Income From House Property

Contents

1 Preface
2 The Concept
3 Kind of property
4 Who is liable to pay ?
5 The concept of annual value
6 Determination of annual value of self-occupied property
7 Annual value of one house away from work place
8 Annual value of let out property
9 Other deductions
10 Special note relating to interest
11 Note regarding the deductions
12 If unrealized rent is subsequently, is it taxable ?
13 Can there be loss under the head income from house
property?
14 The treatment of such loss
15 Co-ownership of property

PREFACE

Among the various sources of income that a person can have, income from house
property is one of the important heads of income under the Income Tax Act. In
most cases it is rather easy to compute taxable income from house property. At
times, however, some complicated problems of computation of income are faced
by the taxpayers who do not have legal assistance.

This booklet brought out under Tax Payers Information Series attempts to solve
this problem by explaining the provisions relating to calculation of income from
house property in a non-legalistic and easy-to-understand language.

The booklet has gone through several editions since 1994 when it was first
published by this Directorate. This edition has been updated by Sh. I. Satish
Kumar, an officer working in the Regional Training Institute, Bangalore under the
able guidance of Smt. Manju Madhavan, Commissioner of Income-tax. Latest
provisions as amended by the Finance Act, 2001 have been incorporated in it.

It is my earnest hope that the booklet, as in the past, shall be found useful by the
taxpayers. Any suggestions for its improvement are welcome.

Rajiv Lal
New Delhi
Dated 19th November 2001

RAJIV LAL
Director of Income tax (RSP&PR)

Income from House Property

House Property is regarded as a source of income for Income-tax purposes.
Income from house property is one of the heads of income under the Income tax
Act. Your income from different heads like Salaries, Income from house property,
profits and gains of business or profession, capital gains and other sources are
first determined and then added to get your total income which is subjected to
tax at the rates specified in the Finance Act. The Income tax Act has provided
the manner of computation of income under different heads giving the
permissible deductions and exemptions under each head of income.

The Concept

In ordinary parlance, your income from house property will presuppose that you
have a house from which you are deriving income in the form of rent. The scope
of income from house property for the purpose of the Income tax Act is, however,
much wider. It is quite possible that the house property in question is not giving
you any rent as is the case when it remains vacant throughout the year or you
may be using it yourself for self-occupation. Yet, for the purpose of the Income-
tax Act, you will have income from house property. For what is taxed under this
head is not the actual rent but the inherent capacity of the property to earn
income. This is technically known as the “annual value” of the property.

The kind of property

The property that we have been speaking of should consist of buildings or land
appurtenant to such buildings. Income from letting out of vacant plots of land
when there is no adjoining building will not be taxed under this head (but will be
taxed as income from other sources). The existence of a building is, therefore,
an essential prerequisite. Building will of course, include residential house
(whether let out or self-occupied), office building, factory building, godowns, flats
etc. And the purpose for which the building is used by the tenant is also
immaterial. Thus, income from letting out godowns will be taken as income from
house property. It does not make any difference at all if the property is owned
by a limited company or a firm. However, if the building or part thereof is used
by the owner himself for the purpose of his own business then there will be no
income from such portion of the house property.

Who is liable to pay ?

We have seen that the inherent capacity of a property consisting of any buildings
or lands appurtenant thereto is subjected to tax under the head income from
house property. But in whose hands? The answer is in the hands of the owner of
the property. The assessee must be the owner. In case the assessee is not the
owner, but gets rent from sub-letting a property, the income will not be taxed as
income from house property (but will be considered as income from other
sources). Ownership will also include deemed ownership. As per Sec.27 of the
Income tax Act, the following persons are to be treated as deemed owner of
house property for the purpose of charging to tax income from house property:

1. An individual who has transferred his house property to his spouse

(otherwise than in connection with an agreement to live apart) or to a
minor child (not being a married daughter);
2. The holder of an impartible estate is deemed to be the individual owner of
the properties of the estate;
 3. A member of a Co-operative Society, Company etc., to whom a building or
part thereof has been allotted or leased under a house building scheme;
4. A person who is allowed to take or retain possession of a property in part
performance of a contract as defined in Section 53A of the Transfer of
Property Act; and
5. A person having long-term lease rights in a property under a lease
agreement extending to 12 years or more in the aggregate including the
term for which the lease may be extended.

Thus, when a flat is allotted by a Co-operative Society or a Company to its

members/ shareholders who enjoy the flat, technically the Co-operative
Society/Company may be the owner. However, in such situations the allottees
are deemed to be owners and it is the allottees who will be taxed under this
head. Persons who purchase properties on the basis of Power of Attorney and
under long-term leases (12 years & more) are also deemed to be owners. The
concept of deemed owner is introduced to prevent misuse like transferring
properties in the name of spouse or minor child etc., and for assessment of
income in the hands of beneficial owner.

Ownership must be of the superstructure. It is not necessary that the assessee

should also be the owner of the land. Thus, when someone takes a piece of land
on lease and constructs a building thereon, the income from such building will be
taxed in his hands as income from house property.

To sum up, it can be said that the inherent capacity to earn income of a property
consisting of buildings or lands, appurtenant thereto is charged to tax as income
from this property in the hands of the owner except in respect of the whole or
such part of the property as is used for the purpose of his own business or
profession, the profits of which are chargeable to Income-tax separately.

The concept of Annual Value:

The basis of calculating Income from House property is the “annual value”. This
is the inherent capacity of the property to earn income and it has been
defined as the sum for which the property might reasonably be expected
to let from year to year. It is not necessary, as we have seen earlier, that the
property should actually be let. It is also not necessary that the reasonable
return from property should be equal to the actual rent realized when the
property is, in fact, let out. Where the actual rent received is more than the
reasonable return, it has been specifically provided that the actual rent
will be the annual value. Where, however, the actual rent is less than the
reasonable rent (e.g., in case where the tenancy is affected by fraud, emergency,
close relationship or such other consideration), the latter will be the annual
value. The municipal value of the property, the cost of construction, the standard
rent, if any, under the Rent Control Act, the rent of similar properties in the same
locality are all pointers to the determination of annual value. However if the
property is let and was vacant during any part or whole of the year and due to
such vacancy, the rent received is less than the notional rent, such lesser amount
shall be the Annual value. For example, in case of a house, whose municipal
valuation is Rs.24,000/- and actual rent received is Rs.36,000/- the annual
lettable value will be taken at Rs.36,000. If the actual rent received were to be
Rs.18,000, Rs.24,000/- would be the annual value for the purpose of the Income-
tax Act.
Determination of Annual Value of Self Occupied Property

Having understood the concept of Annual Value, we can now go into the details of
its actual determination. Self-occupied house property does not generate any
rent. Yet notional income from it was liable to tax and causing hardship to tax
payers. Presently, a preferential treatment is given to one self-occupied
house property which has not been actually let out at any time in which
case, the annual value is taken as ‘Nil’. If, one is fortunate enough to own
more than one house property using all of them for self-occupation, he is entitled
to exercise an option in terms of which, the annual value of one house property
as specified by him will be taken at Nil. The annual value of the other self
occupied house property/ies will be determined on notional basis as if it had been
let out.

Annual Value of one house away from work place

Before going into the final stage of calculation of income from house property, let
us consider two more situations. A person may own a house property, in
Bangalore, which he normally uses for his residence. He is transferred to
Chennai, where he does not own any house property and stays in a rental
accommodation. In such a case, the house property in Bangalore cannot be used
for self-occupation and notional income, therefore, would normally have been
chargeable although he derives no benefit from the property. To save the tax
payer from hardship in such situations, it has been specifically provided
that the annual value of such a property would be taken to be nil subject
to the following conditions:

• The assessee must be the owner of only one house property.

• He is not able to occupy the house property because of his employment,
business etc., away from the place where the property is situated.
• The property should not have been actually let or any benefit is derived
therefrom.
• He has to reside at the place of employment in a building not belonging to
him.

Annual Value of let out property

In respect of a let out house property, the rent received is usually taken as the
annual lettable value as we have discussed earlier. When, however, the rent is
not indicative of the actual earning capacity of the house, the notional value will
have to be found out. The standard rent in the case of properties subject to Rent
Control Legislation, the annual lettable value fixed by the Municipalities, rent of
similar property in the locality, the cost of construction of the property are the
facts which will determine such notional annual value. It must, however, be
kept in mind that when the actual rent received or receivable is higher
than the notional annual value as calculated above, the higher figure will
be taken for the purpose of Income-tax.

From the annual value as determined above (referred to as annual lettable value
in the Return of Income) municipal taxes are to be deducted if the following
conditions are fulfilled:
 o The property is let out during the whole or any part of the
previous year
(There is no such deduction in respect of one self-occupied house
property for which ‘nil’ annual value is adopted).
o The Municipal taxes must be borne by the landlord
(If the Municipal taxes or any part thereof are borne by the tenant,
it will not be allowed).
o The Municipal taxes must be paid during the year
(Where the municipal taxes become due but have not been actually
paid, it will not be allowed. Similarly, the year to which the taxes
relate to, is also immaterial).

For the purpose of determining the Annual value, the actual rent shall not include
the rent which cannot be realised by the owner. However, the following
conditions (these conditions are as per existing Rule 4 as on 29.06.2001. The
new rule has not yet been framed) need to be satisfied for this :

(a) The tenancy is bona fide ;

(b) The defaulting tenant has vacated, or steps have been taken to compel him to
vacate the property.

(c) The defaulting tenant is not in occupation of any other property of the
assessee;

(d) The assessee has taken all reasonable steps to institute legal proceedings for
the recovery of the unpaid rent or satisfied the Assessing Officer that legal
proceedings would be useless ; and

(e) The annual value of the property to which the unpaid rent relates has been
included in the assessed income of theprevious year during which that rent was
due and tax has been duly paid on such assessed income.

Other Deductions

From the annual value as determined above, further deductions are allowed. It
has to be borne in mind that the deductions mentioned here (section 24)
are exhaustive and no other deductions are allowed. The deductions
admissible are as under:

1. Repairs & Collection Charges: 30% of the Annual Value. It is a

statutory deduction not dependent on the actual expenditure incurred on
repairs or collection by the owner.
2. Interest: When money is borrowed on interest and the property in
question is either acquired or constructed or repaired or reconstructed
with such borrowed funds, interest payable thereon is deducted from the
annual value. The amount of interest payable for the relevant year should
be calculated and claimed as deduction. It is immaterial whether the
interest has actually been paid during the year or not. However, there
should be a clear link between the borrowal and the construction/purchase
etc., of the property. If money is borrowed for some other purpose,
interest payable thereon cannot be claimed as deduction.
Interest attributable to period prior to construction/acquisition

Money may be borrowed prior to the acquisition or construction of the property.

In such a case, interest paid/payable before the final completion of construction
or acquisition of the property will be aggregated and allowed in five successive
financial years starting with the year in which the acquisition or construction is
completed. This deduction is not allowed if the loan is utilized for repairs,
renewal or reconstruction.

Example: The assessee took a loan of Rs.3,00,000/- in April 1999 from a Bank
for construction of a house on a piece of land which he owns at Meerut. The loan
carried interest @ 15% p.a. The construction is completed in April 2001 and the
house is given on rent from May 2001. Meanwhile he has already paid interest of
Rs.90,000 (over and above the yearly interest) in five equal installments of
Rs.18,000/- each starting from the assessment year 2002-03.

Special Note relating to interest

1. In case the property is let out, the entire amount of interest accrued
during the year is deductible. The borrowals may be for
construction/acquisition or repairs/renewals. In the case of Self-occupied
property, the deduction will be:

(a)either the actual amount accrued or Rs.30,000/- whichever is

less.
(b)when the borrowal is on or after 1.4.99 and construction or
acquisition is before 1.4.2001-deduction is Rs.75,000/-
applicable to A.Y 2000-01.
(c) when borrowal is on or after 1.4.99 and construction or
acquisition is before 1.4.2003-deduction is Rs.1,00,000/-
applicable to A.Y 2001-02.
(d)when borrowal or acquisition is before 1.4.2003- deduction is
Rs.1,50,000/- applicable to A.Y 2002-03 and onwards.
2.
Thus in the case of Self-occupied property, if the borrowal is for repairs,
renewals or reconstruction, the deduction is restricted to Rs.30,000. If the
borrowal is for construction/acquisition, higher deduction as noted above
is available.

3. A fresh loan may be raised exclusively to repay the original loan taken for
purchase/ construction etc., of the property. In such a case also, the
interest on the fresh loan will be allowable.

4. Interest payable on interest will not be allowed.

5. Brokerage or commission paid to arrange a loan for house construction will

not be allowed.

6. When interest is payable outside India, no deduction will be allowed unless

tax is deducted at source or someone in India is treated as agent of the
non-resident.

Note regarding the deductions

 1. In respect of self occupied house property and a property away from work
place, the annual value has been taken as NIL and no other deduction
other than interest to the extent of Rs.30,000/- (Rs.150000/- as the case
may be).

2. The deductions mentioned in the section are exhaustive. Therefore, no

deduction, which is not mentioned here, will be allowed. Thus there is no
provision for allowing deduction in respect of salary paid to a caretaker,
stamp duty and registration charges in respect of lease of the house,
interest on enhanced ground rent etc.

3. When a house is built or acquired with borrowed funds to be repaid with

interest, there are two elements of repayment – repayment of principal
and repayment of interest. It is the interest element alone on which
deduction is allowed (subject to the conditions already discussed) in
computing income under the head “Income from House Property”.
Repayment of principal upto a maximum amount of Rs.20,000/- is eligible
for rebate u/s.88 along with Life Insurance Premium etc., subject to the
conditions mentioned in that section. Taxpayers, therefore, should
invariably give a break-up of the interest and principal when the
repayment consists of both the elements.

If unrealised rent is received subsequently, is it taxable ?

Where any rent cannot be realised, and subsequently if such amount is realized,
such an amount will be deemed to be the income from house property of that
year in which it was received. We have seen earlier that the basic requirement
for assessment of this income is the ownership of the property. However, in the
cases where unrealised rent is subsequently realised, it is not necessary that the
assessee continues to be the owner of the property in the year of receipt also.

Arrears of rent: When the owner of a building receives arrears of rent from such a
property, the same shall be deemed to be the income from house property of the
year of receipt. 30% of the receipt shall be allowed as deduction towards repairs,
collection charges etc., (prior to the A.Y 2002-03, the rate of deduction was
25%). No other deduction will be allowed. As in the case of unrealised rent, the
assessee need not be the owner of the property in the year of receipt.

Can there be loss under the head Income from House Property?

This brings us to the question whether there can be any loss under this head. In
so far as income from a self-occupied property is concerned and in respect of a
property away from workplace, the annual value is taken at nil, no other
deductions are allowed except for interest on borrowed capital upto a maximum
of Rs.30,000. In such cases, there may be loss upto a maximum of Rs.30,000
(or Rs.1,50,000 as the case may be). In respect of other type of house property,
namely a house property that is let out, there are no restrictions on deductions
and therefore, there can be loss under this head :

The treatment of such loss

Once loss is determined in respect of house property, the next question would be
regarding the to be given to such losses. The loss from one house property can
be set off against the income from another house property. The remaining loss, if
any, will be set of against incomes under any other heads like salary. In case the
loss does not get wiped out completely, the balance will be carried forward to the
next assessment year to be set off against the income from house property of
that year. However, such carry forward is restricted to eight assessment years
only.

Examples

1. ‘A’ has a property, which is self-occupied. The net loss from this property
is Rs.15,000. ‘A’ has income from salary of Rs.60,000. The loss can be
set off from salary income (after standard deduction).

2. ‘A’ a salaried employee (salary Rs.85,000/- after standard deduction) has

two properties which are let out. The net loss from one property ‘X’ is
Rs.20,000. The income from the other property ‘Y’ is Rs.14,000. The loss
from property ‘X’ can be set off against income from property ‘Y’. There
will still be a loss of Rs.6,000/- in respect of property ‘X’. This can be set
off against his salary income.

Co-ownership of property

In case of joint ownership of any property, when the share of each co-owner is
definite and ascertainable, it has been provided that each of the owners will be
assessed individually in respect of share of income from the property. In other
words, income from the property will be determined and allocated to each co-
owner according to his share. When each of the co-owners of a property uses it
for his residence, each of them will also get the concessional treatment in respect
of one self-occupied property.

COMPUTATION OF INCOME FROM

LET OUT HOUSE PROPERTY
Income from house property is determined as under:

Gross Annual Value xxxxxxx

Less: Municipal Taxes xxxxxxx

Net Annual Value xxxxxxx

Less: Deductions under Section 24

- Statutory Deduction (30% of NAV) xxxxxxx

- Interest on Borrowed Capital xxxxxxx

Income From House Property Composite rent

In some cases, the owner obtains rent of other assets (like furniture) or he charges
for different services provided in the building (for instance, charges for lift,
security, air conditioning, etc.), apart from obtaining the rent of the building. The
amount so recovered is known as composite rent.
If the owner of a house property gets a composite rent for the property as well as
for services rendered to the tenants, composite rent is to be split up and the sum
which is attributable to the use of property is to be assessed in the form of annual
72
value under section 22. The amount which relates to rendition of the services
(such as electricity supply, provisions of lifts, supply of water, watch and ward
facilities, etc.) is charged to tax under the head ‘Profits and gains of business or
profession’ or under the head ‘Income from other sources’.
If there is letting of machinery, plant and furniture and also letting of the building and
the two lettings form part and parcel of the same transaction or the two
lettings are inseparable, then such income is taxable either as business income or
income from other sources. This happens in the case of letting out of hotel rooms,
theatres, auditoriums, etc. It is commonly understood that the charges per day for
a room in a hotel are not specifically for the room only. In fact, a major portion of
room tariff is for the amenities and services provided in the hotel. Similar is the
case where a cinema house is let out at composite rent charged for the building,
furniture, machines, equipment, staff, power consumption, etc. In all such cases,
the composite rent received by the owner of the property is not to be split up and
nothing is taxable as income from house property. xxxxxxx