Taxation of house property income

In a fast changing social setup, the past 3-4 decades have witnessed breaking up of
‘joint families’ into ‘nucleus families’ due to various socio-economic reasons. Today
majority of the families consist of man, wife and two kids. In the younger
generation families, both husband and wife have independent earnings. Hence
many people are opting for acquiring second house as the disposable income of the
family is higher, investment in house properties is highly lucrative and financial
assistance is easily available. Acquiring a second house is also meant to bequeath
one house each to the two kids.

Here is an attempt to throw light on the taxation of income from house properties.

Under Income Tax Act 1961, income from house property is dealt separately under
Sec 22 to 27 of the Act.

Major conditions to tax income from house property are the property should consist
of any building or land appurtenant thereto, the assessee should be owning the
property and property should not be used by the owner for carrying his/her
business or profession, the profits of which are taxable.

The income tax will be levied on the ‘annual value’, which can be explained as the
sum for which property might be expected to reasonable let out. The higher
amount of rent received or the notional rent as fixed by municipal authorities is
considered as ‘annual value’ for computation of income from house property.

The computation:

For self occupied property, annual value is considered as ‘nil’ and hence there is no
tax under income from house property. In case of self occupied property, under Sec
24 of IT Act, the owner can claim deduction upto Rs. 150,000 pa towards interest
paid on the capital borrowed to purchase or construct the house property. If loan is
availed for repairs and renovation of the house, the deduction allowed will be
limited to Rs. 30,000 pa.

If an assessee owns more than one house property, and has not let out any
property, as per his/her choice of property, one house will not be taxed under
income from house property, but remaining properties will be taxed considering
notional rental value as fixed by municipal authorities.

In case of let out property, normally rent received is taken as annual lettable value.
However if rent is not indicative of actual earning capacity of the property, the
notional value (as decided by municipal authorities) will be adopted.

For arriving at income from house property, the property tax actually paid to the
revenue authorities will be deducted from annual value.

Further the following deductions are permissible:

i. Deduction equal to 30% of annual value towards maintenance and

repairs of the property (also called standard deduction)
 ii. Interest on borrowed capital (with no upper limits) for purchase,
construction, repair, renewal or reconstruction of the property let out.

Illustration:

Here is the computation of income from house property incase of Mr. Shankar, who
has income of Rs. 6 lacs from employment, who is living in his parents house and
has let out his house property for a rent of Rs. 10,000 pm. He has availed a home
loan of Rs. 25 lacs to acquire the let out property and has paid interest of Rs.
250,000 during the year. He has paid property tax amounting to Rs. 20,000 to the
Municipal Corporation.

Here is the computation of income from house property.

Gross Annual Value (GAV) : Rs. 120,000 (Rs. 10,000 x 12 months)

Less Municipal Taxes paid : Rs. 20,000
Net Annual Lettable Value (ALV) : Rs. 100,000
Less standard deduction @ 30% of ALV : Rs. 30,000
Less interest on loan : Rs. 250,000
Income from house property (Loss) : (Rs.180,000)

A loss under the head, income from house property will be allowed to be carried
forward for 8 assessment years to claim it as a set off in the subsequent years.

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R. P. Deshpande

(The author is the Director of Institute of Home Finance and can be contacted at
deshpanderp2007@gmail.com).