House Property - Income Tax Notes Part - 03
INCOME TAX NOTES PART - 03
HOUSE PROPERTY
When income is not taxable under the head “House Property”
In the following cases, income is not taxable under the head “Income from house property”:
1. If letting is only incidental and subservient to the main business of the assessee, rental income is not taxable under the head “Income from house property” but is chargeable under the head “Profits and gains of business and profession”.
2. Composite Rent:
If apart from recovering rent of the building, in some cases, the owner gets rent of other assets (like furniture, plant and machinery etc.) or he charges for different services provided in the building (for instance, security, charges for lift, air conditioning, electricity, water etc.), the amount so recovered is known as “composite rent”.
Following is the tax treatment of “composite rent”:
a. Where composite rent includes rent of building and charges for different services: In such situations, composite rent is to be split up and amount of services is chargeable under the head “Profits and gains of business or profession” or “Income from other sources” as the case may be and rent of property is chargeable under the head “Income from house property”. This rule is applicable even if it is difficult to split up the amount.
b. Where composite rent is rent of letting out of building and letting out of other assets (like furniture, plant etc.) and two letting are not separable i.e., letting of one is not acceptable to the other party without letting of the other):
In such situations, income is taxable either under the head “Profits and gains of business or profession” or “Income from other sources” as the case may be.
This rule is applicable even if sum receivable for the two lettings is fixed separately.
c. Where composite rent is rent of letting out of building and letting out of other assets (like furniture, plant etc.) and the two lettings are separable i.e., letting of one is acceptable to the other party without letting of the other):
In such situations, income from letting out of building is taxable under the head “Income from house property” and income from letting out of other assets is taxable under the head “Profits and gains of business or profession” or “Income from other sources” as the case may be. This rule is applicable even if the assessee receives composite rent from his tenant for two lettings.
When property income is not chargeable to tax
In the following cases, rental income is not chargeable to tax:
1. Income from farm house
2. Annual value of any one palace of an ex-ruler
3. Property income of a local authority
4. Property income of an approved scientific research association
5. Property income of an educational institution and hospital
6. Property income of a trade union
7. House property held for charitable purpose
8. Property income of a political party
9. Property used for own business or profession
10. One self-occupied property
Computation of Income under the head “House Property”
There can be three different types of house properties for the purpose of taxation under the head “Income from house property”.
1. Let out property [LO]
2. Self-occupied property [SO]
3. Deemed to be let out property [DLO]
Following format is to be followed for computing the income under the head “House Property”:
| Particulars | LO (Rs.) Let Out | SO (Rs.) Self- Occupied | DLO (Rs.) Deemed to be Let Out | |
| Step 1: Expected Rent [MV* or FR* whichever is higher but subject to a maximum of SR*] | XX | ---- | XX | |
| Step 2: Actual rent received/ receivable after deducting Unrealised Rent | XX | ---- | NA* | |
| Step 3: Higher of Step 1 or step 2 | XX | ---- | ER* | |
| Step 4: Deduct loss due to vacancy | XX | ---- | NA | |
| Step 5: Gross Annual Value (GAV) [Step 3 – Step 4] | XX | Nil | ER | |
| Less: Municipal Taxes | XX | Nil | XX | |
| Net Annual Value (NAV) | XX | Nil | XX | /tr>|
| Less: | Deductions under section 24: | |||
| Standard Deduction [24(a)] (30% of NAV) | XX | Nil | XX | |
| Interest on capital borrowed [24(b)] (*limits applicable) | XX | XX* | XX | |
| Income from house property | XX | (XX) | XX | |
| Add: | Income under section 25A | XX | ---- | ---- |
| Income taxable under “House Property” | XXX | (XXX) | XXX | |
* MV refers to Municipal Value, FR refers to Fair Rent, SR refers to Standard Rent, ER refers to Expected Rent and NA refers to Not Applicable.
Meaning of Annual Value
The annual value of any property shall be the sum for which the property might reasonably be expected to be let out from year to year. It may neither be the actual rent derived nor the municipal valuation of the property.
Calculation of gross annual value (GAV)
Step 1: Find out reasonable expected rent of the property
[Municipal value or fair rent whichever is higher but subject to a maximum of standard rent]
Expected Rent:
It is deemed to be the sum for which the property might reasonably be expected to be let out from year to year.
Fair rent:
Rent fetched by a similar property in the same or similar locality.
Standard Rent:
It is the maximum rent which a person can legally recover from his tenant under a Rent Control Act.
Step 2: Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
Step 3: Higher of amount computed in Step 1 or Step 2 is taken
Step 4: Find out loss due to vacancy.
Step 5: Step 3 minus Step 4 is gross annual value.
Rent actually received/ receivable:
Following points should be noted in this regard:
1. Advance rent cannot be rent received/ receivable of the year of receipt.
2. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot be added to rent received or receivable.
3. Occupier’s (i.e., tenant’s) share of municipal tax realized from the tenant cannot be added to actual rent received/ receivable, as it is the occupier’s duty to pay municipal tax.
Unrealized Rent
Unrealized rent is the rent which the owner could not realize. Unrealized rent of earlier years is not deductible, only unrealized rent of current previous year is deductible.
Unrealized rent shall be excluded from rent received/ receivable only if the following conditions are satisfied [Conditions of Rule 4]:
1. The tenancy is bonafide.
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 proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Municipal Taxes
Municipal taxes (like house tax, service tax, local tax)
Standard Deduction [Sec. 24(a)]
30% of NAV is deductible irrespective of any expenditure incurred by the assessee. Thus, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of liftman, etc.
Interest on Borrowed Capital [Sec. 24(b)]
Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.
Pre-construction period interest:
Pre-construction period means the period commencing from the date of borrowing and ending on –
a. 31st March immediately prior to the date of completion of construction/ date of acquisition; or
b. Date of repayment of loan, whichever is earlier.
Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a period prior to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, is deductible is five equal annual installments and the first installment starts from the previous year in which the property is acquired or constructed.
Post-construction period interest:
It is charged from the year of completion (YOC) to date of repayment (DOR).
Notes –
1. Interest on borrowed capital is calculated by adding pre-construction period interest and current year interest.
2. Interest is borrowed capital is deductible on “accrual basis”. It can be claimed as deduction on yearly basis, even if the interest is not actually paid during the year.
3. If interest is calculated on the basis of number of days, the date of borrowing should be included while the date of repayment of loan should be excluded.
4. Income from a self-occupied house property can be negative. Its value always lies between Zero to (-) Rs. 2,00,000.
5. Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is allowable as deduction. This rule is applicable even if the first loan was interest-free loan.
Steps for computation of Interest on Capital Borrowed:
Step 1: Compute Pre-construction Period
PCP which starts from DOB (Date of borrowing)
Step 2: Compute Pre-construction Period Interest
Step 3: Total Pre-construction Period Interest is allowed as deduction in 5 equal annual instalments and first instalment will be deductible in the year in which the house is purchased or constructed.
Step 4: Compute Post-construction period interest
It starts from YOC (Year of Completion) and ends on Actual DOR (Date of Repayment).
Step 5: Calculate IOCB (Interest on capital borrowed) which is equal to PCPI (Preconstruction period interest) + PCPI (Post-construction period interest) for different years. For assessment year 2018-19, relevant previous year is 2017-18.
Tax treatment of different cases of self-occupied house property
| S.No. | Self – Occupied Property | Tax Treatment |
| 1. | If such property is used by the owner for the purpose of carrying on his business or profession | No income is taxable under the head “Income from house property” but taxable under the head “Profits and gains of business or profession” |
| 2. | If such property is used throughout the previous year for own residential purposes, it is not let out or put to any other use. Further, no benefit is derived by the owner from such property. | Nothing is taxable. Only interest on borrowed capital is deductible subject to a maximum ceiling of Rs. 30,000 or Rs. 2,00,000 depending upon the case |
| 3. | If such property could not be occupied throughout the previous year because employment, business or profession of the owner is situated at some other place and he has to reside at that other place in a building not owned by him. Further, no other benefit is derived by the owner from that unoccupied property. | Same as point (2) above |
| 4. | When a part of the property (being independent residential unit) is selfoccupied and the other part is let out. | Income from the independent unit (which is self-occupied) will be taxable as selfoccupied property and income from the unit which is let out is taxable as if the unit is let out |
| 5. | When such property is self-occupied for a part of the year and let out for the other part of the year. | Taxable as a let-out property |
| 6. | Where a person has occupied more than one property for his own residential purpose. | Only one property (according to his own choice) is treated as self-occupied and all other properties will be taken as deemed to be let out |
Notes –
1. In the case of “deemed to be let out” properties, the taxable income will be calculated in the same manner as used for let out properties. In case of “deemed to be let out” properties, GAV shall be taken as reasonable expected rent.
2. As far as point (6) mentioned in the above table is concerned, the option should be exercised in such a way that the net income of a taxpayer is reduced to the minimum possible level. Moreover, the option may be changed every year.
Special provision for arrears of rent and unrealised rent received subsequently [Section 25A]
The amount of rent received in arrear (or unrealised rent realised subsequently) after deducting 30% amount shall be charged to tax in the year in which such rent is received (or realized) by the assesse under the head “Income from house property”.
Notes –
• It is taxable even if the house is not owned (or deemed to be owned) by the assessee in the year of recovery.
• In case of recovery of unrealized rent, expenditure on recovery is not taken in to consideration.
• It is to be noted that normally income is taxable under the head “Income from house property” only if the taxpayer is the owner or deemed owner of a house property during the previous year. However, in the case of arrears of rent received or recovery of unrealized rent, property income is taxable even if no house is owned (or deemed to be owned) by the taxpayer.
Note: The summary of Income Tax Notes Part-03 summarise from the content of Book of School of Open Learning. © School of Open Learning.
