Income under the head House Property

Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 1 INCOME UNDER THE HEAD HOUSE PROPERTY Sec 22 : Annual Value of Building owned is taxable under HP(except used for Business/Profession) (1) Municipal value XXXXX (2) Fair Rental value XXXXX (3) Standard Rent XXXXX (1 or 2,Higher, cannot exceed 3) (4) Reasonable Value XXXXX (5) Actual Rent Received/Receivable XXXXX (Excluding Unrealised rent ) Rule 4 ( 4 or 5) Higher : GAV XXXXX Less : Municipal taxes (XXXXX) (Paid by Owner during P/Y) NAV XXXXX Less : Deductions 24 (a) : 30% of Positive NAV (XXXXX) Actual expenses have no relevance 24 (b) : Interest Due on borrowed Capital (XXXXX) Interest due during p/y + Interest for Preconstruction/prepurchase period Amount after deduction XXXXX Add : Recovery u/s 25A, 25AA , 25B XXXXX Amount Taxable under HP XXXXX Example: Mr. X owns five houses at Delhi. Compute the gross annual value of each house for the A.Y. 2016-17 from the information given below: House-I House-II House-III House-IV House –V Municipal value 1,20,000 2,40,000 1,10,000 90,000 75,000 Fair rent 1,50,000 2,40,000 1,14,000 84,000 80,000 Standard rent 1,08,000 N.A. 1,44,000 N.A. 78,000 Actual rent received/ 1,80,000 2,10,000 1,20,000 1,08,000 72,000 receivable Ans: Computation of Gross Annual Value for AY 2016-17 House I House II House III House IV House V (a) Fair Rent 1,50,000 2,40,000 1,14,000 84,000 80,000 (b) Municipal Valuation 1,20,000 2,40,000 1,10,000 90,000 75,000 (c) Higher of (a) or (b) 1,50,000 2,40,000 1,14,000 90,000 80,000 (d)Standard Rent 1,08,000 N.A 1,44,000 N.A 78,000 (e) Expected Rent 1,08,000 2,40,000 1,14,000 90,000 78,000 {Lower of (c) or (d)} (f)Rent Received/Receivable 1,80,000 2,10,000 1,20,000 1,08,000 72,000 (g) GAV Higher of (e) or (f) 1,80,000 2,40,000 1,20,000 1,08,000 78,000 Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 2 Deduction u/s 24(b) Type of Property Deduction u/s Purpose of loan 24(b) on Due basis Let out property 100% Construction, Purchase, Repair, Renovation, Reconstruction Residential property Max 30,000 Construction, Purchase, Repair, Renovation, Reconstruction Self occupied Residential property Max 2,00,000 loan is taken on or after 1st April,1999 Self occupied for purchase or construction purchase or construction is completed Within 3 years from end of financial year in which loan is taken Example Loan Taken on 01-05-2006 of Rs. 5,00,000/- @12%p.a. Construction End on 07-09-2012. Pre Construction/Acquisition Period = 01-05-2006 to 31-03-2012 Pre Construction/Acquisition Interest = Rs 3,55,000 ( Rs 5,00,000*71 Months*1%) Pre Construction/Acquisition Interest Deduction for Financial Year 2012-13 to 2016-17 Assuming let out property or deemed to be let out = Rs 71,000 per year ( 3,55,000/5 ) Pre Construction/Acquisition Interest Deduction for Financial Year 2012-13 to 2016-17 Assuming self occupied property = Rs 71,000 per year ( 355000/5 ) (as the construction is completed within 5 years from the end of the financial year in which capital was borrowed) Interest from 01-04-2012 to 31-03-2013 shall be allowed as deduction in 2012-13 as current year’s interest. Interest from 01-04-2012 to 07-09-2012 shall not be considered as Pre Acquisition/Construction Period. Note: – If a property is partly self occupied property and partly let out then also the limit of Rs 2,00,000/30,000 shall be available for SOP portion and there is no limit of deduction for let out portion even if the construction is completed after 3 years. Example : Mr. X commenced construction of a residential house intended exclusively for his residence, on 01.11.2014. He raised a loan from PNB of Rs.5,00,000 at 16 per cent interest for the purpose of construction on 01.11.2014. Finding that there was an over-run in the cost of construction he raised a further loan of `8,00,000 at the same rate of interest on 01.10.2015. The assessee has submitted a certificate confirming the amount of interest. What is the interest allowable under section 24, assuming that the construction was completed by 31.03.2016. Answer :Since the house was for self-occupation only, the annual value of the property would be ‘nil’ under section 23(2).The interest allowable for the current year has to be considered with respect to both the loans. Interest on loan borrowed after 01.04.1999 is eligible for deduction subject to a maximum of Rs.2,00,000 in the case of self occupied property. Prior period interest (upto 31.03.2015) (5,00,000 x 16% x 5 / 12 ) 33,333 This is to be allowed over 5 years beginning with A/Y 16-17. Amount allowable for each year 6,667 Interest eligible for deduction for the assessment year 2016-17 Prior period interest : One-fifth of 33,333 6,667 Interest on first loan : Current year interest : 5,00,000 @ 16% 80,000 Interest on second loan : 8,00,000 @ 16% x 6/12 64,000 Total Deduction 1,50,667 Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 3 Special Points Interest on unpaid interest is not deductible. Interest on a fresh loan raised merely to repay the original loan taken for the above purpose is allowable as a deduction under this section. Brokerage or commission paid for arranging the loan is not deductible. If arrears of interest is paid during the previous year, no deduction is available in respect of arrears as it has already been claimed on due basis in earlier years. Similarly interest paid in advance is not fully deductible in one year, as deduction is on accrual basis. If interest is payable outside India then it must be paid after TDS as per the requirement of Section 25 of Income Tax Act, otherwise the deduction shall not be allowed. If interest is paid on unpaid purchase price to the seller then also deduction can be claimed u/s 24(b). TAX TREATMENT OF VARIOUS PROPERTIES (1) (2) (3) (4) Type of House Fully let out HP partly let out & partly vacant Fully vacant Property Sec23(1)(a) or Case 1 Case 2 Case 3 Sec 23(1)(b) AR >RV AR < RV AR < RV Intention No (Rent (Due to to let out Intention Higher less) vacancy) to let out 23(1)(c) 23(1)(c) (1) RV Entire P/Y Entire P/Y Entire P/Y Entire P/Y Entire P/Y Entire P/Y (2) AR Let out Let out Let out Let out Nil Nil period period period period GAV 1 or 2, Higher AR RV AR NIL RV Less : Paid by Paid by Paid by Paid by Paid by Paid by M. Tax Owner Owner Owner Owner Owner Owner NAV Less: 30% of 30% of 30% of 30% of NAV NIL 30% of 24(a): SD NAV NAV NAV NAV Less: Fully allowed Fully Fully Fully Fully Fully 24 (b) : allowed allowed allowed allowed allowed Interest DUE during P/Y+ Pre contruction/ purchase period Amount after Deduction Add : 25A/25AA/ 25B Income taxable under HP Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 4 (5) Self (6) Not (7) More than one residence (8) Partly let out & Residence occupied due property Partly self to B/P/E residence Sec 23(4) Sec 23(1)(a) or Sec 23(1((b),high Sec 23(2) Sec 23(2)+ Residence Deemed to +Sec23(3) Sec 23(3) let out (1) RV NA NA NA Entire P/y Entire P/Y (2) AR NA NA NA Nil Let out period GAV NA NA NA RV 1 or 2,Higher Less : Paid by Paid by M. Tax NA NA NA Owner Owner NAV NIL NIL Nil Less: NA NA NA 30% of NAV 30% of 24(a): SD NAV Less: 24 (b) : Max 30,000/ Max 30,000/ Max 30,000/ Fully Fully Interest DUE Max 2,00,000 Max 2,00,000 Max 2,00,000 allowed allowed during P/Y+ Precontruction/ purchase period Amount after Deduction Add : 25A/25AA/ 25B Taxable Sec 25A Sec 25AA Sec 25B Recovery of Unrealised Rent Recovery of Unrealised Rent Recovery of Arrears of rent Deduction claimed for Unrealised Unrealised rent reduced from HP let out a to a tenant for any Rent upto A/Y 2001-2002 actual rent on or after A/Y 2002- previous year 2003 Recovery of Such amount in a Recovery of such amount in a P/Y Recovery of arrears of rent not P/Y charged to tax for any P/Y Recovered amount taxable under Recovered amount taxable under Recovered amount taxable under HP in P/Y of receipt HP in previous year of receipt house property in previous year of receipt Whether or not assessee is Whether or not assessee is Whether or not assessee is owner of such property in p/y of owner of such property in p/y of owner of such property in p/y receipt receipt of receipt No deductions allowed from such No deductions allowed from such Deduction of 30% shall be unrealised rent. unrealised rent. allowed from such unrealised Interest on unrealised rent is Interest on unrealised rent is rent. taxable under other source. taxable under other source. Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 5 Sec 25 : Deduction of Interest payable outside India Shall be allowed only if Tax deposited on such Interest income or Deducted at source from such interest income or some person is treated as agent in India of recipient Sec 26 : House Property Owned by Co-owners If the share of each co-owner Is definite & ascertainable Each co-owner shall be taxable for his portion in HP Otherwise HP income taxable in hands of AOP Sec 27 : Deemed Owners Individual transfers House Property to Spouse for inadequate consideration except ,HP transferred under an agreement to live apart HP transferred to minor except minor married daughter . Holder of impartible estate. Member of Co-op society, Company to whom flat is allotted under house building scheme Person allowed to take Possession as per transaction u/s 53A of Transfer of Property Act. A person acquiring House property on lease for 12 years or more Special point : 1.If assessee is dealing in Property dealing business or business of letting out ,even then rental income will be chargeable under House property 2.If letting is subservient & incidental to running of main business than rental income chargeable under P/G/B/P. 3. Treatment of Composite Rent is done as under Where rent of property and rent of services / assets can be Where rent of property and rent of services / separated assets cannot be separated Rent of letting of property Rent of service ,assets Taxable under Other sources or Business Taxable under House Taxable under Other sources property or business Example : Mr. Raman is a co-owner of a house property along with his brother. Municipal value of the Property 1,60,000 Fair Rent 1,50,000 Standard Rent under the Rent Control Act 1,70,000 Rent received 15,000 p.m. The loan for the construction of this property is jointly taken and the interest charged by the bank is `25,000 out of which `21,000 have been paid. Interest on the unpaid interest is `450. To repay this loan, Raman and his brother have taken a fresh loan and interest charged on this loan is `5,000. The Municipal taxes of `5,100 have been paid by tenant. Mr. Raman has 50% share in the house property. Compute income from this property chargeable in hands of Mr. Raman for A.Y. 2016-17. Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 6 Answer : Computation of income from house property of Mr. Raman for A.Y. 2016-17 Gross Annual Value 1,80,000 Working Note: (a) Municipal value of property 1,60,000 (b) Fair rent 1,50,000 (c) Higher of (a) and (b) 1,60,000 (d) Standard rent 1,70,000 (e) Annual Letting Value / Expected Rent [lower of (c) and (d)] 1,60,000 (f) Actual rent [15,000 x 12] 1,80,000 (g) Gross Annual Value [higher of (e) and (f)] 1,80,000 Less: Municipal taxes – paid by the tenant, hence not deductible Nil Net Annual Value (NAV) 1,80,000 Less: Deductions under section 24 (i) 30% of NAV u/s 24(a) 54,000 (ii) Interest on housing loan u/s 24(b) Interest on loan taken from bank 25,000 Interest on fresh loan to repay old loan for this property 5,000 84,000 Income from house property 96,000 50% share taxable in the hands of Mr. Raman 48,000 WN : Interest on housing loan is allowable as a deduction under section 24 on accrual basis. Further, interest on fresh loan taken to repay old loan is also allowable as deduction. However, interest on unpaid interest is not allowable as deduction under section 24. Example : Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the house is self occupied by Mr. X and another unit is rented for `8,000 p.m. The rented unit was vacant for 2 months during the year. The particulars of the house for the previous year 2015-16 are as under: Standard rent 1,62,000 p.a. Municipal valuation 1,90,000 p.a. Fair rent 1,85,000 p.a Municipal tax 15% of municipal valuation Light and water charges paid by the tenant 500 p.m. Interest on borrowed capital 1,500 p.m. Insurance charges paid by Mr. X 3,000 p.a. Repairs 12,000 p.a. Compute income from house property of Mr. X for the A.Y. 2015-17. Answer : Computation of Income from house property for A.Y. 2016-17 (A) Rented unit (50% of total area) (a) Fair rent (`1,85,000 x ½) 92,500 (b) Municipal valuation (`1,90,000 x ½) 95,000 (c) Higher of (a) or (b) 95,000 (d) Standard rent (`1,62,000 x ½) 81,000 (e) Expected rent (lower of (c) or (d) 81,000 (f) Rent received or receivable (`8,000 x 10) 80,000 GAV 80,000 (owing to vacancy the actual rent received is lower than Expected rent the actual rent received is the Gross Annual value Less: Municipal taxes (15% of `95,000) 14,250 Durgesh Vashisth durgeshvashisth@gmail.com +919899812287 Page 7 Net Annual value 65,750 (i) 30% of net annual value u/s 24(a) 19,725 (ii) Interest on borrowed capital (`750 x 12) u/s 24(b) 9,000 Taxable income from let out portion 37,025 (B) Self occupied unit (50% of total area) Net Annual value Nil Less: Deduction under section 24 Interest on borrowed capital (`750 x 12) u/s 24(b) 9,000 Income from House property (9,000) 28,025 WN : (i) It is assumed that both the units are of identical size. Therefore, the rented unit would represent 50% of total area and the self-occupied unit would represent 50% of total area. (ii) No deduction will be allowed separately for light and water charges, insurance charges and repairs. Example: Mr. Ramesh owns a house property which is let out. During the previous year ending 31.03.2016 he receives (i) Arrears of rent of Rs.10,000 and (ii) Unrealised rent of Rs.30,000. You are requested to (a) state, how they should be dealt with as per the provisions of the Act, and (b) compute the income chargeable under the head “Income from house property”. Answer: (a) As per provisions of section 25B, arrears of rent will be charged to tax as income from house property in the previous year in which such rent is received, after deducting a sum equal to 30% of such amount. The taxability shall be there whether Mr. Ramesh remains as the owner of the property in the concerned year or not. In this case, it shall be taxed as income from house property in the year of receipt of such arrear rent. (b) As per the provisions of section 25AA, the unrealised rent when received, it shall be deemed to be the income chargeable under the head “Income from house property” and shall be charged to tax in the year of receipt. In this case also, the taxability shall be there, irrespective of the fact whether Mr. Ramesh is the owner of property or not in the year of receipt. The section does not provide for any deduction thereunder. Computation of income from house property Rs. Arrears of rent 10,000 Less : Deduction @ 30% of Rs.10,000/- u/s 25B 3,000 7,000 Add : Unrealised rent received 30,000 Income from house property 37,000