Taxation of rental income from property

Income from House Property

What is ‘House Property?’

According to the Income tax Act, the income received as rent from the building or buildings or building with appurtenant land is taxed under the under the head, ‘Income from House Property.’ Thus, there should exist a ‘building’ or ‘buildings with lands appurtenant thereto’. It means that there should be a superstructure which is capable of occupation. Where the property comprises a mere vacant land or site, the income there from will not be assessed under the head ‘Income from house property’ but will be assessed as income from ‘other sources’.

In case the building or such a superstructure is occupied by the assessee for carrying out business activities, the income from that property is not taxable.

Such taxation of income is not confined only to residential properties but it extends to all buildings irrespective of whether they are used as dwelling houses/flats, or for other purposes.

Is the ownership of the house necessary for charging income from house property?

The primary condition to be satisfied is that the property should be ‘owned’ by the assessee. The ‘Owner’ must be that person who can exercise the rights of ownership, not on behalf of the owner but in his own right.

This does not mean that the person should be the absolute owner of the house property or the house property must be registered in his/her name but the person must be the beneficial owner of the house property meaning thereby the person must be the one who is entitled to receive the income from the house property in his own right. This would include cases involving not only the absolute ownership of the property but also cases where the assessee is legally in a position to receive the income from the house property concerned and enjoy the said income or the property as he likes. Thus the cases involving lessees, power of attorney holders, co-owners and owners of flats in Co-Operative Societies.

FAQs on of house property

  • Question: I have transferred my house property to my spouse through a gift. We are living together and not separated. In whose hands the income from the house property will be taxed?
    Answer: As per section 27(i) of the I T Act, you shall be the owner of the house property and hence the income shall be taxed in your hands.
  • Question: I have transferred my house property to my spouse as per the terms of the agreement of living separately from each other. In whose hands the income from the house property will be taxed?
    Answer: As per section 27(i) of the I T Act, your spouse shall be the owner of the house property and hence the income shall be taxed in her/his hands, since the property stands transferred in connection with an agreement to live apart.
  • Question: I have transferred my house property to my minor child who is not married. In whose hands the income from the house property will be taxed?
    Answer: As per section 27(i) of the I T Act, you shall be the owner of the house property and hence the income shall be taxed in your hands.
  • Question:What is meant by the annual value of the property?
    Answer: The computation of income from house property is based on the ‘annual value’ of the property. As a general rule, this is a notional figure and may have no relation to the actual income earned from the property. Even if no income is earned from the property, it will still have an ‘annual value’. The computation of annual value of the house property shall be as per the provisions of section 23. Further, what is taxed is annual income that is expected to be received from the property and not the value of the property.
  • Question: I am not the owner of the land on which I have constructed the house. But as per municipal records, the house is in my name. Is the income taxable in my hands?
    Answer: You need not be the absolute owner of the house property. It will suffice if you are the beneficial owner and are entitled to receive the income from such house property, and then the income is liable to be taxed in your hands as income from house property.

What is the position in respect of the co-ownership of the house property?

In case the house property is owned by more than two owners, the income from house property shall be divided amongst the co-owners as per their share of the ownership and all applicable deductions shall apply accordingly to each of the co-owners. This is as per section 26 of the Income tax Act.

I have borrowed the housing loan from a bank or an institution situated out of India and the payments of interest are also done outside India. Am I eligible for deduction of interest from the income form House Property?

No. As per section 25 of the Income Tax Act, the interest on the loans or capital borrowed must be paid in India.

What is unrealized rent and what is its taxability?

When the property was let out but the assessee could not recover the rent from the tenant even after making full efforts for recovery of the rent from the tenant, the unrealized rent shall be deductible from the annual value of the house property. Such a deduction is admissible from annual value subject to certain conditions as per Rule 4 of the Income Tax Rules and these are as follows:

  • 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

The unrealized rent which has been deducted from the annual value shall be taxed in the year in which it has been received and the standard deduction shall be admissible against such an unrealized rent. This is as per section 23 and section 25A of the Income tax Act, 1961.

What is arrears of rent and what is it’s taxability?
The taxability treatment of arrears of rent is similar to the unrealized rent received.

Self occupied property (SOP)

Section 23(2) of the Act defines the Self Occupied Property as the one which is occupied by the owner for his own residence and also the one which the owner cannot occupy even if he intends to, because of situation of his workplace somewhere else other than the place where the house property is situated.

If the assessee owner has occupied the property for a part of the year and let for another part of the year, then the property is a let out property (LOP) and not a Self Occupied Property.

Even if the assessee has derived any benefit from the property, other than letting it out, then also the property ceases to be a Self Occupied Property (SOP).

If the assessee owner has more than one property which is self occupied or not let during the year, then he has the option of choosing any property as a Self Occupied Property (SOP) according to his convenience. The property other than the one opted as a Self Occupied Property will be treated as Deemed Let out Property (DLOP).

Let out Property (LoP)

This means the property which is actually let for occupation and the assessee is receiving the rent or any consideration against such letting out of the property. Such letting out may be for a full year or year to year or may be for a part of the year. The annual value of the property shall be the amount of rent received either for a full year or a part of the year as the case may be but it shall not be less than the reasonable rent or the municipal valuation. Even if the property is let out for one month or less in a year, the same shall be considered as a let out property. Unlike the Self Occupied Property (SOP) which the assessee can have only ONE, the assessee can have any number of Let out Properties for the purposes of computation of income from house property.

Deemed Let out Property:

When the property is not actually let out and the assessee has exhausted the option of considering the property as a self occupied property, the house property is considered as a deemed let out property (DLoP). For example, A has three properties X, Y and Z. The property X is let out, Y is self occupied and Z is not occupied nor let out.  In this case, the property Z will be considered as deemed let out property (DLoP). The annual value of such a property will be greater of the values of municipal value and the reasonable expected rent.

Computation of Income from House Property

The steps for computation of net income from house property are:

 Compute Gross Annual Value (GAV)

Compute Net Annual Value (NAV)

Less 30% standard deductions at 30% of NAV

Less interest on borrowings

Net taxable income from House Property

Gross Annual Value (GAV)

Based on the status of the occupation of the house property, the GAV computation differs. This is as follows:

Sr. No. Status of House Property GAV

Conditions

1 Self Occupied Property (SOP) Nil This shall not be applicable if the part of the house is actually let during part of the year or any benefit is derived by the owner from such a property
2 Let Out Property (LOP) It shall be the greater of the municipal valuation or reasonable rent or the actual rent received by the owner (less unrealized rent) The unrealized rent is eligible to be deducted only from the actual rent received or receivable subject to satisfaction of conditions as per Rule 4.
3 Deemed let out property It shall be the greater value between reasonable rent and municipal valuation Such a valuation will apply only to the cases where a property is not let for an entire year.

Net Annual Value (NAV)

The Net Annual Value is computed after deducting the municipal taxes from the Gross Annual Value (GAV). Such municipal taxes must be paid. It is not necessary that the municipal taxes should only belong to that particular previous year but those municipal taxes which are actually paid during that previous year are deductible. The municipal taxes may be belonging to any of the previous year. The service taxes levied by the local authority are deemed to be included in such municipal taxes and shall accordingly be deductible from the GAV.

The society maintenance charges paid for by the owner of the house property in respect of such house property are also deductible from annual value though they are not expressly provided for in the Income Tax Act. This was subjected to litigation and the Courts have held the issue in favor of the deduction of society maintenance charges.

Standard Deduction

As per section 24(a) of the Income Tax Act, 1961, deduction at the rate of 30% of NAV is admissible from Net Annual Value (NAV). This deduction is available universally in respect of all kinds of computation of income from House Property.

Interest on borrowings:

The deduction on account of interest is admissible against the NAV of the house property. Such a deduction is admissible against construction, acquisition, reconstruction or replacement, renewal or repair of the house property. Such a deduction is admissible for interest paid or payable after construction as well as interest paid or payable for a pre-construction period.

The amount of deduction admissible varies for different house properties as below:

Sr. No. Status of House Property Amount of deductible interest Conditions
1 Self Occupied Property (SOP) Amount of interest paid or payable or Rs. 200,000/- whichever is lower. The house must be constructed or acquired within a period of five years from the end of F.Y. in which such capital/loan was borrowed.
2 Let Out Property (LOP) Amount of interest paid or payable by the owner of the house property The assessee must produce the certificate of interest paid or payable
3 Deemed let out property Amount of interest paid or payable by the owner of the house property The assessee must produce the certificate of interest paid or payable

Pre-construction period interest:

In case, the assessee has acquired loan or capital and has paid interest on such a capital before the acquisition or the construction of such a house was completed, the amount of interest paid or payable by the assessee in such a period is deductible in equal installments for a period of five years after the year in which such a construction or acquisition is complete. This is in addition to the deduction which the assessee is eligible in respect of the deduction of interest payments post-construction period.

Treatment of losses from house property

Where for any assessment year the net result of computation under the head ‘Income from house property’ is a loss to the assessee, the assessee can set it off against positive income under any other head, [viz. salaries, profits and gains of business or profession, capital gains (long-term or short-term), and income from other sources].

However, if such loss cannot be or is not wholly set-off against income from any other head of income, so much of the loss as has not been so set-off or where he has no income under any other head, the whole loss shall be carried forward to the following assessment year and set-off against the income from house property assessable for that assessment year; and if not fully set off then the remaining loss is carried forward to subsequent assessment years but for not more than eight assessment years.

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