Income from House Property:
BASIS OF CHARGE/ CONDITIONS FOR CHARGEABILITY:
‘Annual value’ of any house property which is owned by the assessee is taxable under the head ‘Income from House Property’.
House property shall include all types of house properties
[i.e. residential houses, shops, godowns, cinema building, workshop building, hotel buildings etc].
Income from Renting of House Property - Taxable under the head Income from ‘House Property’
Income from Sale of House Property - Taxable under the head ‘Capital Gains’
Property should consist of any Building or/& Land attached to the building
1.Land appurtenant means land connected with the building [Ex: Garden, Garage, Parking]
2.Letting out of vacant land → Taxable under the head Income from Other Sources [as No Building]
3.Subletting of House Property → Taxable under the head Income from Other Sources [as No Ownership]
Assessee must be the owner of the rented House Property
A.Registration of the sale deed → Not necessary. [& thus includes also a beneficial owner]
1.Ownership includes both free-hold & lease-hold rights.
2.Ownership includes deemed ownership (discussed in Section 27 later).
3.Ownership of land on which the building stands is not necessary. [Land may be on lease].
4.Ownership in Previous Year is relevant & not in Assessment Year.
(House Property with Disputed Title of Ownership: It will be the decision of Income-tax Department as to who is the owner till the court gives its decision on such property).
Purpose
1.House Property may be used for any purpose by the owner (other than for his business/profession).
2.If house property is used by the assessee for his own business/profession, annual value of such house property is not taxable under the head ‘Income from house property’.
(Since section 30 does not allow deduction of ‘notional rent” of the property while computing business income under the head Profit and Gains from Business and Profession).
HOUSE PROPERTY HELD AS STOCK IN TRADE
1.If house property constitutes stock-in-trade of a business, rental income from such house property is to be taxed u/h ‘Income from House Property’. [Since specific head has been given for income from house property, it cannot be taxed under any other head].
2.House Property held as stock-in-trade → Annual value = NIL for 2 years from the end of FY in which completion certificate is obtained from competent authority, if such property is not Let out Property during such period.
(Note: Rental Income earned by an assessee engaged in the business of letting out of properties on rent would be taxable as Business Income).
STEPS TO COMPUTE “INCOME FROM HOUSE PROPERTY”
A.Gross Annual Value (GAV) XXX
B.Less: Municipal tax paid by the owner during the Previous Year XXX
C.Net Annual Value (NAV) [A – B] XXX
D.Less: Deduction u/s 24
24(a).Standard deduction (30% of NAV) XXX
24(b).Interest on borrowed Capital XXX
A.DETERMINATION OF GROSS ANNUAL VALUE (Section 23)
1.Expected Rent (ER) = Higher of (a) Market Value or (b) Fair Rent subject to maximum of Standard Rent.
2.Actual Rent Received (ARR) = Rent receivable - Unrealized Rent
(Unrealized Rent → House was let out, but rent could not be recovered from tenant).
3.Gross Annual Value = Higher of ER or ARR
B.MUNICIPAL TAXES
Municipal taxes are to be deducted from Gross Annual Value if:
a.Municipal taxes have been borne by the owner, &
b.They have been actually paid during Previous Year.
Points to be Consider:
Municipal Taxes are allowed as deduction in PY of payment even if they relate to past years.
Municipal Taxes levied by foreign local authority → Deductible if such taxes are paid by the owner.
Refund of Municipal Tax Paid → Not taxable.
If Municipal taxes are borne by tenant, rent received/receivable should not be increased to calculate rent since it is the duty of occupier of HP (i.e. tenant) to pay the municipal taxes.
C.NET ANNUAL VALUE (NAV)
NAV = Gross Annual Value - Municipal Taxes paid & borne by the owner
D.DEDUCTIONS U/S 24
a.Standard Deduction [Sec 24(a)]
Standard deduction = 30% of NAV shall be allowed from NAV.
This is a flat deduction & is allowed irrespective of the actual expenditure incurred.
No other expenses shall be allowed as deduction while computing house property income.
Self Occupied Property (SOP) → Standard Deduction = Nil (as NAV itself is Nil).
b.Interest on Borrowed Capital [Sec 24(b)]
1.Current year Interest
Deduction:Interest = Amount of Loan × ROI p.a (Without any limit)
From When:Interest relating to the PY of completion of construction can be fully Claimed in that PY (irrespective of the date of completion)
Purpose:Loan can be taken for Acquisition, construction, repair, renovation,
reconstruction of HP.
Accrual:Deduction u/s 24(b)for interest is available on accrual basis. Thus
Interest accrued but not paid during PY can also be claimed as deduction.
2.Pre-construction period Interest
Deduction:Pre-commencement Interest is allowed as deduction in 5 successive PY starting from PY of completion of construction. [1/5th of Total Interest]
Meaning:Pre-construction Period means period during which loan was taken but the construction of HP was/could not be started.
Pre-Construction Period:
Start: From Date of Borrowing &
End: (a) 31st March immediately prior to date of completion of construction
(b) Date of payment of Loan (Whichever is earlier).
Note: Interest will be aggregated from the date of borrowing till the end of the PY prior to the PY in which the house is completed and not till the date of completion of construction.
Computation of Prior Period Interest
Step 1: Identify the Date of Borrowing of Loan.
Step 2: Identify the Date of Completion/Acquisition.
Step 3: Identify Last Date of FY immediately preceding the date of Completion/ Acquisition.
Step 4: Prior Period = Period calculated from Step 1 to Step 3
Step 5: Prior Period Interest = Prior Period as per Step 4 × Rate of Interest × Amount of Loan.
Step 6: Allowable Prior Period Interest = Prior period interest as per step 5/5years.
Points to be considered:
a.Loan may be taken for purchasing the land even if construction is done out of the own funds.
b.Interest on unpaid interest is not deductible.
c.Interest on fresh loan taken to repay original loan is allowed as a deduction.
d.Amount paid as brokerage/commission for arrangement of loan → NOT Allowed as deduction.
e.If loan is taken from outside India, Interest is deductible if tax has been deducted at source.
f.Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with interest due, the seller becomes the lender in relation to unpaid purchase price & buyer becomes the borrower. In such case, unpaid purchase price can be treated as capital borrowed for acquiring property & interest paid can be allowed as deduction.
LIMIT ON DEDUCTIONS OF INTEREST FOR SELF OCCUPIED PROPERTIES
Loan is taken for Maximum Interest Allowed
Repair or Renovation of House property on/after 1.4.1999 Actual Interest payable
(Maximum of Rs. 30,000)
Acquisition or Construction of House Property on/after
1.4.1999 & such acquisition or construction is
completed within 5 years from the end of the PY in
which capital was borrowed. Actual interest payable
(Maximum of Rs. 2,00,000)
(Note: No such limit is applicable in case of Let-out property or Deemed Let out property).