INCOME FROM HOUSE PROPERTY
CHARGEABILITY [SEC. 22]
Annual value of a property shall be taxable under the head 'Income from house property' subject to satisfaction of the following conditions: 1. There must be a property consisting of any building or land appurtenant (attached) thereto. 2. Assessee should be the owner of that property (as per Sec 27). 3. The property should not be used by the owner for the purpose of business or profession (which is charged to tax) carried on by him.
1. Building or land appurtenant thereto: • The term 'house property' means: - Any land surrounded by wall having roof or not; and - Any land appurtenant to a building. Also building includes: - An enclosure of bricks, stone work or even mud walls - residential as well as commercial houses. • Vacant land is not a house property. Hence, income from letting of vacant land is not taxable under this head but taxed as business income or as income from other sources. Also an incomplete, a ruined or demolished house cannot be termed as house property.
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2. Owner: • Owner includes legal owner, beneficial owner and deemed owner. • Fictional owner or Deemed owner: U/s Sec 27, in the following cases, a person shall be treated as deemed owner of the property and liable to tax (in such case legal owner or beneficial owner shall not be further liable to tax):
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? Transfer to spouse or minor child [Sec. 27(i)]: When an individual transfers a house property to(a) his or her spouse (not being a transfer in connection with an agreement to live apart); or (b) a minor child (not being a married daughter) -without adequate consideration, then transferor shall be treated as deemed owner of such property. It should be noted that in case of transfer to spouse, marriage should subsist on both the days i.e., on the day of transfer as well as on the day when income arises. ? The holder of an impartible estate [Sec. 27(ii)] is deemed to be the owner of all the properties comprised in the estate. ? Property held by a member of a company, co-operative society or other association of persons to whom a building or a part thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed owner of that building or a part thereof. ? Any person who is allowed to retain possession of any building as per section 53A of the transfer of property act 1882 is the deemed owner. Section 53A comes into operation only if the following conditions are satisfied: (a) There should be a contract for consideration, in the writing, duly signed, in relation to transfer of immovable property. (b) The transferee should have taken the possession of the property. (c) The transferee has performed or is willing to perform his part of the contract. The transferee shall be considered to be the owner, even if the instrument of transfer is not registered. ? Lessee of a building: A person who acquires any right u/s 269UA(f) in or with respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed as the owner of that building (or part thereof). Notes (a) Lease period should not be less than 12 years including extension period. (b) Above provision does not include any right by way of lease from month to month or for a period not exceeding 1 year. 3. Property is used for the purpose of business or profession carried on by the assessee: When a person carries on business or profession in his own house property, annual value thereof is not taxable u/s 22 provided income of such business is chargeable to tax. Incidences thereof are as follows: (a) Letting out to employee : If an assessee lets out the property to his employee, where such letting out supports smooth flow of his business, then such letting out shall be deemed to be incidental to business and such rent shall be chargeable under the head "Profits & gains of business or profession". 2
(b) Letting out to Government Agencies: Where an assessee let out his property to any Government agency for locating branch of a nationalized bank, police station, post office, excise office, railway staff quarters, etc. for the purpose of running the business of assessee more efficiently, such letting out shall be deemed to be incidental to business and such rent shall be chargeable under the head "Profits & gains of business or profession". (c) Letting out to ancillary units: Where an assessee lets out its property to ancillary units, which manufactures components required by the assessee. Income from such letting out shall be taxable under the head "Profits & gains of business or profession". (d) Partner's property used by the firm: The business carried on by the firm should be regarded as carried on by all the partners. Thus, annual letting value of a property belonging to the assessee which is in occupation of the firm in which assessee is the partner, is not includible in income of the assessee-partner u/s 22 However, it must be noted that if an assessee carries on business or profession in his own house property or lets out the property for smooth running of his business or profession, income from such property is taxable under the head "Profits & gains of business or profession". BUT if an assessee is running a business with main object of buying & developing house properties either to let out or to sell such properties, then annual value of such house properties shall be taxable under the head 'Income from house property'. However, profit on sale of house shall be taxable under the head Profits & gains of business or profession. Scope of Chargeability ? Resident: Rent earned by a Resident for property let-out in or outside India are both taxable (whether received in India or not). ? Non-resident or a Not Ordinarily Resident: • In the case of a non-resident or a not ordinarily resident, rent received in India, whether for properties in India or outside India, is taxable in India. • The rent through or from a house property in India (whether received in India or not), is taxable in their hands in India, since it is deemed to accrue or arise in India. Exempted properties: Income from the following house properties are exempted from tax: i. ii. Any one palace or part thereof of an ex-ruler provided the same is not let out.
House property of a local authority. 3
iii. iv. v. vi. vii. viii. ix. x. xi.
House property of an approved scientific research association. House property of an educational institution. House property of a hospital. House property of a person being resident of Ladakh. House property of a political party. House property of a trade union. A farm house. House property held for charitable purpose. House property used for own business or profession.
LET-OUT HOUSE PROPERTY: The format given hereunder is used to determine the taxable income in case of let out house properties: Particulars Amount Amount Gross Annual Value (GAV) xxxx Less: Property taxes paid to local authority xxxx Net Annual Value (NAV) Less: Deductions u/s 24 a) 30 % of the net annual value xxxx b) Interest on capital borrowed (loans) paid or payable xxxx xxxx Income from house property xxxxx I. DETERMINATION OF GROSS ANNUAL VALUE
As per Sec 23 Gross Annual Value is calculated as: (a) Annual letting value (A.L.V) / Reasonable letting value (R.L.V) of the property for the whole year is higher of fair rent and municipal value, subject to standard rent under the Rent control Act (if applicable). (b) Actual rent received / receivable for the period and portion actually let out, less any unrealised rent, if any. (c) Amount at (b) above, plus any rent for the period the property was vacant. If (c) < (a), (a) is G.A.V. If (c) >= (a), (b) is G.A.V. Presentation of the same shall be as follows: Particulars Municipal Value....(i) Fair Rent..............(ii) Higher of (i) and (ii)........ (A)
Amt
Amt
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Standard Rent............... (B) Annual / Reasonable Letting Value = Lower of (A)&(B)............ (C) Actual Rent Received – Unrealised Rent of Current Year.......... (D) Gross Annual Value {Higher of C & D}
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Here, Municipal Valuation – For collecting municipal taxes, local authorities make a periodical survey of all buildings in their jurisdiction. Such valuation may be taken as strong evidence representing the earning capacity of a building. It cannot, however, be considered to be a conclusive evidence. Fair Rent – Fair Rent of the property can be determined on the basis of a rent fetched by a similar property in the same or similar locality. Though two properties cannot be alike in every respect, the evidence afforded by transactions of other parties in the matter of other properties in the neighbourhood, more or less comparable with the property in question, is relevant in arriving at reasonable expected rent. Standard Rent – Standard rent is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. The Supreme Court has observed in a few cases that a landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent under the Rent Control Act. This rule is also applicable to the owner himself. In other words, if a property is covered under the Rent Control Act, its reasonable expected rent cannot exceed the standard rent (fixed or determinable) under the Rent Control Act. Actual Rent – Rent received or receivable is calculated as follows – Rent of the previous year (or that part of the previous year) for which the property is available for letting out Less: Unrealised Rent (if a few conditions are satisfied) Rent received / receivable before deducting loss due to vacancy
xxxx xxxx xxxx
While calculating rent, the following are points to be kept in mind – a) Loss due to vacancy shall not be deducted from the computation above. b) Sometimes a tenant pays a composite rent of property as well as certain benefits provided by the landlord. To determine rent received / receivable, composite rent must be disintegrated and it is only that part of it attributable to the let out of property which would form the basis of the aforesaid calculation. c) Occupier’s (i.e. tenant’s) share of municipal tax realised from the tenant cannot be added to actual rent received / receivable, as it is the occupier’s duty to pay municipal tax. d) 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. e) A non-refundable deposit will be included in rent received or receivable on pro rata basis. f) A refundable deposit cannot be included in rent received or receivable. To find out whether notional interest on refundable deposit can form part of rent received or the receivable, one has to examine the purpose for
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which refundable deposit/security is taken from a tenant. Such deposit / security is taken generally for any of the following purposes – • To ensure that tenant will vacate the property after the expiry of lease period. • To ensure proper payment of rent on due dates. • To check that the tenant will not misuse the property. • To check that the tenant will not damage the property, or will not make any unauthorised alteration. • To compensate short payment or non-payment of rent (in such case it is paid in lieu of rent) Only in the last case, notional interest on refundable deposit / security may form part of rent received or receivable. g) Advance rent cannot be rent received / receivable of the year of receipt. h) Commission paid by the owner of a property to a broker for rental income is not deductible. Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual Rent Receivable, provided the following 4 conditions are satisfied: 1) The tenancy is bona fide. 2) The defaulting tenant has vacated the property 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 proceeding for the recovery of the unpaid rent or has satisfied the Assessing Officer that legal proceedings would be worthless. If subsequently the rent gets recovered and to the extent it has not been included in annual value earlier, it is brought to tax in the year of recovery, without allowing any expenses of recovery in the head-“Income from house property”, even if the assessee is no longer the owner of such a house property in such a year of subsequent recovery. These provisions are applicable from Previous year 2001-02, Assessment year 2002-03 and onwards u/s 25AA. If such unrealised rent relates to Previous year 2000-01, Assessment year 2001-02 or any earlier year, which was allowed as a deduction u/s 24(1)(x) prevailing, its subsequent recovery is also taxable as above, but u/s 25A.
II.
Deduction is permissible in respect of property taxes subject to the following two conditions: i. It should be borne by the assessee; and ii. It should be actually paid during the previous year. If Property taxes levied by a local authority for a particular previous year are not paid during the year, no deduction shall be allowed in the computation of house property income for that year. However, if in a later year the entire arrears are paid, then actual amount paid during such later year shall be fully allowed as deduction in the computation of house property income for that later year. In respect of the above the following points should be noted: 7
MUNICIPAL TAXES
-If the property is situated in a foreign country, municipal taxes levied by foreign local authority are deductible (if such taxes are paid by the owner). -Municipal tax exceeds GAV (Negative NAV): In case municipal tax paid includes tax paid for several past years and the total amount of tax so paid by the owner exceeds GAV, then Net Annual Value (NAV) can be negative. -Refund of municipal tax: Refund of Municipal tax paid for a property is not taxable u/s 22. -Advance Municipal Tax paid by assessee: Payment of municipal tax in advance (Liability in respect of which has not yet incurred) shall not be allowed as deduction in the year of payment.
III.
NET ANNUAL VALUE
It is the Gross Annual Value (-) Municipal taxes paid.
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IV.
The following two deductions are available under section 24 – a) Standard Deduction b) Interest on Borrowed Capital The list of allowance of section 24 is exhaustive. In other words, no deduction can be claimed in respect of that expenditure which is not specified in section 24. For instance, 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. a) Standard Deduction 30% of the net annual value is allowed as standard deduction in respect of all expenditures (other than interest on borrowed capital) irrespective of the actual expenditure incurred. This deduction is allowed even if no expenditure is incurred by the assessee. Assessee can avail this deduction even if tenant undertakes to do the repairs. b) Interest on Borrowed Capital 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. The following points are also to be kept in mind:• 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.
DEDUCTIONS UNDER SEC. 24
• Interest on 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.
• Deduction is available even if neither the principal nor the interest is a charge on property. • Interest on unpaid interest is not deductible. • No deduction is allowed for any brokerage or commission for arranging the loan.
• Interest on a fresh loan, taken to repay the original loan raised for the
aforesaid purpose is allowable as deduction. This rule is applicable even if the first loan was interest-free loan.
• Any interest chargeable under the Act, in the hands of recipient and
payable out of India, on which tax has not been paid or deducted at source, and in respect of which there is no person who may be treated as an agent, is not deductible, by virtue of sec. 25, in computing income chargeable under the head “Income from house property”.
• Interest on borrowed capital is deductible fully without any maximum
ceiling (in the case of a let out property only).
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• Transaction of allotment of a property to an assessee on instalment basis
does give rise to relationship of borrower and lender between the assessee and the estate officer and as such interest paid by the assessee on instalments constitutes interest on borrowed capital.
Interest of Pre-Construction Period – Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a prior period to the previous year in which such property has been acquired or constructed, to the extent is not allowed as a deduction under any other provision of the Act, will be deducted in five equal annual instalments, commencing from the previous year in which the house is acquired or constructed. For this purpose “pre-construction period” means the period commencing from the date of borrowing and ending on (a) March 31 immediately prior to the date of completion of construction / date of acquisition or (b) date of repayment of loan, whichever is earlier.
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DEEMED TO BE LET-OUT HOUSE PROPERTY
Where the assessee occupies more than one house property as self-occupied or has more than one unoccupied property, then for any one of them, benefit u/s 23(2) can be claimed (at the choice of the assessee) and remaining property or properties shall be treated as deemed to be let out. This option can be changed year after year in a manner beneficial to the assessee. Generally, the house with the higher gross annual value shall be treated as self occupied so that the house with lesser gross annual value shall be liable to tax as deemed let out property. However, one more aspect that has to be considered before exercising this option is the amount of interest on loan borrowed in respect of each property. While interest can be claimed without any limit as deduction in the case of a deemed let out property, deduction in respect of interest gets restricted in the case self occupied or unoccupied property is subject to a maximum amount of Rs. 30,000 or Rs. 1,50,000, as the case may be. Treatment: Income from such house property shall be computed in the same way as that of the let out properties. However, the following points should be noted: a) Gross Annual Value (GAV) of deemed to be let out property will be the Reasonable Expected Rent / Annual Letting Value of the property as Actual rent will always be Zero. b) Municipal taxes actually paid can be claimed as deduction.
c)
Both the deductions permissible u/s 24 can be claimed as available in the case of a let out property. The ceiling prescribed for one selfoccupied property in respect of interest on loan borrowed does not apply to a deemed let out property.
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SELF-OCCUPIED HOUSE PROPERTY
As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part thereof: -Is in the occupation of the owner for the purposes of his own residence; -Is not actually let out during the whole or any part of the previous year; -and no other benefit there from is derived by the owner. Treatment : The annual value of such house or part of the house shall be taken to be NIL. If an assessee occupies more than one house property as self-occupied, he is allowed to treat only one house as self-occupied at his option. The remaining self-occupied house properties shall be treated as 'Deemed to be let out'. However, the following points are to be noted: • Benefit u/s 23(2)(a) cannot be claimed by a company and firm. • When the assessee occupies his house but not in the capacity of owner then benefit under this section cannot be claimed. Computation of taxable income of self-occupied property Net annual value of self-occupied property shall be taken as NIL. As a consequence, deduction u/s 24(a) (standard deduction) shall also be NIL. Interest on loan u/s 24(b) shall be allowed, subject to certain ceiling. Thus, Annual value as per sec. 23(2) Nil Less: Deduction u/s 24(b) – Interest on loan borrowed paid or payable xxxx (As per table below) Loss from house property xxxx
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Interest on loan u/s 24(b) (Self Occupied Properties) Interest on loan taken for construction, acquisition, repair, renovation or extension is allowed according to the following table: Conditions Maximum Interest allowed in aggregate Where loan is taken on or after 1/4/99 and following Rs.150000 conditions are satisfied • Loan is utilized for construction or acquisition of house property on or after 1-4-1999; • Such construction or acquisition is completed within 3 years from the end of the financial year in which the capital was borrowed; and • The lender certifies that such interest is payable in respect of the loan used for the acquisition or construction of the house or as refinance of the earlier loan outstanding (principal amount) taken for the acquisition or construction of the house. In any other case Rs.30000 In any case, deduction in respect of interest on loan on self-occupied property cannot exceed Rs.150000 in a year. Calculation and deduction of interest for the period of pre and post construction, acquisition, etc. is same as in case of let out house property.
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CO-OWNERSHIP [SEC. 26] a) In case of joint ownership of any property, when the share of each coowner is definite and ascertainable, then the income from such property cannot be taxed as income of an association of persons.
b) The share income of each such co-owner should be determined and
included in his individual assessment. Each co-owner is entitled for the concessional computation relating to one self-occupied property with reference to the share of property under his occupation.
c) When property is owned by two or more persons whose shares are definite
and ascertainable the share of each such person in the income from property is includible in his respective total income u/s 22 even if the coowners are also receiving charges from the lessees for air conditioning facility which is assessable as income from other sources u/s 56. Thus property held by co-owners is assessable individually in respect of lease rent and not as an association of persons.
TAXATION OF ARREARS OF RENT IN THE YEAR OF RECEIPT [SEC. 25B]
Where the assessee is the owner of the house property which has been let out to a tenant and has received any amount by way of arrears of rent (like enhancement in rent with retrospective effect) from such property, not charged to income tax in any previous year. The amount so received to the extent such amount together with the Actual rent receivable (ARR) of the previous year to which it relates, exceeds GAV of that year, shall be taxable under the head “Income from house property” in the year of receipt. From such amount a further deduction of 30% shall be allowed as standard deduction. In short, taxable amount shall be positive value of 70% * [{Recovery of Arrear Rent + (Actual Rent Receivable - Unrealised Rent) # } - Gross Annual Value # ] # For the previous year for which such arrears rent pertain. Note: Such receipt shall be chargeable as income from house property although the assessee is not the owner of such property in the year of receipt.
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EXAMPLE OF COMPUTATION OF INCOME UNDER HOUSE PROPERTY
Mr. Keerthi has completed construction of house property on 31st January 2001 on temple land. The house property is partly self-occupied and partly let-out. Out of the total floor area, 60% is let-out for residential purposes on monthly rent of Rs. 6,000. This portion was self-occupied during April and May 2009. The remaining portion of 40% is self-occupied throughout the previous year 2009-10. The municipal valuation of the house is Rs.72,000. It is informed that the following expenses have been paid during the year: Municipal taxes: Rs. 72,000 Repairs: Rs. Nil Ground rent: Rs. 5,000 Land revenue: Rs. 2,400 Collection charges: Rs.1,200; and Insurance premium: Rs. 4,000 Income from House Property for the A.Y. 2010-11
Particulars Gross Annual Value (GAV) - Note Less: Municipal tax (6,000 * 60%) Net Annual Value (NAV) Less: Deductions u/s 24 30 % of the net annual value Income from house property
Amount 60,000 3,600 56,400 16,920 39,480
Note – The actual rent received for the 60 % let-out area for 10 months amounts to Rs. 6000*10= Rs. 60,000. The municipal valuation of the whole property is given as Rs. 72,000. Prorating the municipal valuation attributable for the let out portion works out to be Rs. 43,200. The higher of the two shall be adopted as the gross annual value i.e. Rs. 60,000.
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doc_425119513.doc
CHARGEABILITY [SEC. 22]
Annual value of a property shall be taxable under the head 'Income from house property' subject to satisfaction of the following conditions: 1. There must be a property consisting of any building or land appurtenant (attached) thereto. 2. Assessee should be the owner of that property (as per Sec 27). 3. The property should not be used by the owner for the purpose of business or profession (which is charged to tax) carried on by him.
1. Building or land appurtenant thereto: • The term 'house property' means: - Any land surrounded by wall having roof or not; and - Any land appurtenant to a building. Also building includes: - An enclosure of bricks, stone work or even mud walls - residential as well as commercial houses. • Vacant land is not a house property. Hence, income from letting of vacant land is not taxable under this head but taxed as business income or as income from other sources. Also an incomplete, a ruined or demolished house cannot be termed as house property.
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2. Owner: • Owner includes legal owner, beneficial owner and deemed owner. • Fictional owner or Deemed owner: U/s Sec 27, in the following cases, a person shall be treated as deemed owner of the property and liable to tax (in such case legal owner or beneficial owner shall not be further liable to tax):
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? Transfer to spouse or minor child [Sec. 27(i)]: When an individual transfers a house property to(a) his or her spouse (not being a transfer in connection with an agreement to live apart); or (b) a minor child (not being a married daughter) -without adequate consideration, then transferor shall be treated as deemed owner of such property. It should be noted that in case of transfer to spouse, marriage should subsist on both the days i.e., on the day of transfer as well as on the day when income arises. ? The holder of an impartible estate [Sec. 27(ii)] is deemed to be the owner of all the properties comprised in the estate. ? Property held by a member of a company, co-operative society or other association of persons to whom a building or a part thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed owner of that building or a part thereof. ? Any person who is allowed to retain possession of any building as per section 53A of the transfer of property act 1882 is the deemed owner. Section 53A comes into operation only if the following conditions are satisfied: (a) There should be a contract for consideration, in the writing, duly signed, in relation to transfer of immovable property. (b) The transferee should have taken the possession of the property. (c) The transferee has performed or is willing to perform his part of the contract. The transferee shall be considered to be the owner, even if the instrument of transfer is not registered. ? Lessee of a building: A person who acquires any right u/s 269UA(f) in or with respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed as the owner of that building (or part thereof). Notes (a) Lease period should not be less than 12 years including extension period. (b) Above provision does not include any right by way of lease from month to month or for a period not exceeding 1 year. 3. Property is used for the purpose of business or profession carried on by the assessee: When a person carries on business or profession in his own house property, annual value thereof is not taxable u/s 22 provided income of such business is chargeable to tax. Incidences thereof are as follows: (a) Letting out to employee : If an assessee lets out the property to his employee, where such letting out supports smooth flow of his business, then such letting out shall be deemed to be incidental to business and such rent shall be chargeable under the head "Profits & gains of business or profession". 2
(b) Letting out to Government Agencies: Where an assessee let out his property to any Government agency for locating branch of a nationalized bank, police station, post office, excise office, railway staff quarters, etc. for the purpose of running the business of assessee more efficiently, such letting out shall be deemed to be incidental to business and such rent shall be chargeable under the head "Profits & gains of business or profession". (c) Letting out to ancillary units: Where an assessee lets out its property to ancillary units, which manufactures components required by the assessee. Income from such letting out shall be taxable under the head "Profits & gains of business or profession". (d) Partner's property used by the firm: The business carried on by the firm should be regarded as carried on by all the partners. Thus, annual letting value of a property belonging to the assessee which is in occupation of the firm in which assessee is the partner, is not includible in income of the assessee-partner u/s 22 However, it must be noted that if an assessee carries on business or profession in his own house property or lets out the property for smooth running of his business or profession, income from such property is taxable under the head "Profits & gains of business or profession". BUT if an assessee is running a business with main object of buying & developing house properties either to let out or to sell such properties, then annual value of such house properties shall be taxable under the head 'Income from house property'. However, profit on sale of house shall be taxable under the head Profits & gains of business or profession. Scope of Chargeability ? Resident: Rent earned by a Resident for property let-out in or outside India are both taxable (whether received in India or not). ? Non-resident or a Not Ordinarily Resident: • In the case of a non-resident or a not ordinarily resident, rent received in India, whether for properties in India or outside India, is taxable in India. • The rent through or from a house property in India (whether received in India or not), is taxable in their hands in India, since it is deemed to accrue or arise in India. Exempted properties: Income from the following house properties are exempted from tax: i. ii. Any one palace or part thereof of an ex-ruler provided the same is not let out.
House property of a local authority. 3
iii. iv. v. vi. vii. viii. ix. x. xi.
House property of an approved scientific research association. House property of an educational institution. House property of a hospital. House property of a person being resident of Ladakh. House property of a political party. House property of a trade union. A farm house. House property held for charitable purpose. House property used for own business or profession.
LET-OUT HOUSE PROPERTY: The format given hereunder is used to determine the taxable income in case of let out house properties: Particulars Amount Amount Gross Annual Value (GAV) xxxx Less: Property taxes paid to local authority xxxx Net Annual Value (NAV) Less: Deductions u/s 24 a) 30 % of the net annual value xxxx b) Interest on capital borrowed (loans) paid or payable xxxx xxxx Income from house property xxxxx I. DETERMINATION OF GROSS ANNUAL VALUE
As per Sec 23 Gross Annual Value is calculated as: (a) Annual letting value (A.L.V) / Reasonable letting value (R.L.V) of the property for the whole year is higher of fair rent and municipal value, subject to standard rent under the Rent control Act (if applicable). (b) Actual rent received / receivable for the period and portion actually let out, less any unrealised rent, if any. (c) Amount at (b) above, plus any rent for the period the property was vacant. If (c) < (a), (a) is G.A.V. If (c) >= (a), (b) is G.A.V. Presentation of the same shall be as follows: Particulars Municipal Value....(i) Fair Rent..............(ii) Higher of (i) and (ii)........ (A)
Amt
Amt
4
Standard Rent............... (B) Annual / Reasonable Letting Value = Lower of (A)&(B)............ (C) Actual Rent Received – Unrealised Rent of Current Year.......... (D) Gross Annual Value {Higher of C & D}
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Here, Municipal Valuation – For collecting municipal taxes, local authorities make a periodical survey of all buildings in their jurisdiction. Such valuation may be taken as strong evidence representing the earning capacity of a building. It cannot, however, be considered to be a conclusive evidence. Fair Rent – Fair Rent of the property can be determined on the basis of a rent fetched by a similar property in the same or similar locality. Though two properties cannot be alike in every respect, the evidence afforded by transactions of other parties in the matter of other properties in the neighbourhood, more or less comparable with the property in question, is relevant in arriving at reasonable expected rent. Standard Rent – Standard rent is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. The Supreme Court has observed in a few cases that a landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent under the Rent Control Act. This rule is also applicable to the owner himself. In other words, if a property is covered under the Rent Control Act, its reasonable expected rent cannot exceed the standard rent (fixed or determinable) under the Rent Control Act. Actual Rent – Rent received or receivable is calculated as follows – Rent of the previous year (or that part of the previous year) for which the property is available for letting out Less: Unrealised Rent (if a few conditions are satisfied) Rent received / receivable before deducting loss due to vacancy
xxxx xxxx xxxx
While calculating rent, the following are points to be kept in mind – a) Loss due to vacancy shall not be deducted from the computation above. b) Sometimes a tenant pays a composite rent of property as well as certain benefits provided by the landlord. To determine rent received / receivable, composite rent must be disintegrated and it is only that part of it attributable to the let out of property which would form the basis of the aforesaid calculation. c) Occupier’s (i.e. tenant’s) share of municipal tax realised from the tenant cannot be added to actual rent received / receivable, as it is the occupier’s duty to pay municipal tax. d) 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. e) A non-refundable deposit will be included in rent received or receivable on pro rata basis. f) A refundable deposit cannot be included in rent received or receivable. To find out whether notional interest on refundable deposit can form part of rent received or the receivable, one has to examine the purpose for
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which refundable deposit/security is taken from a tenant. Such deposit / security is taken generally for any of the following purposes – • To ensure that tenant will vacate the property after the expiry of lease period. • To ensure proper payment of rent on due dates. • To check that the tenant will not misuse the property. • To check that the tenant will not damage the property, or will not make any unauthorised alteration. • To compensate short payment or non-payment of rent (in such case it is paid in lieu of rent) Only in the last case, notional interest on refundable deposit / security may form part of rent received or receivable. g) Advance rent cannot be rent received / receivable of the year of receipt. h) Commission paid by the owner of a property to a broker for rental income is not deductible. Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual Rent Receivable, provided the following 4 conditions are satisfied: 1) The tenancy is bona fide. 2) The defaulting tenant has vacated the property 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 proceeding for the recovery of the unpaid rent or has satisfied the Assessing Officer that legal proceedings would be worthless. If subsequently the rent gets recovered and to the extent it has not been included in annual value earlier, it is brought to tax in the year of recovery, without allowing any expenses of recovery in the head-“Income from house property”, even if the assessee is no longer the owner of such a house property in such a year of subsequent recovery. These provisions are applicable from Previous year 2001-02, Assessment year 2002-03 and onwards u/s 25AA. If such unrealised rent relates to Previous year 2000-01, Assessment year 2001-02 or any earlier year, which was allowed as a deduction u/s 24(1)(x) prevailing, its subsequent recovery is also taxable as above, but u/s 25A.
II.
Deduction is permissible in respect of property taxes subject to the following two conditions: i. It should be borne by the assessee; and ii. It should be actually paid during the previous year. If Property taxes levied by a local authority for a particular previous year are not paid during the year, no deduction shall be allowed in the computation of house property income for that year. However, if in a later year the entire arrears are paid, then actual amount paid during such later year shall be fully allowed as deduction in the computation of house property income for that later year. In respect of the above the following points should be noted: 7
MUNICIPAL TAXES
-If the property is situated in a foreign country, municipal taxes levied by foreign local authority are deductible (if such taxes are paid by the owner). -Municipal tax exceeds GAV (Negative NAV): In case municipal tax paid includes tax paid for several past years and the total amount of tax so paid by the owner exceeds GAV, then Net Annual Value (NAV) can be negative. -Refund of municipal tax: Refund of Municipal tax paid for a property is not taxable u/s 22. -Advance Municipal Tax paid by assessee: Payment of municipal tax in advance (Liability in respect of which has not yet incurred) shall not be allowed as deduction in the year of payment.
III.
NET ANNUAL VALUE
It is the Gross Annual Value (-) Municipal taxes paid.
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IV.
The following two deductions are available under section 24 – a) Standard Deduction b) Interest on Borrowed Capital The list of allowance of section 24 is exhaustive. In other words, no deduction can be claimed in respect of that expenditure which is not specified in section 24. For instance, 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. a) Standard Deduction 30% of the net annual value is allowed as standard deduction in respect of all expenditures (other than interest on borrowed capital) irrespective of the actual expenditure incurred. This deduction is allowed even if no expenditure is incurred by the assessee. Assessee can avail this deduction even if tenant undertakes to do the repairs. b) Interest on Borrowed Capital 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. The following points are also to be kept in mind:• 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.
DEDUCTIONS UNDER SEC. 24
• Interest on 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.
• Deduction is available even if neither the principal nor the interest is a charge on property. • Interest on unpaid interest is not deductible. • No deduction is allowed for any brokerage or commission for arranging the loan.
• Interest on a fresh loan, taken to repay the original loan raised for the
aforesaid purpose is allowable as deduction. This rule is applicable even if the first loan was interest-free loan.
• Any interest chargeable under the Act, in the hands of recipient and
payable out of India, on which tax has not been paid or deducted at source, and in respect of which there is no person who may be treated as an agent, is not deductible, by virtue of sec. 25, in computing income chargeable under the head “Income from house property”.
• Interest on borrowed capital is deductible fully without any maximum
ceiling (in the case of a let out property only).
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• Transaction of allotment of a property to an assessee on instalment basis
does give rise to relationship of borrower and lender between the assessee and the estate officer and as such interest paid by the assessee on instalments constitutes interest on borrowed capital.
Interest of Pre-Construction Period – Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a prior period to the previous year in which such property has been acquired or constructed, to the extent is not allowed as a deduction under any other provision of the Act, will be deducted in five equal annual instalments, commencing from the previous year in which the house is acquired or constructed. For this purpose “pre-construction period” means the period commencing from the date of borrowing and ending on (a) March 31 immediately prior to the date of completion of construction / date of acquisition or (b) date of repayment of loan, whichever is earlier.
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DEEMED TO BE LET-OUT HOUSE PROPERTY
Where the assessee occupies more than one house property as self-occupied or has more than one unoccupied property, then for any one of them, benefit u/s 23(2) can be claimed (at the choice of the assessee) and remaining property or properties shall be treated as deemed to be let out. This option can be changed year after year in a manner beneficial to the assessee. Generally, the house with the higher gross annual value shall be treated as self occupied so that the house with lesser gross annual value shall be liable to tax as deemed let out property. However, one more aspect that has to be considered before exercising this option is the amount of interest on loan borrowed in respect of each property. While interest can be claimed without any limit as deduction in the case of a deemed let out property, deduction in respect of interest gets restricted in the case self occupied or unoccupied property is subject to a maximum amount of Rs. 30,000 or Rs. 1,50,000, as the case may be. Treatment: Income from such house property shall be computed in the same way as that of the let out properties. However, the following points should be noted: a) Gross Annual Value (GAV) of deemed to be let out property will be the Reasonable Expected Rent / Annual Letting Value of the property as Actual rent will always be Zero. b) Municipal taxes actually paid can be claimed as deduction.
c)
Both the deductions permissible u/s 24 can be claimed as available in the case of a let out property. The ceiling prescribed for one selfoccupied property in respect of interest on loan borrowed does not apply to a deemed let out property.
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SELF-OCCUPIED HOUSE PROPERTY
As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part thereof: -Is in the occupation of the owner for the purposes of his own residence; -Is not actually let out during the whole or any part of the previous year; -and no other benefit there from is derived by the owner. Treatment : The annual value of such house or part of the house shall be taken to be NIL. If an assessee occupies more than one house property as self-occupied, he is allowed to treat only one house as self-occupied at his option. The remaining self-occupied house properties shall be treated as 'Deemed to be let out'. However, the following points are to be noted: • Benefit u/s 23(2)(a) cannot be claimed by a company and firm. • When the assessee occupies his house but not in the capacity of owner then benefit under this section cannot be claimed. Computation of taxable income of self-occupied property Net annual value of self-occupied property shall be taken as NIL. As a consequence, deduction u/s 24(a) (standard deduction) shall also be NIL. Interest on loan u/s 24(b) shall be allowed, subject to certain ceiling. Thus, Annual value as per sec. 23(2) Nil Less: Deduction u/s 24(b) – Interest on loan borrowed paid or payable xxxx (As per table below) Loss from house property xxxx
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Interest on loan u/s 24(b) (Self Occupied Properties) Interest on loan taken for construction, acquisition, repair, renovation or extension is allowed according to the following table: Conditions Maximum Interest allowed in aggregate Where loan is taken on or after 1/4/99 and following Rs.150000 conditions are satisfied • Loan is utilized for construction or acquisition of house property on or after 1-4-1999; • Such construction or acquisition is completed within 3 years from the end of the financial year in which the capital was borrowed; and • The lender certifies that such interest is payable in respect of the loan used for the acquisition or construction of the house or as refinance of the earlier loan outstanding (principal amount) taken for the acquisition or construction of the house. In any other case Rs.30000 In any case, deduction in respect of interest on loan on self-occupied property cannot exceed Rs.150000 in a year. Calculation and deduction of interest for the period of pre and post construction, acquisition, etc. is same as in case of let out house property.
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CO-OWNERSHIP [SEC. 26] a) In case of joint ownership of any property, when the share of each coowner is definite and ascertainable, then the income from such property cannot be taxed as income of an association of persons.
b) The share income of each such co-owner should be determined and
included in his individual assessment. Each co-owner is entitled for the concessional computation relating to one self-occupied property with reference to the share of property under his occupation.
c) When property is owned by two or more persons whose shares are definite
and ascertainable the share of each such person in the income from property is includible in his respective total income u/s 22 even if the coowners are also receiving charges from the lessees for air conditioning facility which is assessable as income from other sources u/s 56. Thus property held by co-owners is assessable individually in respect of lease rent and not as an association of persons.
TAXATION OF ARREARS OF RENT IN THE YEAR OF RECEIPT [SEC. 25B]
Where the assessee is the owner of the house property which has been let out to a tenant and has received any amount by way of arrears of rent (like enhancement in rent with retrospective effect) from such property, not charged to income tax in any previous year. The amount so received to the extent such amount together with the Actual rent receivable (ARR) of the previous year to which it relates, exceeds GAV of that year, shall be taxable under the head “Income from house property” in the year of receipt. From such amount a further deduction of 30% shall be allowed as standard deduction. In short, taxable amount shall be positive value of 70% * [{Recovery of Arrear Rent + (Actual Rent Receivable - Unrealised Rent) # } - Gross Annual Value # ] # For the previous year for which such arrears rent pertain. Note: Such receipt shall be chargeable as income from house property although the assessee is not the owner of such property in the year of receipt.
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EXAMPLE OF COMPUTATION OF INCOME UNDER HOUSE PROPERTY
Mr. Keerthi has completed construction of house property on 31st January 2001 on temple land. The house property is partly self-occupied and partly let-out. Out of the total floor area, 60% is let-out for residential purposes on monthly rent of Rs. 6,000. This portion was self-occupied during April and May 2009. The remaining portion of 40% is self-occupied throughout the previous year 2009-10. The municipal valuation of the house is Rs.72,000. It is informed that the following expenses have been paid during the year: Municipal taxes: Rs. 72,000 Repairs: Rs. Nil Ground rent: Rs. 5,000 Land revenue: Rs. 2,400 Collection charges: Rs.1,200; and Insurance premium: Rs. 4,000 Income from House Property for the A.Y. 2010-11
Particulars Gross Annual Value (GAV) - Note Less: Municipal tax (6,000 * 60%) Net Annual Value (NAV) Less: Deductions u/s 24 30 % of the net annual value Income from house property
Amount 60,000 3,600 56,400 16,920 39,480
Note – The actual rent received for the 60 % let-out area for 10 months amounts to Rs. 6000*10= Rs. 60,000. The municipal valuation of the whole property is given as Rs. 72,000. Prorating the municipal valuation attributable for the let out portion works out to be Rs. 43,200. The higher of the two shall be adopted as the gross annual value i.e. Rs. 60,000.
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