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Income From House Property

Income From House Property

INCOME CHARGEABLE REAL & NOTIONAL
This is the only head of income, which taxes notional income (except under some circumstances under capital gains, income from other sources). The taxability may not necessarily be of actual rent or income received but the potential income, which the property is capable of yielding. Accordingly, if a person owns a property which is leying vacant, notional income with respect to such property may be liable to tax even though the owner may not have received any income from such property. Further, if the property is let out and the rent received is less than the potential rent which the property is capable of yielding, tax would be payable on the rent which the owner is capable of getting and not on the actual rent (Refer heading – "Determination of annual value"). Though the head of chargeability of the income is Income from house property what is charged under this head not only the income from house (dwelling) but all income arising out of letting of building. In other words Sections 22 to 27 are wholly silent as to the purpose for which a building or a house property is to be used. This head of income can be aptly described as income from properties.
Chargeability u/s 22
  1. What is chargeable under this head?
Annual value of property consisting of any building or land appurtenant thereto except such property which is used by assessee for the purpose of business and profession. If the building is used by the assessee for the purposes of his business or profession, no notional income from such building can be assessed to tax under the head "Income from house property" and no deduction on account of notional rent is available to the assessee while computing the income under the head "Income from business or profession".
  1. In whose hand such income is taxable?
Income from house property is taxable in the hands of owner/deemed owner of the property. Owner is a person who is entitled to receive income from property in his own right. Income is chargeable in the hands of person even if he is not a registered owner. Rental income from sub-letting of property acquired on monthly tenancy basis or on lease for a period of less than twelve years may be taxable either as "Income from business or profession", where such letting is the business of the assessee or taxable as "Income from other sources". This would depend upon facts of each case.
Property Owned by Co-Owners (Section 26)
Where property consisting of buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not be assessed as an A.O.P. (Association of Persons) but the share of each person in the income from the property as computed under sections 22 to 25 (i.e., income from house property) shall be included in his total income.
Owner includes deemed owner u/s 27 as under:
Transfer to spouse without adequate consideration or to a minor child not being a married daughter. However, if the transfer is under an agreement to live apart, such transfer to the spouse would not be covered.
Holder of impartial estate shall be deemed to be owner of all the properties comprised in the estate
A member of a co-operative society, company or other association to whom a building is allotted or leased under a house building scheme of society, company or other association as a case may be.
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 (4 of 1882).
A person who acquires any lease rights of not less than twelve years (excluding any rights by way of a lease from month to month or for a period not exceeding one year)
Official assignee can be treated as owner for the purpose of section 22 except when the receiver is appointed by court.
income from PROPERTIES UNDER THE perview of the HEAD "INCOME FROM HOUSE PROPERTY"
  1. Predominantly, only income from letting out of building or land appurtenant thereto is taxable under the head "Income from house property". Accordingly, if letting out is of a bungalow along with the garden surrounding it, the income of the entire bungalow along with land appurtenant thereto; i.e., the garden would be taxed under this head. If the letting out is only of the vacant land, the rent received from such letting out of land is not taxable under the head "Income from house property". It may be taxable under the head "Income from business or profession" if the business of the assessee is to let out land or may be taxable as "Income from other sources" if letting out of land is not the business of the assessee. Further if composite rent is received for property as well as services and amenities, the annual value of such property is assessable under section 22 and profits arising from services and amenities is chargeable to tax under section 28; i.e., business income or under section 56; i.e., income from other sources.
  2. Rental income from letting out of residential and commercial buildings is covered under this head of income. Where property constitutes stock in trade of business or where business of assessee is to let out house property, income is covered under the head profits and gains of Business & Profession. Further if letting out is subservient to the main business the annual value will not be chargeable u/s. 22 rather it will be chargeable under profits and gains of Business & Profession.
  3. Where an assessee let machinery, plant or furniture and also buildings, and the letting out of buildings is inseparable from the letting of the machinery, plant or furniture, the income from such letting, if it is not chargeable to tax under the head "Income from business or profession" would be taxable under the head "Income from other sources" .
— Refer Section 56(2)(iii). The Hon’ble Supreme Court has in the case of Shambhu Investments (P.) Ltd. vs. CIT (2003) 263 ITR 143 (SC) held that income from letting out would be taxable under the head "Income from house property" primarily on the ground that letting of building was a primary object with additional right to use furniture, etc.
DETERMINATION OF ANNUAL VALUE
For determining the annual value, one has to first determine the gross annual value (GAV) which is the higher of :
  1. The sum for which the property might reasonably be expected to let from year to year. In cases of properties where Standard rent has been fixed, such sum cannot exceed the standard rent fixed (Refer Sheila Kaushish vs. CIT [1981] 7 Taxman 1 (SC) & Amolak Ram Khosla vs. CIT [1981] 7 Taxman 51 (SC)). However where property let was vacant during the whole or part of the previous year and rent actually received or receivable is less than expected rent, then rent actually received or receivable is taken as GAV.
  2. Where property is actually let out and the rent received or receivable is more than the amount determined in (a) above, the annual value would be the actual rent received.
Note: Following amounts are not added to the GAV
  • Amount of municipal tax realised from tenant
  • Notional interest on amount received towards ‘rent/security deposit’ from the tenant
  • Repairs carried out by the tenant.
ANNUAL VALUE TO BE TAKEN AS ‘NIL’ IN CERTAIN CASES
  1. The annual value of a property which is in occupation of the owner for the purposes of his residence would be considered to be nil if he does not derive any other benefit from the said residential house. If the owner has more than one house for the purposes of his residence, the annual value of any one of such houses, at his option, would be considered to be nil. Notional income of other residential houses would be liable to tax. In such case owner may choose to consider the annual value nil (for computation purposes) in respect of the one property at his option.
  2. Similarly, if the assessee is owner of only one residential house which he is unable to occupy on account of his employment, business or profession carried on at any other place and on account of which he has to reside at that other place in a building not owned by him, the annual value of such house shall be nil.
DETERMINATION OF NET ANNUAL VALUE (NAV)
The following amounts are required to be reduced while determining the net annual value :
  1. Any taxes levied by any local authority, which are liable to be paid by the owner, only on actual payment thereof during the previous year; and
  2. The unrealisable rent subject to satisfaction of conditions prescribed under Rule 4. Amount of unrealised rent 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,—
  • the tenancy is bona fide
  • the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property
  • the defaulting tenant is not in occupation of any other property of the assessee
  • the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless. 
Unrealised Rent Realised subsequently — Sec. 25AA
  • The entire amount of unrealised rent received in the PY shall be chargeable to tax in the year in which such amount is received. (The deduction u/s 23/24 shall not be allowed if the unrealised rent pertaining to period up to AY 2001-02 & deduction u/s 24(1)(x) in respect thereof was allowed in earlier years.)
  • Unrealised rent received subsequently is chargeable to tax even if the house property is not owned by the assessee in the year of such recovery.
ARREARS OF RENT RECEIVED S. 25B
Where any arrears of rent is received which was not taxed earlier, such rent shall be assessed under the head "Income from house property" in the year in which such arrears are received i.e. taxable on receipt basis. The arrears would be taxable under this head irrespective of the fact whether the assessee is the owner of the buildings in the year in which such arrears are received. A deduction of 30% on account of repairs on the arrears of rent received would be allowed in the year in which such arrears are taxable.
Deductions allowed while computing Income under this head
The following deductions shall be allowed from the annual value u/s. 24:
  1. 30% of the annual value as computed.
  2. Interest paid/payable on borrowed capital acquired for the purpose of acquisition, construction, repairs, renewals or reconstruction of house property subject to conditions and limits as mentioned herein after.
  • Interest for the period prior to acquisition or construction of the premises would be deductible in five equal instalments starting from the year in which property is acquired or constructed.
  • In case of self occupied House Property interest allowable is subject to following conditions:
    Sr. No.
    Particulars
     Limit of deduction (in Rs.)
    1.
    Property acquired/constructed after 1st April, 1999 with borrowed capital (deduction is allowed only where such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed)
    1,50,000.00
    2.
    In all other cases.
    30,000.00
    Note:
  1. Interest on new loan taken to repay original loan is considered as loan taken for such acquisition, construction etc. (Refer CBDT Circular No. 28 dt. 20.08.1969).
  2. Where interest is claimed as a deduction, a certificate from the lender certifying the amount of interest payable should be furnished by the assessee.
  3. The list of deduction specified u/s 24 are exhaustive, no other deduction can be claimed other than specified therein.
  4. 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 a person in India, who may be treated as agent of the recipient for such purpose.
  5. Brokerage or commission paid to arrange a loan for house construction will not be allowed.
Computation of Income from House Property in nutshell
Particulars
Type of Property

Let-Out Property u/s. 23(1)
Self-Occupied House Property u/s. 23(2)
Deemed to be Let-Out Property u/s. 23(4)

Amt. Rs.
Amt. Rs.
Amt. Rs.
Amt. Rs.
Amt. Rs.
Amt. Rs.
(i) Reasonably Expected Rent
XXX
NIL
XXX
(ii) Actual rent received or receivable
XXX
NIL
NIL
Gross Annual Value (GAV)
XXX
1. (i) or,
2. (ii)>(i), then (ii) or,
3. (ii)<(i) due to vacancy then (ii)




NIL




XXX
Less Municipal Taxes paid to local authority by the owner
(XXX) 
NIL
(XXX)
1. Net Annual Value(NAV)
XXX
NIL
XXX
Less: Deduction u/s. 24
(a) 30% of NAV
XXX 
NIL
XXX
(b) Interest on loans as allowed
XXX
XXX
XXX
2. Total Deductions (a)+(b)

(XXX) 
(XXX)
(XXX)
A. Income from House Property (1-2)
 
XXX
(XXX)
XXX
B. Add Unrealised Rent Received subject to conditions of deduction u/s. 23/24
XXX 
NIL
NIL
C. Add Arrears of Rent Received
XXX
NIL
NIL
Less: 30% of arrears of Rent
(XXX)  
—————
XXX
NIL
NIL
NIL
NIL
Total Income from House Property (A+B+C)
XXX
XXX
XXX

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