INCOME UNDER HEAD HOUSE PROPERTY AND THE CONCEPT OF

DEDUCTION UNDER THIS HEAD

(special repeat project)

Project submitted to:

Mr. Rana Navneet Roy

Subject:
Principles of Taxation Law

Project submitted by:

Deepanshu Bansod
Batch 2012

Hidayatullah National Law University

Raipur, Chhattisgarh

1
 INDEX
1. Acknowledgement … ………………………………………3
2. Research methodology & objective………………………..4
3. Chapter I ..............................................................................5
4. Chapter II ...……...………………………………………..6
5. Chapter III............……………………………………….....8
6. Chapter IV………………………………………………....10
7. Chapter V..............................................................................11
8. References ………………………………………… ……..12

ACKNOWLEDGEMENT

2
The successful completion of task would be incomplete, without the mention of people who
made it possible and whose constant guidance and encouragement crowned my effort with
success. I would like to thank my course teacher Mr. Rana Navneet Roy for providing me the
topic. Secondly, I would like to thank our Vice Chancellor for providing the best possible
facilities of I.T and library in the university. I would also like to extend my warm and sincere
thanks to all my colleagues, who contributed in numerable ways in the accomplishment of this
project.
Deepanshu Bansod
Batch 2012

RESEARCH METHODOLOGY & OBJECTIVE OF THE PROJECT

3
This research paper is descriptive and analytical approach. It is largely based on secondary and

electronic sources. Books and other reference are primarily helpful for the completion of this

project. Footnotes have been provided wherever needed, either to acknowledge the source.

The main objective of my project is to study about one of the heads of income tax which is

income from house property, meaning, types, computations and deductions.

Chapter I: Introduction

4
A good tax system must fulfill certain principles if it is to raise adequate revenue and fulfill
certain social objectives. Adam Smith had explained four principles of taxation which he thought
a good tax must fulfill; Equality; Certainty; Convenience; and Economy. These are still regarded
as characteristics of a good tax system. However, there have been significant developments in
economic theory and policy since Adam Smith wrote his book ‘The Wealth of Nations’ and the
activities and functions of Government have enormously increased. Now, the Governments are
expected to maintain economic stability at full employment level, they are to reduce inequalities
in the income distribution, and they are also to perform the functions of a Welfare State. Above
all, they are to promote economic growth and development, especially in the developing
countries, not only through encouraging private enterprise, but by undertaking the task of
production in some strategic industries. Thus, in order to devise a good tax system, these
objectives and functions of Government’s economic policy must be kept in view. Similarly, any
tax reforms must lead the system towards these principles.

As per the Section 14 Income Tax Act,1961, there are five main income tax heads for an
individual. The computation of income tax is an important part and has to be calculated
according to the income of a person. For a hassle-free calculation, the income has to be classified
properly so that there is no confusion regarding the same. The government has classified the
sources of income under separate heads and then the income tax is computed accordingly. The
provisions and rules are according to the details mentioned in the Income Tax Act. Five main
Income tax heads: Income from Salary, Income from House Property, Income from Profits and
Gains of Profession or Business, Income from Capital Gains, Income from Other Sources.

This project is about the head of income from house property and its computation, its steps,
importance and deduction.

Chapter II Meaning, Essential Conditions and Types of House Property:

5
House property consists of any building or land appurtenant thereto of which the assessee is the
owner. The appurtenant lands may be in the form of a courtyard or compound forming part of the
building. But such land is to be distinguished from an open plot of land, which is not charged
under this head but under the head „Income from Other sources‟ or Business Income‟, as the
case may be. Besides, house property‟ includes flats, shops, office space, factory sheds,
agricultural land and farm houses. Further, house property includes all type of house properties,
i.e., residential houses, godowns, cinema building, workshop building, hotel building, etc.

Example:- Mr. X has one big house. It includes vast open area within its boundaries. The house
has been let out at a rent of Rs. 1, 00,000 p.m., out of which rent of Rs. 25,000 p.m. is
attributable to the open land. In this case, entire rental income is taxable under the head house
property.

Essential conditions for taxing income under this head:

Income from house property is taxable in the hands of its legal owner in whose name the
property stands. Owner‟ for this purpose means a person who can exercise the rights of the
owner not on behalf of the owner but in his own right. A person entitled to receive income from
a property in his own right is to be treated as its owner, even if no registered document is
executed in his name. The following three conditions must be satisfied before the income of the
property can be taxed under the head “Income from House Property”:

 The property must consist of buildings and lands appurtenant thereto;

 The assessee must be the owner of such house property;
 The property may be used for any purpose, but it should not be used by the owner for the
purpose of any business or profession carried on by him, the profit of which is chargeable
to tax. If the property is used for own business or profession, it shall not be chargeable to
tax.

Ownership includes both free-hold and lease-hold rights and also includes deemed ownership.1

1
https://www.incometaxindia.gov.in/Tutorials/Income-from-House-Property-Practical.pdf

6
The second head of Income Tax heads is Income from house property, According to the Income
Tax Act 1961, Sections 22 to 27 is dedicated to the provisions for the computation of the total
standard income of a person from the house property or land that he or she owns. An interesting
aspect is that the charge is derived out of the property or land and not on the amount of rent
received. However, if the property is utilized for letting out the normal course of business, then
the income from the rent will be considered.2

Types of House Property:

1. Self-Occupied House Property : A self-occupied house property is used for one’s own
residential purposes. This may be occupied by the taxpayer’s family – parents and/or
spouse and children. A vacant house property is considered as self-occupied for the
purpose of Income Tax. If more than one self-occupied house property is owned by the
taxpayer, only one is considered and treated as a self-occupied property and the
remaining are assumed to be let out. The choice of which property to choose as self-
occupied is up to the taxpayer.
2. Let Out House Property: A house property which is rented for the whole or a part of the
year is considered a let out house property for income tax purposes.
3. Inherited Property :When you inherit property from your father, you will be taxed like
if it were your own property. When you own more than one house property, only one
house is treated as self-occupied house property according to the I-T Department while
others are assumed and taxed as if they are on rent.3

Chapter III: Steps to calculate Income from House Property

2
www.legalraasta.com/itr/income-tax-heads/
3
https://cleartax.in/s/house-property

7
The annual value of property consisting of any building or lands appurtenant thereto of which the
assessee is the owner shall be subject to Income-tax under the head Income from House
Property‟ after claiming deduction under Sec. 24, provided such property or any portion of such
property is not used by the assessee for the purpose of any business or profession, carried on by
him, the profits of which are chargeable to Income-tax.

Steps to Calculate income from house property:

 Gross Annual Value of the property: The gross annual value of a self-occupied house
is zero. It is the rent collected for a house on rent.
 Less Property Tax: Property tax, when paid, is allowed as a deduction.
 Net Annual Value: Net Annual Value = Gross Annual Value – Property Tax
 Less: 30% standard deduction on NAV: A standard 30% deduction on NAV is allowed
as a deduction under Section 24 of the Income Tax Act. No other expenses such as
painting and repairs can be claimed as tax relief beyond the 30% cap under this section.
 Less: Interest on the home loan: Deduction is allowed for Interest on the home loan.
 Income from house property: The resulting value is your income from house property.
This is taxed at the slab rate applicable to you.
 Loss from house property: Since the gross annual value of a self-occupied house is
zero, claiming the deduction on home loan interest will result in a loss from house
property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the property. The
rental value must be higher than or equal to the reasonable rent of the property determined by the
municipality.4

4
https://www.financialhospital.in/blog/five-heads-of-income-eligible-for-income-tax-computation/

8
Chapter IV Deductions:
Income chargeable under the head “Income from house property” shall be computed after
making the following deductions, namely:-

i) Standard deductions:- From the net annual value computed, the assessee shall be allowed a
standard deduction of a sum equal to 30% of the net annual value.

ii) Interest on borrowed capital:- Where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any interest payable on such
capital is allowed as a deduction.
The amount of interest payable yearly should be calculated separately and claimed as a deduction
every year. It is immaterial whether the interest has been actually paid or not paid during the
year.

Interest attributable to the period prior to completion of construction: It may so happen that
money is borrowed earlier and acquisition or completion of construction takes place in any
subsequent year. Meanwhile interest becomes payable. In such a case interest paid/payable for
the period prior to the previous year in which the property is acquired/ constructed will be
aggregated and allowed in five successive financial years starting from the year in which the
acquisition/construction was completed.

Interest will be aggregated from the date of borrowing till the end of the previous year prior to
the previous year in which the house is completed and not till the date of completion of
construction.

Deductions provided under Sec.24

The deductions under Sec. 24 include standard deduction and interest on borrowed capital and no
other deduction is allowed from net annual value. Any amount paid for brokerage or commission
for arrangement of the loan will not be allowed as deduction.

9
According to Section 24 of Income tax act: Income chargeable under the head "Income from
house property" shall be computed after making the following deductions, namely:—

(a) a sum equal to thirty per cent of the annual value;

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with
borrowed capital, the amount of any interest payable on such capital:

Provided that in respect of property referred to in sub-section (2) of section 23, the amount of
deduction shall not exceed thirty thousand rupees;

Provided further that where the property referred to in the first proviso is acquired or constructed
with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction
is completed [within three years from the end of the financial year in which capital was
borrowed], the amount of deduction under this clause shall not exceed 61[two lakh rupees].

Explanation.—Where the property has been acquired or constructed with borrowed capital, the
interest, if any, payable on such capital borrowed for the period prior to the previous year in
which the property has been acquired or constructed, as reduced by any part thereof allowed as
deduction under any other provision of this Act, shall be deducted under this clause in equal
installments for the said previous year and for each of the four immediately succeeding previous
years:] [Provided also that no deduction shall be made under the second proviso unless the
assessee furnishes a certificate, from the person to whom any interest is payable on the capital
borrowed, specifying the amount of interest payable by the assessee for the purpose of such
acquisition or construction of the property, or, conversion of the whole or any part of the capital
borrowed which remains to be repaid as a new loan.

Explanation.—For the purposes of this proviso, the expression "new loan" means the whole or
any part of a loan taken by the assessee subsequent to the capital borrowed, for the purpose of
repayment of such capital.]5

5
https://www.taxmann.com/budget-2016-17/budget/samd408/earlier-section.aspx

10
Chapter V: Conclusion

Therefore form all the above it can be concluded that income from house property is a national
income based on a concept called Annual value. This is the value a property is expected to fetch
if it is let out. It may be more than the actual rent being received if let out. If it is not let out the
expected market/fair rent will be considered as annual value for the purpose of taxation. Property
includes the building and the land surrounding it. Rent Received or Receivable from house
properties owned by a person other than those which are occupied by him for the purpose of any
business or profession carried on by him is charged to Income-tax as 'Income from House
Property'.

11
References:

 https://www.incometaxindia.gov.in/Tutorials/Income-from-House-Property-Practical.pdf
 www.legalraasta.com/itr/income-tax-heads/
 https://cleartax.in/s/house-property
 https://www.financialhospital.in/blog/five-heads-of-income-eligible-for-income-tax-
computation/
 https://www.taxmann.com/budget-2016-17/budget/samd408/earlier-section.aspx

12