house is let out and remaining part is self occupied (LOP and SOP).
Income from any portion or part of a property which is let out shall be computed
separately under the “let out property” category and the other portion or part which
is self-occupied shall be computed under the “self-occupied property” category.
Municipal valuation/fair rent/standard rent, if not given separately, shall be
apportioned between the let-out portion and self-occupied portion either on plinth
area or built-up floor space or on such other reasonable basis.

5. House let out for part of the year and self-occupied for remaining part of the year
(LOP) Sec. 23(3).
If a single unit of a property is self-occupied for part of the year and let-out for the
remaining part of the year, then the ER for the whole year shall be taken into account
for determining the GAV.
The ER for the whole year shall be compared with the actual rent for the let out
period and whichever is higher shall be adopted as the GAV.
However, municipal tax for the whole year is allowed as deduction provided it is paid
by the owner during the previous year.

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 Income Tax – I: Income from House Property

Deduction from Annual Value u/s 24

(i) There are two deductions from annual value. They are –
(1) Standard deduction: 30% of NAV; and

(2) Interest on borrowed capital

(1) 30% of NAV is allowed as deduction under section 24(a)
(a) This is a flat deduction and is allowed irrespective of the actual
expenditure incurred.

(b) The assessee will not be entitled to deduction of 30%, in thefollowing

cases, as the annual value itself is nil.
(i) In case of self-occupied properties or
(ii) In case of property held as stock-in-trade and the whole or any part
of the property is not let out during the whole or any part of the
previous year, upto 2 years from the end of the financial year in
which certificate of completion of construction of the property is
obtained from the competent authority.
(2) Interest on borrowed capital is allowed as deduction u/s 24(b)
Interest payable on loans borrowed for the purpose of acquisition,
construction, repairs, renewal or reconstruction can be claimed as
deduction.
Interest payable on a fresh loan taken to repay the original loan raised
earlier for the aforesaid purposes is also admissible as a deduction.
Interest for pre-construction period:
Pre-construction period is the period prior to the previous year in which
property is acquired or construction is completed.
Interest payable on borrowed capital for the period prior to the previous
year in which the property has been acquired or constructed (Pre-
construction interest) as reduced by any part thereof allowed as deduction
under any other provision of the Act, can be claimed as deduction over a
period of 5 years in equal annual installments commencing from the year of
acquisition or completion of construction.
Interest for the year in which construction is completed/ property is
acquired:
Interest relating to the year of completion of construction/ acquisition of
property can be fully claimed in that year irrespective of the date of
completion/ acquisition.

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 Income Tax – I: Income from House Property

(ii) Deduction in respect of self-occupied or unoccupied property where annual

value is nil
(1) In this case, the assessee will be allowed a deduction on account of interest
(including 1/5th of the accumulated interest of pre- construction
period) as under –
S. Conditions Amount of Deduction
No.
(a) Loan borrowed before 1.4.99: Actual interest payable
Where the property has been in aggregate for one or
acquired, constructed, repaired, two self-occupied
renewed or reconstructed with properties, subject to
borrowed capital before 1.4.99. maximum of ` 30,000.
(b) Loan borrowed on or after 1.4.99:
(i) Where the property is acquired Actual interest payable in
or constructed with capital aggregate for one or two
borrowed on or after 1.4.99 and self-occupied properties,
such acquisition or construction is subject to
completed within 5 years from the maximum of ` 2,00,000, if
end of the financial year in which certificate mentioned
the capital was in (2) below is obtained.
borrowed.
(ii) Where the property is Actual interest payable in
repaired, renewed or aggregate for one or two
reconstructed with capital self-occupied properties,
borrowed on or after 1.4.99. subject to a
maximum of ` 30,000.
However, the total interest deduction under (a) and (b) cannot
exceed ` 2,00,000.

Important points:

 The ceiling limit would not apply to let-out/deemed let-out property:

 Interest allowable on accrual basis:
 Unpaid purchase price would be considered as capital borrowed:
 Interest on unpaid interest is not deductible.
 Interest on loan taken to pay municipal tax is not deductible.
 Interest on new loan borrowed for repayment of earlier housing loan can be
deducted.

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 Income Tax – I: Income from House Property

Deduction from Annual Value u/s 24: AT A GLANCE

Other points:

1. More than two houses are used for self-occupied: In this case the annual value any two
houses as chosen by assessee will be treated as Nil and the remaining self-occupied
houses will be chosen as deemed to be let-out property.
2. House reserved for self occupation: When there are two self pccupied houses and it
would not be actually occupied by the owner on account of his
employment/business/profession. Annual value of such houses is treated as Nil.

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 Income Tax – I: Income from House Property

3. House property used for own business or profession: In this Case house is not
considered for income from house property.
4. Income from co-owned property is let out: Income from this property is computed and
the share of each co-owner is taxable as an individual under the head income from
house property.
5. Composite rent: If the other assets let out along with building are non-separable, the
composite rent received is not taxable under the head House property. This income is
taxable under the head income from other sources.
If the other assets let out along with building are separable, the rent relating building is
taxable under the head house property and the rent relating to other assets is taxable
under other sources.
6. Treatment of unrealized rent: This amount can be deducted from actual rent.
7. Treatment of unrealized rent realized subsequently: It is treated as income from house
property of the previous year in which it is received subject to 30% standard decuction
u/s 24 even though the assessee may not be the owner of that property during the
relevant previous year.

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