Income From House Property

BALU.... (CCI STUDENT....) (44619 Points)

25 November 2009  

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:

    • 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).
    • 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).
    • 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.

    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.

  2. 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.

  3. Interest payable on interest will not be allowed.

  4. Brokerage or commission paid to arrange a loan for house construction will not be allowed.

  5. 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.

  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.