All About House Property Income – Deductions | Calculations | Annual Value

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House property consists of any building or land appurtenant thereto of which the assessee is the owner.

The appurtenant lands may be in the form of a courtyard or compound forming part of the building. But such land is to be distinguished from an open plot of land, which is not charged under this head but under the head ‘Income from Other Sources’ or ‘Business Income’, as the case may be.

Besides, ‘house property’ includes flats, shops, office factory sheds, agricultural land and farm houses. Even if the house property is situated outside India it is taxable in India if the owner-assessee is resident in India.

Chargeability

The annual value of a house property is taxable as income in the hands of the owner of the property. The two basic conditions for chargeability of income from house property are:

  1. there is a house property, and
  2. the assesee is the owner of such house property.

Owner

Income from house property is taxable in the hands of its owner even if he is not receipt of income from such property.

  1. Owner primarily means the legal owner, however, it also includes deemed owner.
  2. Income from subletting Of the house property is taxable under the head ‘income from other sources’ and not under this head, as the person, who sublets the property, is not its owner but is only a tenant.

Income from house property is taxable in the hands of its legal owner in whose name the property stands. 1

A person entitled to receive income from a property in his own right is to be treated as its owner, even if no registered document is executed in his name.

Besides, in following cases house property shall be deemed to be belonging to assessee even if he may not be the legal owner of the property: [Sec. 271]

  • Property transferred by an individual without adequate consideration, to his/her spouse (otherwise than in an agreement to live apart), or to a minor child, not being a married daughter.
  • An impartible estate held by an individual.
  • A house or part thereof allotted or leased by the co-operative society, company or association of persons to the member.
  • Property in possession of a person in part performance of a contract of the nature referred to in Section 53A of Transfer of Property Act i.e. agreement to sell.

Property Owned by Co-owners

Where house property is owned by two or more persons and their respective shares are definite, such persons shall not, in respect of such property, be assessed as an association of persons, but their share in income from the property will be computed according to Sections 22 to 25 and taxed in their hands respectively. [Sec. 261]

Income from House Property

Income from every house property, whether self-occupied, let-out or vacant is chargeable to tax.

  1. In case of self-occupied property, annual value is determined on notional basis.
  2. In case of let-out property, the annual value is based on reasonable rent and actual rent.
  3. Where composite rent is received for property as well as services and amenities like furniture and fixtures, water and electricity etc., only the rent attributable to such property is taxable under the head ‘Income from House Property’.
  4. Profit arising from services and amenities are chargeable to tax under the head Profit and Gains from Business or Profession’ or ‘Income from Other Sources’ as may be applicable.
    Where the assessee was engaged in the business of renting its properties and was declaring Income from rent under head business or profession’, it was held that the income from rent was taxable as ‘business income’ and not ‘income from house property’.

The following incomes are excluded from the charge of income tax under the head of house property income.

  • Annual value of house property used for business purposes.
  • Income of rent received from vacant land.
  • Income from house property in the immediate vicinity of agricultural land and used as a store house, dwelling house etc. by the cultivators. However, following incomes shall be taxable under the head ‘Income from House Property.
  • Income from letting of any farm house or agricultural land appurtenant thereto for any purpose other than agriculture, shall not be deemed as agricultural income, but taxable as income from house property.
  • Any arrears of rent, received in a subsequent year, shall be taxable in the year of receipt. See ‘Taxation of Rent Arrears’ later in this chapter.

Annual Value

Income from house property is taxable on the basis of annual value. Even if the property is not let-out, notional rent receivable is taxable as its annual value.

Reasonable Rent

In determining reasonable rent factors such as location of the property, annual rateable value of the property fixed by municipalities, rents of similar properties in neighbourhood and rent which the property is likely to fetch having regard to demand and supply are to be considered.

Generally, in deciding the reasonable rent for a property, the following values are taken into consideration :

  • Municipal Value : It is the rateable value of the property determined for the purpose of levy of municipal taxes.
  • Fair Rental Value : It is the rental value which the property is expected to fetch depending on the prevailing rents in the neighbourhood and other market conditions.
  • Standard Rent : It is the maximum rent for a property which its owner can legally charge from a tenant, as per the Rent Control Act for the area. It has been heldl that a landlord cannot reasonably expect a tenant to pay anything more than thc standard rent for a property. This doctrine applies to all properties covered under the Rent Control law.

Accordingly, the reasonable rent for a property can be said to be the higher of its municipal value or the fair rental value, but it shall not be, in any case, more than the standard rent for such property.

Annual Value of Let out Property

Where the property or any part thereof is let out, the annual value of such property or part shall be

  1. the reasonable rent for that property or part or
  2. the actual rent received or receivable whichever is higher

In determining the rent received/receivable, following points should be considered

  1. A refundable deposit is not to be included.
  2. Notional interest on refundable deposit is not to be included except where such deposit is obtained to compensate for short payment or non-payment of rent.
  3. Advance rent is not to be included.
  4. Brokerage/commission paid is not to be deducted.
  5.  In case of composite rent for property including furniture, fixtures, services, etc. only rent attributable to the property is to be considered.
  6. Occupier’s share of municipal tax realised from the tenant is not to be included.
  7. Expenditure on repairs undertaken to be borne by tenant is not to be included.
  8. A non-refundable deposit is to be included on pro-rata basis (over the period of tenancy).

Composite Rent

In case the furnished property is rented out, the annual value of such property should be estimated excluding the rent of the furniture. Similar is the position about monies charged in respect of other services provided by the landlord. The rent of furniture and charges of other services are chargeable under the head ‘Income from other sources’.

In case the rent or the letting are not separable, the entire income will be taxable as business income or as income from other sources.

Deduction for Unrealised Rent

In determining, the amount received or receivable, amount of unrealised rent shall not be included.
The 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—

  1. the tenancy is bona fide;
  2. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
  3. the defaulting tenant is not in occupation of any other property of the assessee;
  4. the assessee has taken all reasonable steps. to institute legal proceeding for the recover of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.

Deduction of Municipal Taxes Paid

The local taxes such as municipal tax, water and sewage tax, fire tax, and education cess are allowed to deduct while computing the annual value of the year. Please keep in mind all theses should be actually paid. The taxes may pertain to any year, past, current or future.

Annual Value of Self-occupied Residential Property

One House: Where the property consisting of one house or a part of a house is in the occupation of the owner for his own residence, and is not actually let during any part of the previous year and no other benefit therefrom is derived by the owner, the annual value of such a house or a part of the house shall be taken to be nil.

More Than One House: Where the assessee is the owner of more than one such house used for the purposes of his own residence, the annual value in respect of one of such houses which the assessee may specify in this behalf shall be taken to be nil provided the other conditions are satisfied. An assessee may specify different houses as self-occupied in different years.

However, annual value of other such houses (other than the one specified), shall be calculated as if these were let-out.

Self-occupied Residential Property which cannot be occupied for some reason

Because of Employment of Business on Another Place: Where the owner has only one residential house which cannot 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 belonging to him, the annual value of such a house shall be taken to be nil provided that the house is not actually let and no other benefit therefrom is derived by the owner, ignoring the fact of self-occupation of such property for any part of the year.

More Than One House: Where the assessee is the owner of more than one such house which cannot be occupied by him owing to his employment, business or profession carried on at some other place, the annual value in respect of one of such houses which the assessee may specify in this behalf shall be taken to be nil, provided the other conditions are satisfied.

However, annual value of other such houses (other than the one specified), shall be calculated as if these were let-out.

Annual Value of Partly Let-out and Partly Self-occupied Property

Where a part of property is let-out and a part of it is self occupied, then annual value of the different parts shall be determined separately as per the relevant provisions.

Annual Value of House Property Self-occupied for Part of the Year

Where a house property is self-occupied for part of the year and remained vacant for rest of the year, its annual value shall be deemed as nil.
However, where a house property is self-occupied for part of the ear and let-out for any part of the year, its annual value shall be determined as if the property is let-out.

Annual Value of House Property held as Stock-in-Trade

Where the house property is held as stock-in-trade (e.g. in case real estate developers, property dealers, etc.) and the property or y part thereof is not let during the whole or any part of the previous year, the annual value of such property (or part), for the period up to one year from the end of the financial year in which the certificate of completion of construction is obtained, shall be deemed be nil.

Deductions from House Property Income 

Deductions from Let-out (or deemed to be let-out) Property

Standard Deduction: The total deduction is available is 30% of the net annual value of the property.

Interest on Borrowed Capital: 2 Interest payable in India 3 on borrowed capital, where the property has been acquired, constructed, repaired, renovated or reconstructed with such borrowed capital is allowable (without any limit) as deduction on accrual basis.

Interest payable for the per-construction period i.e. prior to the previous year in which such property has been acquired or constructed, shall be deducted in five equal annual installments commencing from the previous year in which the house was acquired or constructed.

Important Notes:

  • The amount is not deductible like expenditure not specified as specially deduction u/s 24 as electricity, water supply, salary of watchman, liftman, etc.
  • Brokerage or commission paid to arrange a loan will not be allowed.
  • No other deduction by way of repairs, collection charges, insurance premium, annual charge, ground rent, etc. is allowable w.e.f. A.Y. 2002-03.
  • Where a fresh loan has been raised and used to repay the original loan, the interested paid on the second loan, would also be allowed as deduction under the clause. This rule is applicable even if the first loan was interest free.
  • Interest payable on interest will not be allowed.

Deductions from Self Occupied Property Income

Standard Deduction: Not Allowed

Interest on Borrowed Capital: This section is applicable to only owned house property. The privilege of this section allows an assessee to claim deductions as follows:

(a)Interest on capital borrowed on or after 1-4-1999 for acquiring or constructing the house property and acquisition/construction is done within 5 years from the end of the financial year in which the capital is borrowed [Sec 24 (Maximum Rs. 2,00,000
(b)Interest on capital borrowed on or after 1-4-1999 for repair, renewal or reconstruction of property, or any other case not covered in (a) aboveMaximum Rs. 30,000
(c)Interest on capital borrowed before 1-4-1999 for acquiring, constructing, repairing, renewing or reconstructing the propertyMaximum Rs.30,000

Calculation of Income from Self Occupied Property

A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence. Lets understand the calculation of income from self occupied property with example.

Suppose Mr Arun has residential house which he bought during 2012-13. We will calculate the income from house property for Assessment year 2019-20 as per the following detail.

ParticularsAmount in Rs.
Annual Letting Value75000
Municipal Rateable Value70000
Municipal Taxes due but not paid2500
Expenditure on repairs10000
Insurance premium due but not paid500
Interest payable on money borrowed for construction176000
Repayment of house loan224000

Solution with explanation

ParticularsAmount in Rs.
Gross Annual Value

Note: The annual vale of the property is NIL. In respect of such property no other deduction is allowed by way of interest on borrowings for purchase/construction of house.

Nil
Less: Municipal taxes paid during the year

Not: Mr Arun has not paid it yet. It is due on his side

Nil
Net Annual ValueNil
Less: Deduction u/s 24
– Interest on borrowed capital for constructionsNotes:(1) Read (b) point above table(2) The deduction for repayment of loan is not available u/s 24. It is allowed u/s 80C. You can check 80C deduction here.
176000
Net loss
Notes: Loss from self occupied property can be adjusted from any other head of income including let out property income.W.e.f. 2018-19 such set off shall be allowed subject to a maximum of Rs. 200000. The loss from house property which cannot be so set off shall be carried forward for next 8 years.More detail on Set off & Carry Forward of Losses Here
– 176000

A strategic use of these deductions can save a lot of tax for an assessee. However, when it comes to determining the exact tax liability, make sure that you avail a professional’s assistance who can understand your current affairs in detail and offer you with the best guidance. Be smart and choose the most effective way to pay for your taxes!

Other Deductions of Income From House Property

Deduction 80EE

  1. Let-out property: Entire interest amount paid on the housing loan taken for the purpose of acquisition, construction, repairing, re-construction is allowed as deduction.
  2. Self-occupied house property:Interest paid on housing loan taken for the purpose of acquisition or construction of house property is allowed as deduction up to Rs. 2,00,000. If loan is taken for the purpose of reconstruction, repairs or renewals of property, then amount of deduction is restricted to Rs. 30,000.

More about Deduction 80EE

Deductions 80C

The benefit of this section is applicable to taxpayers who have availed a loan for the purpose of purchasing a residential house property. Usually, the installment is computed on the basis of Equated Monthly Installment or otherwise more commonly known as EMI. There are two sections which compromise of EMI- Principle and Interest. An assessee can claim deduction for the principle amount. The scope also allows inclusion of expenses such as stamp duty and other expenditure made on account of facilitating house loan. The total amount available for deduction is INR 1, 50, 000 including all other deductions under section 80C.

More about Deduction 80C

 

 

 

 

  1. Owned for this purpose means a person who can exercise the rights of the owner not on behalf of the owner but in his own right.
  2. Deduction from interest on housing loan taken during 1-4-2016  to 31-3-2017 from an bank/housing finance company, can be availed u/s 80EE up to a maximum of Rs.50,000, subject to specified conditions. Please note that such interest, if claimed as deduction u/s 80EE shall not be deductible against income from house property
  3. If interest is payable outside India the deduction will be allowed if some person in India can be treated as an agent of the payee.
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