HOUSE PROPERTY BASIS of charge [Section 22]: Income is taxable under the head Income from house property if the following three conditions are satisfied: 1. The property should consist of any buildings or lands appurtenant thereto. 2. The assessee should be owner of the property. 3. The property should not be used by the owner for the purpose of business or profession carried on by him, the profits of which are chargeable to income-tax. DEEMED owner [Section 27]: Besides the legal owner, section 27 provides that the following persons are to be treated as deemed owner of house property for the purpose of charging tax on annual value under the head Income from house property : 1. Transfer to spouse or minor child: If the following conditions are satisfied, then the individual who has transferred the property would be deemed as owner of the house property: a. The taxpayer is an individual. b. He or she transfers a house property. c. The property is transferred to his/ her spouse (not being a transfer in connection with an arrangement to live apart) or to his/ her minor child (not being a married daughter). d. The property is transferred without adequate monetary consideration. 2. Holder of impartible estate For example, X is one of the ex-rulers of a former princely state. He has divided all his properties amongst his three sons. However, he could not transfer a building, which is occupied by a temple and which is given, as per family convention, to his eldest son. All the three brothers along with other family members have right to enjoy the benefit of the property. Property is given to the eldest son as it cannot be divided amongst the three brothers as per the family convention. The eldest son is not the beneficial owner of the property. In other words, he holds the property as a trustee on behalf of his younger brothers. For the purpose of section 22, the eldest son, as holder of impartible estate, is deemed as owner of the property. 3. Property held by a member of co-operative society/ Company/ AOP. 4. Person who has acquired a property under a power of attorney transaction: If a person has acquired a property under a power of attorney transaction by satisfying the conditions of section 53A of the Transfer of Property Act, he is deemed as owner of the property, although he may not be the registered owner of the property. Following are the conditions of section 53A of the Transfer of Property Act: a. There is an agreement in writing between the purchaser and the seller. b. The purchaser has paid the consideration or he is ready to pay the consideration (if there is no consideration as in the case of gift, then section 53A of the Transfer of Property Act is not applicable). Dr. Naveen Mittal www.naveenmittal.com Page 1 of 10
c. The purchaser has taken the possession of the property. 5. A person who has acquired a right in a building under section 269UA(f): If a person acquires a right in a building by virtue of a transaction which is referred to in section 269UA(f), then he is deemed as owner of the property. Broadly speaking, section 269UA(f) covers the case of giving a property on lease for a term of not less than 12 years (whether fixed originally or there is a provision for extension of term and the aggregate period is not less than 12 years). The abovenoted provisions of deemed ownership does not cover any right by way of a lease from month to month or for a period not exceeding one year. APPLICABILITY of section 22 in certain typical cases: 1. House property in a foreign country: A resident assessee is taxable under section 22 in respect of annual value of a property situated in a foreign country. A resident but not ordinarily resident or a nonresident is, however, chargeable under section 22 in respect of income of a house property situated abroad, provided income is received in India during the previous year. If tax incidence is attracted under section 22 in respect of a house property situated abroad, annual value will be computed as if property is situated in India. 2. Disputed ownership: If title of ownership of a house property is under dispute in a court of law, the decision about who is owner rests with the Income-tax Department. Thus, mere existence of dispute as to title cannot hold up an assessment even if suit has been filed. Generally, the person who is in receipt of income or the person who enjoys the possession of a house property as owner, though his claim is disputed, is assessable to tax under section 22. 3. Property held as stock-in-trade: As a specific head of charge is provided for income from house property, annual value of house property cannot be brought to tax under any other head of income. It will remain so even if a. the property is held by the assessee as stock-in-trade of a business; or b. the assessee is engaged in the business of letting out of property on rent; or c. the assessee is a company which is incorporated for the purpose of owning house property. Exceptions: Following are the exceptions to the rule that income from ownership of house property is 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 Dr. Naveen Mittal www.naveenmittal.com Page 2 of 10
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. CO-OWNERS [Section 26]: If a house property is owned by two or more persons, then such persons are known as coowners. If respective shares of co-owners are definite and ascertainable, the share of each such person (in the computed income of property) shall be included in his total income. It may be noted that co-owners are not taxable as an association of persons. 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 Dr. Naveen Mittal www.naveenmittal.com Page 3 of 10
COMPUTATION of 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 XX ---- XX higher but subject to a maximum of SR] Step 2: Actual rent received/ receivable after deducting U/R 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 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: Incomes under sections 25A/ 25AA/ 25B XX ---- ---- Income taxable under House Property XXX (XXX) XXX MEANING OF ANNUAL VALUE: As per section 23(1)(a), 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. It is something like notional rent which could have been derived, had the property been let out. In determining the annual value there are four factors which are normally taken into consideration. These are (a) Actual rent received or receivable, (b) Municipal value, (c) Fair rent of the property, and (d) Standard rent. GROSS ANNUAL VALUE [Sec. 23(1)]: Tax under the head Income from house property is not a tax upon rent of a property. It is tax on inherent capacity of a building to yield income. The standard selected as a measure of the income to be taxed is annual income. 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. Dr. Naveen Mittal www.naveenmittal.com Page 4 of 10
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) levied by any local authority in respect of the house property are deductible only if these taxes are borne and actually paid by the owner during the previous year. It doesn t matter whether the taxes belong to the earlier years, current year or coming years. If property is situated in a foreign country, municipal taxes levied by foreign local authority are deductible (if such taxes are paid by the owner). 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. Interest of pre-construction period: Dr. Naveen Mittal www.naveenmittal.com Page 5 of 10
Pre-construction period means the period commencing from the date of borrowing and ending on a. 31 st 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. For the purpose of computing pre-construction period, even if the construction is completed on March 31, 2016, 31 st March prior to date of completions means 31 st March 2015. Current year interest It is charged from the year of completion (YOC) to date of repayment (DOR). IOBC = PCPI + CYI Notes 1. Interest on borrowed capital is calculated by adding pre-construction period interest and current year interest. 2. If capital is borrowed for the purpose of purchasing a plot of land, interest liability is deductible even if construction is financed out of own funds. 3. 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. 4. 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. 5. Income from a self-occupied house property can be negative. Its value always lies between Zero to (-) ` 2,00,000. 6. 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 and ends on 31 st March prior to DOC, OR Actual DOR, Whichever is earlier Step 2: Compute Pre-construction Period Interest Dr. Naveen Mittal www.naveenmittal.com Page 6 of 10
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 CYI It starts from Year of Completion (YOC) and ends on Actual DOR. Step 5: Calculate IOCB which is equal to PCPI + CYI for different years. For assessment year 2016-17, relevant previous year is 2015-16. Interest on borrowed capital in case of LET OUT/ DEEMED TO BE LET OUT property: It is fully deductible (according to the rules given above) without any maximum ceiling. Interest on borrowed Capital in case of SELF-OCCUPIED property: It is deductible (according to the rules given above) subject to a maximum ceiling given below: Case 1: ` 2,00,000 If capital is borrowed on or after April 1, 1999 for acquiring or constructing a property and if such acquisition or construction is completed within 3 years from the end of the financial year in which the capital was borrowed. Further, one more condition to satisfy is that the person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for such acquisition or construction. Case 2: ` 30,000 1. If capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a property. 2. If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of a property. 3. If capital is borrowed on or after April 1, 1999 for acquiring or constructing a property and if such acquisition or construction is not completed within 3 years from the end of the financial year in which the capital was borrowed. Dr. Naveen Mittal www.naveenmittal.com Page 7 of 10
Tax treatment of different CASES of self-occupied house property: S. Self Occupied Property No. 1 If such property is used by the owner for the purpose of carrying on his business or profession 2 [Sec. 23(2)(a)]: If such property is used throughout the previous year for own residential purposes, it is not let out or put to any other use 3 [Sec. 23(2)(b)]: 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 4 When a part of the property (being independent residential unit) is selfoccupied and the other part 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 6 Where a person has occupied more than one property for his own residential purpose Tax Treatment No income is taxable under the head Income from house property but taxable under the head Profits and gains of business or profession Nothing is taxable. Only interest on borrowed capital is deductible subject to a maximum ceiling of ` 30,000 or ` 2,00,000 depending upon the case Same as point (2) above 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 Taxable as a let out property 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. 3. When owner occupies a house in some other capacity: The aforesaid provisions cannot be applied to cases where the owner of the house is not occupying his own house in his capacity as owner for residential purposes. If the assessee lets out his house to his employer-company which, in turn, allots the same to him as rent-free quarter, the assessee is not entitled to the aforesaid benefits, as he occupies the house not as owner but only in his capacity as sub-tenant of the employer-company. Dr. Naveen Mittal www.naveenmittal.com Page 8 of 10
RECOVERY of UNREALIZED RENT which was allowed as deduction in the assessment year 2001-02 (or earlier) [Section 25A]: Where a deduction has been allowed (in the assessment year 2001-02 or earlier years) in respect of unrealized rent and subsequently during any previous year (relevant for the assessment year 2002-03 or subsequent year) the assessee has realized any amount in respect of such rent, the amount so realized will be chargeable to tax under the head Income from house property (without making any deduction under sections 23 and 24). Computation in such a case is done according to the concept given below in the table: Amount recovered Amount of bad debt (i.e., Unrealized rent minus amount of recovery) [1] Deduction allowed by the Assessing Officer [2] Balance [1] [2] Here, balance (if positive) is taxable under section 25A. Notes The amount so recovered is taxable in the previous year in which it is recovered. 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 recovery of unrealized rent, property income is taxable even if no house is owned (or deemed to be owned) by the taxpayer. UNREALIZED RENT of the assessment year 2002-03 (or subsequent year) IS COLLECTED subsequently [Sec. 25AA]: Where the assessee cannot realize rent during the previous year 2001-02 (or in any subsequent year) from a property let out to a tenant and, subsequently, the assessee has realized any amount in respect of such rent, the amount so realized (to the extent it has not been included in annual value earlier), shall be deemed to be income chargeable under the head Income from house property and accordingly charged to income-tax as the income of that previous year in which such rent is realized whether or not the assessee is the owner of that property in that previous year. Notes 1. Method of Calculation: Gross Annual Value (Recomputed with effective unrealized rent) XX Less: Gross Annual Value (Original) XX Unrealized rent not taxed earlier XX 2. This amount of unrealized rent not taxed earlier is to be added in the original income of the previous year in which it recovered. 3. Effective unrealized rent = Unrealized rent (of the previous year) minus amount realized Dr. Naveen Mittal www.naveenmittal.com Page 9 of 10
Mode of taxation of ARREARS OF RENT in the year of receipt [Sec 25B]: Any amount received (not charged to income-tax for any previous year) by way of arrears of rent is chargeable to tax in the year of receipt after deducting a sum equal to 30% of such amount under the head Income from house property even if the assessee is not the owner of that property in the year in which he has received arrears of rent. Litigation expenses etc. are not taken in to consideration. Method of calculation Gross Annual Value (Recomputed with new rent) Less: Gross Annual Value (Original) Arrear of rent XX XX XX MISCELLANEOUS POINTS: 1. If rent actually collected is zero and the entire loss is due to vacancy then the gross annual value is NIL. 2. Valuation of any property (like valuation of municipal value, fair rent etc.) starts from the date on which house is purchased. However, difference between the date on which the house is purchased and the date from which the house is let out is treated as vacancy period. For example, a house is purchased on Sept.1, 2015 and let out from Dec. 1, 2015. In such a case, period between 1/9/15 to 31/11/15 is treated as vacancy period. However, municipal value, standard rent etc. would be calculated from Sept. 1, 2015. 3. If any property is self-occupied for some period, then that period cannot be treated as vacancy period. 4. If the municipal tax paid by the landlord is more than gross annual value, then net annual value can be negative. 5. Whenever the houses are deemed to be let out, expected rent computed in step 1 will become Gross Annual Value. Dr. Naveen Mittal www.naveenmittal.com Page 10 of 10