Taxation Income from house property

Scheme of Provisions: Chargeability Se.22 Computation of Income Sec.22to 27 Special Provisions : 25/26.

Taxation Income from house property

Chargeability : Sec.22 : Annual value of any property comprising of buildings or land appurtenant thereto of which the assessee is the owner is chargeable under the head income from house property. Annual value of a building used for the purpose of business or profession is not chargeable to tax under this head.

Taxation Income from house property

Buildings referred here should be of permanent nature. Temporary structure is not considered as house property such as : circus tent, exhibition structure etc. Building should be complete : Incomplete unit : not completed on account of litigation or not suitable for residential or commercial purposes will not be considered house property. Lawns , gardens, parking spaces etc attached to buildings are part of land appurtenant to buildings hence chargeable. Buildings situated abroad : Income chargeable under this head subject to assessees residential status.

Taxation- Income from house property

Buildings Exempt from taxability : Exemption based on usage : Owner uses the building for the business or profession. But this exemption will not be available if owner gives the building on rent and tenant uses for business purposes. In such a case entire rent will subject matter of income from house property.

Taxation Income from house property

Exemption based on the ownership : a) Farm house outside the specified area b) Buildings owned by educational or charitable institutions c) Buildings owned by trade union d) Buildings owned by political party e) Buildings owned by a local authority f) Buildings owned by approved scientific research institution.

Taxation- Income from house property

Deemed owner : It is owner of building who is subject to tax but in the following cases legal ownership may be with different person and still deemed owner will be subject to tax under this head: a) An individual who transfers house property to his or her spouse or a minor child not being a minor child for inadequate consideration is deemed to be owner of the property so transferred. b) The holder of impartible estate. c) A member of co operative society, company or association of person to whom the building is allotted.

Taxation Income from house property

Deemed owner contd : d) A person who is allowed to retain possession in part performance of contract of the nature referred to in sec.53A of Transfer of Property Act 1882. e) A person who acquires any rights by virtue of following transactions : i) Transfer of land or building or part of the building by way of sale, exchange or lease for a period not less than 12 years ii) Transfer of rights by any agreement or arrangement which has the effect of transferring or enabling the enjoyment of such property.

Taxation Income from house property

Computation : Sec.23,24 and 25. Annual Value Sec.22 (1): Annual value shall be deemed to be a) the sum for which the property might reasonably be let from year to year. ( Fair rent) b) where the property is let, and the actual rent is received or receivable by the owner is in excess of ( a) , the amount so received. ( Actual Rent) c) where the property is let and was vacant during whole or part of the year and owing to such vacancy the actual rent received is less than (a), the amount so received. Provided that the taxes levied by any local authority shall be deducted. For the purposes of clause (b) and ( c) the amount of actual rent shall not include the rent which owner can not realise ( Unrealised rent).

Taxation Income from house property

Annual value contd Se. 22( 2):Where property consists of house which is ( a) in the occupation of the owner for the purpose of his own residence or (b) can not be occupied by the owner on account of employment or business carried on at any other place, Annual value of such house shall be taken as nil.

Taxation Income fromhouse property

Annual value cont. Sec.22(3) The provisions of Sec.22(2)shall not apply ifa) the house or part of the house is actually let out during the whole or part of the year b) any benefit there from is derived by the owner.

Taxation- Income from house property

Annual value cont .Sec. 22 (4) : Where the property referred to in 22 (2) consists of more than one house : a) The provisions of that sub section shall apply only in respect of one house which assessee may at his option specify in this behalf. b) The annual value of the other house or houses shall be determined under sub section (1) as if such house has been let out.

Taxation Income from house property

For determining annual value reference is required to be made to: Municipal Value : Value determined by Municipal authorities for the purpose of charging property tax Fair Rent : Rent at which property can be let out. Standard Rent :In certain area there may be Rent Control Act where Standard rent may be notified. In such cases Annual value can be found out as under:

Taxation Income from house property

Step 1 : Compare Fair Rent ( F.R) with Municipal Value (M.V.)

Whichever is higher is considered F.R.

 Step 2 : Compare Fair Rent of step 1 with Standard Rent (S.R)

Whichever is lower is Fair Rent

Taxation Income from house property

Step 3: Compare Fair Rent in step 2 with actual rent ( AR) If Actual Rent is > Fair Rent, Actual Rent is Annual Value If Actual Rent < Fair Rent , because of vacancy Actual Rent is Annual Value. If Actual Rent is < Fair Rent because of any other reason, Fair Rent is Annual Value.

Taxation Income from house property

Illustration :Determine GrossAnnual Value : Property A B C Municipal Value Rs.1 lakh 80000/- 1,20000 Fair Rent Rs.1.2 lakh 60000/- 110000 Standard Rent Rs.1.25 lakh 1 lakh not fixed Actual Rent Rs.1.10 lakh 1lakh 1 lakh Municipal Tax Rs. 15000 12000 7500

Taxation Income from house property

Property A : Step 1: Compare F.R 1 lakh with MV.Rs.1.2lakh Whichever is higher is F.R. = 1.2 lakh Step 2 Compare F.R ( of step 1 = 1.2) with S.R. 1.25 whichever is lower is FR. = Rs.1.2 lakh Step 3 Compare F.R of step 2 Rs.1.2 lakh with A.R. 1 lakh whichever is higher is Fair Rent = 1.2 lakh

Taxation Income from house property

Case B : Step 1: Compare FR =Rs.60000 with MV= Rs. 80000/-whichever is higher is F.R. =Rs. 80000/Step 2 : Compare FR1 = Rs.80000/- with SR =1,00,000/- whichever is lower =Rs.80000/Step 3 : Compare FR2 = 80000/-with AR.= Rs.1 lakh whichever is higher = Rs. 1 lakh

Taxation Income from house property

Case C: Step 1: Compare F.R.= Rs.1.10 lakh with M.V.= Rs. 1.20 lakh whichever is higher is F.R1= 1.20 Step 2 Compare FR1 = Rs.1.20 lakh with SR= NOT FIXED HenceFR2 = 1.2 LAKH Step 3 Compare FR2 = Rs.1.20 with A.R=Rs.1 lakh whichever is higher is FR=Rs. 1.2 lakh

Taxation Income from house property

Next Step :Determine Net Annual Value: After determining Gross Annual Value Municipal property taxes are deducted from Gross Annual value to arrive at Net Annual Value. Deduction is permissible subject to : Property taxes should have been borne by assessee It should have been actually paid by the assessee in that year. If taxes are not paid , no deduction is permitted. However if the taxes are paid in the later year, actual taxes paid including arrears , will be allowed as deduction.

Taxation- Income from house property

In our illustration: Property A B C Gross Ann.Value Rs 1.2 L 1.00L 1.20L Less Municipal Taxes Rs 15000/- 12000/- 7500/ Net Annual Value 1.05 L 88000/-112500/-

Taxation Income from house property

Next Step ; After determining Net Annual Value, allow deductions under sec.24. Sec.24 allows following deductions : 30 % of Net Annual Value: Sec.24 ( a): 30% of net annual value is allowed as automatic deduction irrespective of actual expenditure incurred. This deduction is allowed to take care of expenses of repairs, insurance etc. Once this deduction is allowed no expenses can be claimed. Assesee can claim this deduction, even if tenant bears the cost of repairs. But This deduction is not available on self occupied property.

Income from house property

Other deductions : Interest on loans Sec.24(b) : Interest payable on loans borrowed for the purpose of acquisition, construction, renovation, repairing , or reconstruction can be claimed as deduction. Interest relating to the year of completion of construction, can be claimed in that year irrespective of date of completion. Interest during construction can be accumulated and claimed as deduction over a period of five years in equal installments commencing from the year of completion of construction. Any subsequent loan borrowed to repay original loan shall also be entitled to deduction.

Income from house property

Format of Income from house property : Gross Annual Value : Less Property taxes paid to local authority Net Annual Value : Less Deductions u/s sec.24: a) 30 % annual value b) Interest on capital borrowed Income from house property :

Income from house property

Illustration : Vikram owns a building which consists of three apartments, the construction of which was completed in Dec.2003. The apartments were let out on rent at Rs.1500/- per month. The annual municipal value is Rs.50000/- . Annual municipal taxis Rs.10000/However, during previous year 2007-08, he paid municipal taxes of Rs.15000/- including arrears. He also paidRs.1800/- towards ground rent,Rs.1100/- towards insurance premium. Vikram borrowed Rs.25000/- for repairs to the property and paid interest of Rs.3000/-. He appointed a person to collect rent on salary ofRs.500/- per month. One of the apartment remained vacant for 6 months during the year. Compute income from house property.

Income from house property

Gross Annual Value Rs. 45000 Less Municipal Taxes Rs. 15000 Net Annual value Rs. 30000 Less Deduction u/s 24 30% of Net Annual Value 9000 Interest on loan 3000 12000 Income from house property : 18000 Note MV. =50000. A.R.=( 1500X2X12) +(1500X6) = 45000 A.R. is< MV on account of vacancy GAV: 45000.

Income from house property

Self occupied property : Annual Value of self occupied property can be adopted as Nil. If a property can not be actually occupied by reason of the fact that owing to his employment, business or profession and assessee has to reside at some other place the annual value of such house will be nil. Accordingly municipal taxes, and30 % deduction can not be claimed.

Income from house property

However deduction for Interest will be allowed as under : In case where property is acquired or constructed out of loan borrowed on or after 1.4.99, and where such acquisition or construction is completed within 3 years from the end of financial year in which loan is taken, the deduction for interest will be allowed up to maximum ofRs.150000/ In respect of self occupied property not falling in this category, limit of interest deduction is Rs.30000/-

Income from house property

Deemed Let out Property Sec. 23 (4): In the case of a deemed let out property the nature of which is self occupied property or unoccupied property, the computation of income shall be similar to that of let out property but subject to following modifications : a) Fair rent has to be adopted as gross annual value. The question of considering actual rent received or receivable does not arise. Consequently no adjustment arises on account of property remaining vacant or on account of unrealised rent. b) Municipal taxes actually paid can be claimed as deduction. c) Both the deductions u/s 24 can be claimed as available The ceiling prescribed in respect of self occupied in respect of loan does not apply to deemed let out property. Where assessee owns two or more house properties, he can opt to treat one such house as self occupied The remaining house / properties can be treated as deemed let out property.

Income from house property

Illustration: Arvind owns two houses and both are used for own residence. The relevant details of properties areas under : Particulars House 1 House 2 Municipal Value 24000 42000 Fair rent 24000 36000 Standard Rent 30000 45000 Municipal taxes 6000 8000 Repairs 12000 4000 Insurance 1500 1800 Int on loan on31.3.99 12000 60000 You are requested to advise him about treating one of the above property as self occupied and other as deemed to be let out.

Income from house property

Option 1 : House 1 self occupied , House 2 deemed to be let out : Particulars House 1 House 2 Gross Annual Value Nil 42000 Less Muni. Taxes Nil 8000 Net Annual Value Nil 34000 Less Ded. u/s 24 : 30 % of Net An. Value Nil 10200 Interest 12000 60000 Income; House prop. (12000) ( 36200) Loss Loss Total Loss : Rs.48200/-

Income from house property

Option 2: House2 self occupied, house 1 deemed to be let out: Particular House 1 house 2 Gross annual value 30000 nil Less Muni. Taxes 6000 nil Net Annual Value 24000 nil Less Ded. u/s 24 30% of NAV 7200 NIL Int. 12000 30000 Inc:house property 4800 ( 30000) Total income Loss ( 25200) Option 1 preferred in view of interest claim deductible.

Income from house property

Inadmissible expenses :Sec.25: In case of interest on loan borrowed payable outside India, deduction will be allowed only if taxis deducted at source and paid. Unrealised rent received subsequently:Se.25AA Where the assessee cannot realise rent from a property let to tenant and subsequently realised any of the amount in respect of such rent, the amount realised shall be deemed to income chargeable under the head income from house property whether or not assessee is the owner of the property in that year.

Income from house property

Arrears of rent received : Sec.25 B: Where the assessee is the owner of any property which has been let out to a tenant and receives any amount by way of arrears of rent from such property which was not charged to tax earlier, shall be chargeable as income from house property of the previous year in which such rent is received even if the assessee is not owner of the property . In computing such income chargeable to tax in respect of arrears so received, deduction of30 % shall be allowed and70% shall be chargeable to tax.

Income from house property

Difference between sec.25AA and 25B: Unrealised rent is excluded from actual rent, subject to conditions under rule 4 in determination of annual value u/s24. Subsequently when amount is realised, it gets taxed u/s 25AA in the year of receipt. On the other hand, the assessee may have sought enhancement of rent from tenant and same could have been in dispute. Subsequently, as and when the additional rent is realised the same is taxable as it was not taxed earlier.Such an amount is assessable u/s 25B. Basic difference between sec.25AA which deals with unrealised rent and sec.25B which deals with arrears of rent is that 30% DEDUCTION IS NOT AVAILABLE under sec.25AA, whereas it is available u/s 25B.

Income from house property

Adjustment of unrealised rent from actual rent : Subject to conditions of Rule 4: Tenancy is bona fide The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property. The defaulting tenant is not in occupation of any other property of the assessee The assessee has taken reasonable steps to institute legal proceedings for recovery of unpaid rent.

Income from house property

Co ownership : When two or more persons jointly own a property, and if their respective shares are definite and ascertainable , they will be taxed under sec.22, and can claim concessional computation with relating to self occupied property with reference to his share in property under occupation.