TAXATION OF HOUSE PROPERTY

If you own a property which is a building, plot or land attached to the building, then any rental income from such property will be chargeable to tax under the head 'Income from House Property.

What all is included in House Property?

• House property consists of any building or land attached to the building. The land may be in the form of a courtyard or compound forming part of the building.
• House property includes flats, shops, office space, factory sheds & farmhouses.
• It also includes all types of house properties, i.e., residential houses, godowns, cinema building, workshop building, hotel building, etc.

What is not included in House Property?

• An empty plot of land.
• Property that is used for the purposes of carrying business or profession will be chargeable under the head ‘Income from Business or Profession’.

Income from House Property will be taxable if the following conditions get satisfied:

• The house property comprises of the building and/or any land attached to it,
• The taxpayer is the owner of the property, and
• The taxpayer should not use the house property to run any business or profession.

First of all, we need to understand some terminologies which are associated with Income from House Property

Annual value: This is the actual rent received or to be received by the property owner on renting out the house.

Municipal value: This is the value on house property as calculated by the municipal authorities for imposing municipal taxes.

Fair rent value: Fair rental value is the rent which a similar property with similar features in the same locality would fetch.

Standard rent: The standard rent is determined under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the property owner cannot charge a rent higher than the standard fixed rent.

Determination of Annual value (Section 23)

Gross Annual Value – Municipal taxes = Net Annual Value

1.Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]

Where the property is let out for the whole year, then the GAV would be higher of the –

(a) Expected Rent (ER) and

(b) Actual rent received or receivable during the year

Note:

• The Expected Rent (ER) is higher of fair rent (FR) and municipal value (MV), but restricted to standard rent (SR).
• Municipal value is the value determined by the municipal authorities for levying municipal taxes on residential property.
• Fair rent means rent which similar property in the same locality would fetch.
• The standard rent (SR) is fixed by the Rent Control Act.
• Where the property is vacant for part of the year [Section 23(1)(c)]

2. Where let out property is vacant for part of the year, loss due to the vacancy is deductible from the higher of Expected Rent and actual rent received or receivable and the remaining amount will be the GAV of the property.

3.In the case of self-occupied property or unoccupied property [Section 23(2)]

a. If the property is self-occupied for own residence or was unoccupied throughout the previous year, its Annual Value will be Nil, as no benefit is derived by the owner from such property.

The expression “Unoccupied property” refers to a property which cannot be occupied by the owner by the reason of his employment, business or profession at a different place and he/she resides at such other place in a building that does not belong to him/her.

b.The benefit of exemption of two self-occupied house is available only to an individual/HUF.

c. No deduction for municipal taxes is allowed in respect with such property.

4.Where a house property is let-out part of the year and self-occupied for part of the year [Section 23(3)]

a.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.

b.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.

c. However, municipal tax for the whole year is allowed as a deduction, provided it is paid by the owner during the year.

5.In case of deemed to be let-out property [Section 23(4)]

a. Where the assessee owns more than one Residential property for self-occupation, then the income from any two properties, at the option of the assessee, shall be computed under the self-occupied property category and its annual value will be nil.

b.The other self-occupied/unoccupied properties shall be treated as “deemed let out properties”.

c. This option can be changed year after year in a manner beneficial to the assessee.

d. In case of a deemed let-out property, the ER shall be taken as the GAV.

e. The question of considering actual rent received/receivable does not arise. Consequently, no adjustment is necessary on account of the property remaining vacant or unrealized rent.

f.Municipal taxes actually paid by the owner during the year can be claimed as a deduction.

6.In case of House Property Held as stock-in-trade [Section 23(5)]

a.In some cases, property consisting of any building or land held as stock-in-trade, and the whole or any part of the property may not be let out during the whole or any part of the previous year.

b.In such cases, the annual value of such property or part of the property shall be NIL.

c.This benefit would be available for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

7. In case of a House Property, a portion let-out and a portion self-occupied [Section 23(5)]

a. 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.

b.There is no need to treat the whole property as a single unit for the computation of income from house property.

c.Municipal valuation or fair rent or 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.

d.Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion or floor or on a reasonable basis.

Unrealized Rent-

1. Actual rent received or receivable should not include any amount of rent that is not capable of being realized.
2. However, the conditions prescribed in Rule 4 should be satisfied. They are –

• 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.

Municipal Taxes-

1. House property taxes are allowed to be deducted from the GAV subject to the following two conditions:

• It should be borne by the assessee (owner), and
• It should be actually paid during the previous year.

2. If property taxes levied by a local authority for a particular previous year is not paid during that year, no deduction shall be allowed in the computation of income from house property for that year.
3. However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed as a deduction in the computation of income from house property for that year.
4. Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise according to the method of accounting regularly employed by the owner, the deduction in respect of such taxes will be allowed only in the year of actual payment.
5. If the property is situated outside India, House property taxes levied by local authority of the country in which the property is situated is deductible.

Deductions from House Property (Section 24)

There are two deductions from annual value. They are –

a.30% of NAV; and

1. This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
2. The assessee will not be entitled to deduction of 30%, in the following cases, as the annual value itself is nil.

• In case of self-occupied property or
•  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, up to 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.

b.Interest on borrowed capital

Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of house property 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.

Pre-construction interest 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.

Deduction in respect of self-occupied house property where annual value is nil:

Inadmissible Deductions (Section 25)

Interest which is payable outside India, shall not be deducted if-

a.The tax has not been paid or deducted from such interest, and

b.In respect of which there is no person in India who may be treated as agent.

Provisions for Arrears of rent and unrealized rent Received Subsequently (Section 25A)

• Taxable in the year of receipt/realization
• Deduction of 30% of rent received/realized is available
• Taxable even if the assessee is not the owner of the property in the financial year of receipt or realization.

Treatment of Income from Co-owned property (Section 26)

1. Where property is owned by two or more persons, whose shares are definite and ascertainable, then the income from such property cannot be taxed as income of an AOP.
2. The shared income of each co-owner should be determined in accordance with sections 22 to 25 and included in his individual assessment.
3. Where the house property owned by co-owners is self-occupied by each of the co-owners, the annual value of the property of each co-owner will be Nil and each co-owner shall be entitled to a deduction of Rs. 30,000 or Rs. 2,00,000, as the case may be, under section 24(b) on account of interest on borrowed capital. However, aggregate deduction of interest to each co-owner cannot exceed Rs. 30,000 or Rs. 2,00,000, as the case may be.
4. Where the house property owned by co-owners is let out, the income from such property shall be computed as if the property is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their specific share.

Deemed ownership (Section 27)

• Transfer to a spouse – In case of transfer of house property by an individual to his or her spouse otherwise, than for adequate consideration, the transferor is deemed to be the owner of the transferred property. 

Exception– In case of transfer to a spouse in connection with an agreement to live apart, the transferor will not be deemed to be the owner. The transferee will be the owner of the house property.

• Transfer to a minor child – In case of transfer of house property by an individual to his or her minor child otherwise, than for adequate consideration, the transferor would be deemed to be the owner of the house property transferred. 

Exception– In case of transfer to a minor married daughter, the transferor is not deemed to be the owner.

• Holder of an impartible estate – The impartible estate is a property that is not legally divisible. The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate.
• Member of a co-operative society – A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society or company or association, shall be deemed to be the owner of that building or part thereof allotted to him although the co-operative society or company or association is the legal owner of that building.
• A person in possession of the property – A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of nature referred to in section 53A of the Transfer of Property Act shall be deemed the owner of that house property.
• A person having right in a property for a period not less than 12 years – A person who acquires any rights in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that building or part thereof. 

Exception – In case the person acquiring any rights by way of lease from month to month or for a period not exceeding one year, such person will not be deemed to be the owner.

Cases Where House Property income exempt from Tax:

1. Section 10(1) - Income from any farmhouse forming part of agricultural income.
2. Section 10(19A) - Annual value of any palace in the occupation of an ex-ruler.
3. Section 10(20) - Income from house property of a local authority.
4. Section 10(21) - Income from house property of an approved scientific research association.
5. Section 10(23C) - Property income of universities, educational institutions, etc.
6. Section 10(24) - Property income of a registered trade union.
7. Section 11 - Income from house property held for charitable or religious purposes.
8. Section 13A - Property income of any political party.