INCOME FROM HOUSE PROPERTY

INTRODUCTION

Among the various sources of income that a person can have, income from house property is one of the important heads of income under the Income Tax Act. House property is regarded as a source of income for Income - Tax purposes. In ordinary parlance, your income from house property will presuppose that you have a house from which you are deriving income in the form of rent. The scope of income from house property for the purpose of the Income Tax Act, however, much wider. It is quite possible that the house property in question is not giving you any rent as is the case when it remains vacant throughout the year or you may be using it yourself for self- occupation. Yet, for the purpose of the Income - Tax Act, you will have income from house property. For what is tax under this head is not the actual rent but the inherent capacity of the property to earn income. This is technically known as the Annual Value of the property.

ESSENTIAL NORMS
1. THE KIND OF PROPERTY: The property that we have been speaking of should consist buildings or land appurtenant to such buildings. Income from letting out of vacant plots of land when there is no adjoining buildings will not be taxed under this head (but will be taxed as income from other sources). The existence of a building is, therefore, an essential prerequisite. The purpose for which the tenant uses the building is also immaterial. Thus, income from letting out godowns will be taken as income from house property. However, if the owner himself thereof uses the building or part for the purpose of his own business then there will be no income from such portion of the house property. 2. WHO IS LIABLE TO PAY: We have been seen that the inherent capacity of a property consisting of any buildings or land appurtenant thereto is subjected to tax under the head income from house property. But in whose hands? The answer is in the hands of the owner of the property. The assessee must be the owner. In case the assessee is not the owner, but gets rent from subletting a property, the income will not be taxed as income from house property (but will be considered as income from other sources).

3. THE CONCEPT OF ANNUAL VALUE: The basis of calculating Income from House Property is the Annual Value. This is the inherent capacity of the property to earn income and it has been defined as the sum for which the property might reasonably be expected to let from year to year. Hence, it is not necessary, that the property should actually be let. The municipal value of the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same locality, Actual Rent are all pointers to the determination of annual value. 4. DETERMINATION OF ANNUAL VALUE OF SELF OCCUPIED PROPERTY: Self-occupied house property does not generate any rent. Self-occupied house property which has not been actually let out at any time in which case, the annual value is taken as NIL. If, one is fortunate enough to own more than one house property using all of them for self-occupation, he is entitled to exercise an option as under: 1. The annual value of one house property as specified by him will be Nil. 2. The annual value of the other self-occupied house property/ies will be determined on notional basis as if it had been let out. 5. ANNUAL VALUE OF ONE HOUSE AWAY FROM WORK PLACE: A person may own a house property, in Mumbai, which he normally uses for his residence. He is transferred to Chennai, where he does not own any house property and stays in a rental accommodation. In such case, the house property in Mumbai cannot be used for selfoccupation and notional income, therefore, would normally have been chargeable although he derives no benefit from the property. To save the tax payer from hardship in such situations, it has been specifically provided that the annual value of such a property would be taken to be nil subjected to the following conditions: The assessee must be the owner of only one house property He is not able to occupy the house property because of his employment, business, etc. , away from the place where the property is situated. Property shouldnt been actually let or any benefit is derived therefrom. He has to reside at a place of employment in a bldg. not belonging to him.

6. ANNUAL VALUE OF LET OUT PROPERTY: In respect of a let out house property, the rent received is usually taken as the annual lettable value. However, when the rent is not indicative of the actual earning capacity of the house, the notional value will have to be found out. Thus, AV* is higher of the following two amounts1. Reasonable Letting Value(RLV) This is the expected rent i.e. the sum for which the property might reasonably be expected to let. RLV is a notional figure. But it is not a fictions figure. RLV may be estimated on the basis of the Fair Rent, Municipal Valuation or Standard Rent. Fair Rent is the rent fetched by a similar house in the same locality. Municipal Valuation is the value fixed by municipality for levy of tax. Standard Rent is the fixed by the Rent Control Act. RLV is computed as shown below: A. Fair Rent XX B. Municipal Valuation XX C. Higher of [A] and [B] XX D. Standard Rent XX E. Lower of [C] and [D] = RLV XX 2. Actual Rent Actual Rent means the actual rent received or receivable. However, the actual rent would not include the amount of rent not realized to the extent allowable under the Income Tax Rules. AR is computed as shown below : Actual Rent Received/ Receivable (-) Unrealised Rent = Actual Rent

In case of a let out property which was vacant for something during the year. The AV is taken as the Actual Rent, if the actual rent is lower than the RLV due to such vacancy [Sec.23(1)(c)]

7. DEDUCTIONS WITH RESPECT TO MUNICIPAL TAXES: From the annual value as determined above, municipal taxes are to be deducted if the following conditions are fulfilled: The property is let out during the whole or any part of the previous year
(There is no such deduction in respect of one self-occupied house property for which nil annual value is adopted )

The Municipal taxes must be borne by the landlord

(If the Municipal Taxes or any part thereof are borne by the tenant, it will not be allowed)

The Municipal taxes must be paid during the year

(Where the municipal taxes become due but have not been actually paid, it will not be allowed. Similarly, the year to which the taxes relate to, is also immaterial)

8. OTHER DEDUCTIONS U/S.24: From the annual value as determined above, further deductions are allowed. But, in respect of self occupied house property and a property away from work place, for which the annual value has been taken as NIL, no other deduction other than interest mentioned here in below would be allowed. The deductions mentioned in the section as exhaustive. Therefore, no deduction which is not mentioned here, will be allowed. Thus, there is no provisions for allowing deductions in respect of salary paid to a caretaker, stamp duty and registration charges is respect of lease of the house, ground rent etc. The deduction admissible are as under: a. Standard Deduction: Standard deductions @30% of the annual value. It is a statutory deductions not depended on the actual expenditure. b. Interest: When money is borrowed on interest and the property in question is either acquired or constructive or repaired or re-constructed with such borrowed funds, interest payable thereon is deducted from the annual value. The amount of interest payable for the relevant year should be calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed from some other purpose, interest payable thereon cannot be claimed as deduction.

Interest attributable to period prior to construction/acquisition Money may be borrowed prior to the acquisition or construction of the property. In such a case, interest paid/payable before the final completion of construction or acquisition of the property will be aggregated and allowed in 5 successive financial year starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilized for repair, for renewal or constructions. Interest other then pre-construction In case the property is let out, the entire amount of interest accrued during the year is deductible. The borrowals may be for construction/acquisitions or repairs or renewals. In the case of self-occupied property, the deduction will be: a. Either the actual amount accrued or Rs.30,000/- whichever is less if loan is borrowed before 1.4.99 b. When borrowals or acquisitions is before 1.4.2003-deductions is Rs.1,50,000/- applicable to A.Y. 2002-2003 and onwards. Other Notes When interest payable outside India, no deduction will be allowed unless tax is deducted at source or someone in India is treated as agent of the nonresident.

9. UNREALISED RENT: Where any rent cannot be realized, and subsequently if such amount is realized, such an amount will be deemed to be the income from house property of that year in which it was received. We have seen earlier that the basic requirement of assessment of this income is the ownership of the property. However, in the case where unrealized rent is subsequently realized, it is not necessary that the assessee continues to be the owner of property in the year of receipts also. 10. ARREARS OF RENT: When the owner of a building receives arrears of rent from such a property, the same shall be deemed to be the income from house property of the year of receipt. 30% of the receipt shall be allowed as standard deduction. As in case of unrealized rent, the assessee need not be the owner of the property in the year of receipt.

11. LOSS UNDER THE HEAD HOUSE PROPERTY: So far as income from a self-occupied property is concerned and in respect of a property away from work place, when the annual value is taken at nil, and no other deduction are allowed except for interest on borrowed capital upto a maximum of Rs30,000/-(or Rs.1,50,000 as the case may be). In such case, there may be loss upto amaximum of Rs.30,000/-(or Rs.1,50,000/- as the case may be). In respect of other type of house property, namely a house property that is let out, there are no restrictions on deductions and therefore, there can be loss under this head. Once loss is determined in respect of house property, the next question would be regarding the treatments to be giving to such losses. The losses from one house property can be set off against the income from other house property. The remaining loss, if any, will be set of against incomes under any other heads like salary. Un case the loss does not get wiped out completely, the balance will be carry forward to the next assessment to be set of against the income from house property of that year. However, such carry forward is restricted to eight assessment years only.

12. CO-OWNERSHIP OF HOUSE PROPERTY: In case of joint ownership of any property, when the share of each co-owner is definite and ascertainable, it has been provided that each of the owners will be assessed individually in respect of shares of income from the property. In other words, income from the property will be determined and allocated to each co-owner according to his share. When each of the co-owners of the property used it for his residence, each of them will also get concessional treatment in respect of one self-occupied property .