Income From “House Property” [Section 22 to 27] – Direct and Indirect Taxes with Tax Ready Reckoner

Income under the head ‘Income from House Property’ under Section 22 to 27 has been described with practical examples for the AY- 2022-23 & 2023-24.

Table showing …How to Compute “Income from House Property”

1.	Gross annual value i.e. expected rent/actual rent received or receivable, whichever is higher		₹………….
	However, in case of vacancy, expected rent or actual rent received or receivable, whichever is lower
2.	Less :
	(a) The amount of rent which could not be realized	₹………….
	(b) Taxes actually paid and borne by owner to local authority	₹………….
	Net annual value (NAV)		₹………….
3.	Less: Deduction allowed u/s 24		₹………….
	(a) Standard deduction @ 30% of NAV	₹………….
	(b) Interest on borrowed capital [Section 24(1)(vi)]	₹………….
	Total		₹………….
4.	Income Chargeable under the head “Income from House Property” (2-3)		₹………….

Table of Contents

1. Income from House Property – Chargeability and Basic of Charge (Section 22)

1.1. Chargeability

The annual value of property consisting of any buildings 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 section 24 provided such property, or any portion of such property is not used by the assessee for the purposes of any business or profession, carried on by him, the profits of which are chargeable to Income-tax.

An analysis of the above would reveal the following:

1.2. Basis of Charge

The basis of calculating income from house property is the ‘Annual Value’. This is the inherent capacity of the property to earn income. Income from house property is perhaps the only income that is charged to tax on a notional basis. The charge is not because of the receipt of any income but is on the inherent potential of house property to generate income. The annual value is the amount for which the property might reasonably be expected to let from year to year. The method of determination of annual value is discussed later

1.3. Essential conditions for taxing income under this head ‘Income from House Property’

The following three conditions must be satisfied before the income of the property can be taxed under the head “Income from House Property”:

(i) The property must consist of buildings and lands appurtenant thereto,

(ii) The assessee must be the owner of such house property,

(iii) 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 him, the profit of which are chargeable to tax. If the property is used for own business or profession, it shall not be chargeable to tax.

(i) Property must consist of any buildings or lands appurtenant thereto:

Although the Act has used the word ‘property’ in section 22, but income of all types of properties are not taxable under this head. The term ‘property’ has a very wide meaning but ‘property’ in sections 22 to 27 has not been used in its wider sense or meaning. It is very much limited to a type defined by the language of the section i.e. buildings or lands appurtenant thereto. In other words, there must be a house property which must consist of buildings or land appurtenant thereto.

If any income is derived from vacant land then this income would not be taxed under the head ‘house property’ because there is no building. Such income shall, however, be taxed under the head income from other sources or income from business depending upon the facts of the case.

(ii) Ownership of the Property:

The assessee must be the owner of such house property. Any income derived from a property which is not owned by the assessee cannot be taxed under this head e.g. X takes a house on rent of Rs.25,000 p.m. and sublets it to Y and receives a rent of Rs. 30,000 p.m. for this house. The rent derived by X cannot be taxed under this head because X is not the owner of the house. This income will be taxed either as business income or as income from other sources.

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

Deemed ownership [Section 27]:

As per section 27, the following persons though not the legal owners of a property are deemed to be the owners for the purposes of sections 22 to 26:

Transfer to a spouse [Section 27(i)]:

If an individual transfer any house property to his or her spouse otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the property so transferred. This would, however, not cover cases where a property is transferred to a spouse in connection with an agreement to live apart.

Transfer to a minor child [Section 27(i)]:

If an individual transfer any house property to his or her minor child otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the house property so transferred. This would, however, not cover cases where a property is transferred to a minor married daughter.

Where the individual transfers cash to his/her spouse or minor child and the transferee acquires a house property out of such cash, the transferor shall not be treated as deemed owner of the house property. Such transaction will however, attract clubbing provisions.

Holder of an impartible estate [Section 27(ii)] :

The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate. The impartible estate, as the word itself suggests, is a property which is not legally divisible.

Member of a Co-operative Society, etc. [Section 27(iii)]:

A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him although the co-operative society/company/association is the legal owner of that building.

Person in possession of a property [Section 27(iiia)]:

A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be deemed owner of that house property. This would cover cases where the (a) possession of property has been handed over to the buyer, (b) sale consideration has been paid or promised to be paid to the seller by the buyer, (c) sale deed has not been executed in favour of the buyer, although certain other documents like power of attorney/agreement to sell/will etc. have been executed. The buyer would be deemed to be the owner of the property although it is not registered in his name.

Person having right in a property for a period not less than 12 years [Section 27(iiib)]:

A person who acquires any right in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years shall be deemed to be the owner of that building or part thereof. This will not cover the case where any right by way of a lease is acquired from month to month basis or for a period not exceeding one year.

(iii) Use of the House Property:

For the purpose of charge under the head income from house property, the crucial words are buildings or lands appurtenant thereto. The purpose for which the building, etc. is being used is not material. Thus, house property may be let by the assessee for residential purposes or for any commercial purpose. The income derived from letting out of such house property will always be taxable under this head. Even if it is the business of the assessee to own and give houses on rent the annual value of the houses owned by him during the previous year would be taxable as ‘Income from house property’. The annual value of house property, though belonging to a business, must be charged under this head and not under section 28, if the property is not used by the assessee for the purposes of his business. It will remain so even if property is held by the assessee as stock in trade of a business. House owning, however profitable, is neither trade nor business for the purpose of the Act. However, the following are the exceptions to the above rule:

(A) The annual value of the house property/portion of the house property which is used for purpose of the business or profession carried on by the assessee does not fall under this head, provided profits of such business or profession are chargeable to income-tax.

If an assessee is running a hotel or paying guest accommodation in a building owned by him, income from such building shall be taxable under the head business or profession. On the other hand, if such hotel building itself has been let out, income from such hotel building shall be taxable under the head house property.

(B) Where the property is let out to employees with the object of carrying on the business of the assessee in an efficient manner, then the rental income shall be taxable as business income (provided letting is not the main business but it is subservient/incidental to the main business) because the letting out of the property is incidental to the main business of the assessee and in this case deductions/allowances would have to be calculated as relating to profits/gains of business and not as relating to house property.

Similarly, where the premises of the assessee are given to any Government agency for locating a branch of a bank, police station, excise office, etc. for the purpose of running the business of the assessee more efficiently, the rental income from such buildings would be taxable as business income.

(C) Where the letting of the property is inseparable from letting of other assets like machinery, furniture, etc. the entire income would be taxable as profits or gains of business and profession or income from other sources.

1.4. Cases of Composite Rent

In certain cases, the owner charges rent from the tenant not only on account of rent for the house property but also on account of various facilities/services provided with the house. Such rent is known as composite rent. The said composite rent can fall under 2 categories:

(a) composite rent on account of rent for the property and for various facilities/ services provided along with the house like lift, gas, water, electricity, watch and ward, air conditioning etc. In this case such composite rent should be split up and the portion of rent attributable to the letting of the premises shall be assessable as “Income from House Property”. The other portion of the composite rent received for rendering facilities or services shall be assessable as “Income from Other Sources”.

(b) composite rent on account of rent for the property and the hire charges of machinery, plant or furniture belonging to the owner. In this case if the letting of the property is separable from the letting of the other assets, then the portion of the rent attributable to the letting of the premises shall be assessable as “Income from House Property” and the other portion of the composite rent for letting other assets shall be assessable either as “Profits and Gains of Business or Profession” or “Income from Other Sources”. On the other hand, if the letting of the property is inseparable from the letting of other assets like machinery, furniture, the entire income would be taxable as “Profits and Gains of Business or Profession” or “Income from Other Sources”.

1.5. When income from house Property is not Charged to Tax

In the following cases income from property is not charged to tax:

(a) Farm house:

Income from any building owned or occupied by an agriculturist or receiver of rent/revenue of such land provided that the building is in the immediate vicinity of agricultural land and is used as a dwelling house or as a store house or other out-building.

(b) Property held for charitable purposes:

As per section 11, where the property is held for charitable or religious purposes the income from such property is exempt from tax.

(c) House property used for own business/profession:

It falls under the head ‘Income from business and profession’ and although no income will be derived but deductions/allowances of such property shall be allowed under that head.

(d) Self-occupied House:

Annual value of two self-occupied house shall be taken as Nil

(e) House property of registered trade union/local authority:

The income from property held by a registered trade union/local authority is not taxable.

(f) Palace of Ex-Ruler:

The annual value of any one palace in the occupation of an ex-ruler shall be exempted from tax.

2. Annual Value of House Property and its computation [Section 23(1)(a), (b) & (c)]

2.1. What is Annual Value?

As per section 23(1)(a) the annual value of any property shall be the sum for which the property might reasonably be expected to be let from year to year. It may neither be the actual rent derived nor the municipal valuation of the property. It is something like notional rent which could have been derived, had the property been let. In determining the annual value there are four factors which are normally taken into consideration. These are:

Actual rent received or receivable:

Actual rent received/receivable is an important factor in determining the annual value of a property though this is not the only decisive factor. The actual rent could be dependent upon various considerations. There could be circumstances where the owner agrees to bear certain obligations of the tenant e.g. the water and electricity bills of the tenant may be payable by the owner. In this case, the de facto rent (i.e. what should have been the actual rent) will be calculated by reducing from the rent received/receivable the amount spent by the owner on meeting the obligation of water and electricity bills of the tenant as we have to tax rent from house property under this head and not the amount recovered for other services provided in the nature of electricity and gas bills. On the other hand, if any obligation of water and electricity bills of the owner is met by the tenant, the de facto rent will be computed by adding to the rent received/receivable, the amount spent by the tenant in discharging the obligation of the landlord. E.g. If the tenant who is in the business of selling gas cylinders, besides giving rent of ₹5,000 p.m. gives 5 gas cylinders every month free to the landlord and the value of each gas cylinder provided free of cost is ₹400, then defacto rent shall be ₹5,000 + ₹2,000 (value of 5 gas cylinders) = ₹7,000 p.m.

It may, however, be observed that the municipal taxes of the house property are to be borne by the occupier who in the case of let out property is the tenant. Therefore, if such municipal taxes are borne by the tenant the rent received/receivable should not be increased to calculate de facto rent. Further where repair expenses are borne by the tenant, the rent received/receivable should not be increased to calculate de facto rent (i.e. what should have been the actual rent).

Any deposit received from the tenant for property is a capital receipt and thus, it cannot be treated as income. Further while determining the actual rent, no notional interest on such deposit should be considered.

Municipal value:

This is the value as determined by the municipal authorities for levying municipal taxes on house property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual letting value of such house property, which is determined by it based upon many considerations. + Fair rent of the property: Fair rent is the rent which a similar property can fetch in the same or similar locality, if it is let for a year.

Standard rent:

The standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent fixed under the Rent Control Act. Therefore, this is also an important factor in determining the annual value.

2.2. Computation of annual value of a property [Section 23(1)]

The Income-tax Act has used the term ‘Annual Value’ only in this chapter. As per the Act the annual value is the value after deduction of municipal taxes, if any, paid by the owner. But for sake of convenience, the annual value may be determined in the following two steps:

Step I: Determine the gross annual value.

Step II: From the gross annual value computed in step I, deduct municipal tax actually paid by the owner during the previous year.

The balance shall be the net annual value which, as per Income-tax Act is the annual value.

The annual value has to be determined for different categories of properties. These could be:

(A) House property which is let throughout the previous year.

(B) House property which is let and was vacant during the whole or any part of the previous year.

(D) House property which is self-occupied for residential purposes or could not actually be self-occupied owing to employment at any other place.

(A) House property which is Let throughout the previous year

Step 1: Determine the gross annual value:

According to section 23(1), the annual value of any property shall be deemed to be—

(a) the sum for which the property might reasonably be expected to let from year to year (i.e. expected rent); or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable i.e. the actual rent.

It may be observed from the above that for calculating Gross Annual Value of the property which is let, we have to first calculate expected rent as per clause (a) above and then compare the same with the actual rent received or receivable as per clause (b). If the actual rent so received or receivable as per clause (b) is more than the expected rent computed as per clause (a), the Gross Annual Value shall be the actual rent so received or receivable. On the other hand, if the actual rent so received or receivable is less than the expected rent then the Gross Annual Value shall be expected rent so computed.

In other words, the gross annual value of the house property let for the whole year shall be higher of the following two:

(a) Expected rent;

(b) Actual rent received or receivable.

How to calculate expected rent:

The Higher of the following two is taken to be the expected rent:

(i) Municipal Valuation;

(ii) Fair Rental value.

However, the Supreme Court in Shiela Kaushish v CIT (1981) 131 ITR 435 (SC) and Amolak Ram Khosla v CIT (1981) 131 ITR 589 (SC) held that where property let out is governed by the Rent Control Acts, the standard rent fixed thereof (or even not fixed but provision thereof is applicable to the area in which the property is situated) will have to be taken for determining the bona fide annual value. From these judgments, it is clear that in case of the property governed by the Rent Control Act, its annual value under section 23(1)(a) cannot exceed the standard rent (fixed or determinable) under the Rent Control Act.

Although the expected rent as per section 23(1)(a) cannot exceed standard rent but it can be lower than standard rent. [Balbir Singh (Dr.) v MCD (1985) 152 ITR 388 (SC)].

To conclude:

First step is to calculate the Gross Annual Value which will be higher of Municipal Value or Fair Rental Value, but it cannot exceed the standard rent. However, if the actual rent received or receivable exceeds such amount then the actual rent so received/receivable shall be the Gross Annual Value.

EXAMPLE:

R owns six houses in Delhi, details of which are as under:

Particulars	I	II	III	IV	V	VI
Municipal Value	2,00,000	2,40,000	3,60,000	4,20,000	4,80,000	4,50,000
Fair Rental Value	2,40,000	3,00,000	4,00,000	4,20,000	5,00,000	5,00,000
Standard Rent	N.A.	2,40,000	5,00,000	3,00,000	N.A.	4,80,000
Actual Rent/Annual Rent	1,80,000	3,60,000	4,80,000	3,60,000	5,40,000	4,20,000

Compute the gross annual value of the above houses.

SOLUTIONS:

Gross Annual Value	2,40,000	3,60,000	4,80,000	3,60,000	5,40,000	4,80,000
In case of III, the standard rent will not be considered because it is more than the maximum of other two factors.

Step 2: Taxes levied by any local authority in respect of the property i.e. Municipal taxes (including taxes levied for services) to be deducted:

Municipal taxes, etc. levied by local authority are to be deducted from the gross annual value calculated as above, if the following conditions are fulfilled:

(a) the municipal taxes have been borne by the owner, and

(b) these have been actually paid during the previous year.

Therefore, deduction for municipal taxes, etc. levied by any local authority is allowed if they are borne and actually paid by the owner. It must be noted that the taxes are allowed as deduction only in the previous year in which these are paid. Municipal taxes, etc. due but not paid shall not be allowed as deduction. However, municipal taxes, etc. paid during the previous year are allowable even if they relate to past years or future years. The deduction of municipal taxes for future years shall be allowed if the assessee follows cash system of accounting.

Even where the property is situated outside the country, taxes levied by local authority in that country are deductible in deciding the annual value of the property. [CIT v R. Venugopala Reddiar (1965) 58 ITR 439 (Mad)].

The value arrived at after deducting the municipal taxes, if any, may be referred to as the Net Annual Value (Annual value as per Income-tax Act).

From such net annual value, deductions as permissible u/s 24(a) & (b) are allowed and the balance is the income under the head ‘Income from house property’.

EXAMPLE:

X owns three houses in Delhi, particulars of which are as under:

Particulars	I House	II House	III House
	Rs.	Rs.	Rs.
No. of residential units	2	1	3
Municipal value	1,20,000	72,000	60,000
Fair Rental Value	1,50,000	75,000	75,000
Standard rent	1,30,000	80,000	72,000
Rent per unit per annum	70,000	84,000	21,000
Municipal taxes	Rs.12,000 (due but not paid)	Rs.8,000 for last year paid in this year, and Rs.9,000 of current year due but not paid.	Rs.60,000 (It includes Rs.54,000 paid as advance for next 9 years)

Compute the annual value of the above three houses for the assessment year 2022-23.

SOLUTION:

Particulars	I House	II House	III House
	Rs.	Rs.	Rs.
Gross Annual Value i	1,40,000	84,000	72,000
Less: Municipal Taxes	–	8,000	60,000
Net Annual Value	1,40,000	76,000	12,000

(B) House property which is let and was vacant during the whole or part of the previous year:

According to section 23(1), the annual value of such house property shall be deemed to be: —

(a) the sum for which the property might reasonably be expected to let from year to year i.e. the expected rent; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a) the amount so received or receivable i.e. the actual rent, if any:

From the perusal of the above, the following two situations may emerge

Situation 1:

Where the property is let and was vacant for part of the year and the actual rent received or receivable is more than the sum determined under clause (a) in spite of vacancy period. (This situation falls under clause (b) above)

Situation 2:

Where the property is let and was vacant for whole or part of the year and the actual rent received or receivable owing to such vacancy is less than the sum determined under clause (a). (This situation falls under clause (c) above)

The gross actual value in the above two cases shall be determined as under:

Situation 1: Where the property is let and was vacant for part of the year and the actual rent received or receivable is more than the sum determined under clause (a) in spite of vacancy period.

In this case, clause (c) shall not be applicable as it will be applicable only when actual rent received or receivable is less than the sum referred under clause (a). Hence the gross annual value in this case shall be:

(1) the sum for which the property might reasonably be expected to let from year to year; or

(2) actual rent received or receivable,

whichever is higher.

EXAMPLE:

Municipal value of a house is Rs.90,000, Fair rent, Rs.1,40,000, Standard rent Rs.1,20,000. The house property has been let for Rs.12,000 p.m. and was vacant for one month during the previous year 2021-22. Municipal taxes paid during the year were Rs.40,000. Compute the annual value for assessment year 2022-23.

SOLUTION:

Step I: Compute Gross Annual Value (which shall be higher of the following two)

(a)	Expected rent which shall be municipal value (Rs.90,000) or fair rent (Rs.1,40,000) but limited to standard rent (₹1,20,000)	1,20,000
(b)	Actual rent received or receivable ₹12,000 x 11	1,32,000
	# Gross annual value shall be	Rs.1,32,000
Step II	Less: Municipal Taxes paid	40,000
	Net annual value	92,000

Situation 2: Where the property is let and was vacant for whole or part of the year and the actual rent received or receivable owing to such vacancy is less than the sum determined under clause (a).

The annual value of the property shall be determined under this situation if all the following 3 conditions are satisfied:

(1) The property is let;

(2) It was vacant during the whole or part of the previous year;

(3) Owing to such vacancy, the actual rent received or receivable is less than the value determined under section 23(1)(a)

In this case, both clause (a) and clause (b) shall not be applicable but clause (c) shall be applicable and the gross annual value shall be the actual rent received or receivable.

EXAMPLE: (Take the just above EXAMPLE)

Assume the property was vacant for 3 months. Determine the annual value for the assessment year 2022-23.

SOLUTIONS:

(a)	Expected rent (as determined above)	Rs. 1,20,000
(b)	Actual rent received/receivable (12,000 x 9)	Rs. 1,08,000

As the actual rent received or receivable owing to vacancy is less than the sum determined under clause (a), it will fall under situation 2 i.e. section 23(1)(c) and therefore net annual value shall be determined as under:

	Rs.
Actual rent receives or receivable	1,08,000
Less: Municipal Taxes paid	40,000
Net annual value	68,000

(C) House Property which is part of the year let and part of the year occupied for own residence:

Where a house property is, part of the year let and part of the year occupied for own residence, its annual value shall be determined as per the provisions of section 23(1) relating to let out property. In this case, the period of occupation of property for own residence shall be irrelevant and the annual value of such house property shall be determined as if it is let for part of the year. Hence, the expected rent as per section 23(1)(a) shall be taken for full year but the actual rent received or receivable shall be taken only for the period let and the gross annual value shall be higher of these two.

EXAMPLE:

R has a house property in Delhi whose Municipal Value is Rs.1,00,000 and the Fair Rental Value is Rs.1,20,000. It was self-occupied by R. from 1.4.2021 to 31.7.2021. W.e.f. 1.8.2021, it was let out at Rs.9,000 p.m. Compute the annual value of the house property for the assessment year 2022-23 if the municipal taxes paid during the year were Rs.20,000.

SOLUTION:

The gross annual value shall be higher of the following two:

	Rs.	Rs.
(a) Expected rent (Municipal value Rs.1,00,000 or FRV Rs.1,20,000 whichever is higher)	1,20,000
(b) Actual rent received/receivable for let out period i.e. 9,000 x 8	72,000
# Gross annual value		1,20,000
Less: Municipal taxes		20,000
Net annual value		1,00,000

EXAMPLE: (Take just above Example)

Determine the annual value assuming that the standard rent is fixed at Rs.1,08,000.

SOLUTION:

Gross annual value shall be higher of the following two:

	Rs.	Rs.
(a) Expected rent shall be limit to standard rent	1,08,000
(b) Actual rent received or receivable	72,000
# Gross annual value		1,08,000
Less: Municipal taxes		20,000
Net annual value		88,000

3. Treatment of Unrealised Rent from House Property [Explanation to Section 23(1)]

As per the Explanation, the actual rent received or receivable mentioned in section 23(1)(b) and (c) shall not include the amount of rent which the owner cannot realise, subject to the rules made in this behalf. In other words, unrealized rent, if any should be deducted from clause (b) or (c) of section 23(1).

Rules for unrealised rent

The amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where, —

(a) the tenancy is bona fide;

(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

Important Note

Explanation to section 23(1) mentioned above provides that unrealized rent should be deducted from clause (b) or clause (c) of section 23(1) i.e. the actual rent received or receivable. It does not provide that it should be deducted from clause (a) i.e. from expected rent. Thus, problem will arise when gross annual value is to be taken as expected rent instead of actual rent received or receivable as the assessee in that case cannot take the deduction of unrealized rent.

However, in the income-tax return forms, unrealized rent has been shown as deduction from the gross annual value (i.e. after taking expected rent or actual rent whichever is higher). It is therefore, recommended that unrealized rent should be deducted after computation of gross annual value.

Similarly, where a house is vacant for part of the year, section 23(1)(c) provides that gross annual value is be taken as actual rent if the same is less than the expected rent. In this case also, unrealised rent should be deducted after computation of gross annual value (i.e. the actual rent).

Schedule HP of the income-tax return form in which details of income from house property are to be given is given below:

Schedule HP Details of Income from House Property

EXAMPLE :

R furnishes the following particular in respect of a house property owned by him in Delhi.

	Rs.
Municipal value	2,00,000
Fair rent	2,40,000
Actual rent (per month)	21,000
Municipal tax paid during the year	20,000

The tenant vacated the property on 31.10.2022 and thereafter the property was let out for ₹25,000 p.m.

could not realise the rent for the months of September and October, 2022 due to the death of the earlier tenant.

(A) Compute the annual value of the property for the assessment year 2022-23.

(B) What will be your answer if the unrealised rent is for one month instead of two months.

SOLUTION : Solution to Q (A)

	Rs.	Rs.
Step I: Determine the value as per section 23(1)(a)
It shall be Rs.2,00,000 or Rs.2,40,000 whichever is higher		2,40,000
Step II: Actual rent received/receivable (21,000 x 7 + 25,000 x 5)		2,72,000
Gross annual value		2,72,000
Less: Unrealised rent	42,000
Less: Municipal tax paid	20,000	62,000
Net annual value		2,10,000

SOLUTION : Solution to Q (B)

	Rs.	Rs.
Step I: Determine the value as per section 23(1)(a)
It shall be Rs.2,00,000 or Rs.2,40,000 whichever is higher		2,40,000
Step II: Actual rent received/receivable (21,000 x 7 + 25,000 x 5)		2,72,000
Gross annual value		2,72,000
Less: Unrealised rent	21,000
Less: Municipal tax paid	20,000	41,000
Net annual value		2,31,000

4. Computation of Income of a Property which is self-occupied for Residential Purposes or which could not actually self-occupied owing to employment [Section 23(2), (3) & (4)]

(A) Where the Annual Value of such House shall be NIL [Section 23(2)(a) & (b)] :

Where the property consists of a house or part of a house which—

(a) is in the occupation of the owner for the purposes of his own residence; or

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,

the annual value of such house or part of the house shall be taken to be nil.

(B) Where the Annual Value of such House shall not be NIL [Section 23(3)]

The annual value of selfoccupied house shall not be nil:

(i) if such house or part of the house is actually let during the whole or any part of the previous year; or

(ii) any other benefit therefrom is derived by the owner from such house.

In the above cases, the annual value shall be determined as per provisions applicable for let out properties i.e. under clause (a), (b) or (c) of section 23(1).

(C) Where assessee has more than Two houses for self-occupation [Section 23(4)]

If there are more than two residential houses, which are in the occupation of the owner for his residential purposes then he may exercise an option to treat any two of the houses to be self-occupied. The other house(s) will be deemed to be let out and the annual value of such house(s) will be determined as per section 23(1)(a) i.e. the sum for which the property might reasonably be expected to let from year to year.

In other words, the annual value of two self-occupied houses opted by the assessee can be taken as nil.

The assessee in this case, should exercise his option in such a manner that his taxable income is the minimum. Such option may be changed from year to year. However, if an assessee has a house property which consists of two or more residential units and all such units are self-occupied, the annual value of the entire house property shall be taken as nil as there is only one house property though it has more than one residential unit.

1. Annual value as per Income-tax is after deduction of municipal taxes, etc. paid, if any.

2. The benefit of exemption of two self-occupied houses is available only to an individual/HUF.

3. If the assessee lets out his house to his employer, which in turn allots the same to him, as rent free accommodation, such house will not be treated as self-occupied for the above purpose, because he is not occupying his own house in the capacity of owner [D.R. Sunderraj v CIT (1980) 123 ITR 471 (AP)].

(D) Deduction in respect of One or Two self-occupied houses where Annual Value is NIL

Where annual value of one or two self-occupied house is nil, the assessee will not be entitled to the standard deduction of 30%, as the annual value itself is nil. However, the assessee will be allowed deduction on account of interest (including 1/5th of the accumulated interest of pre-construction period) as under: —

(a) Where the property is acquired or constructed with capital borrowed on or after 1.4.1999 and such acquisition or construction is completed within 5 years of the end of the financial year in which the capital was borrowed	Actual interest payable subject to maximum Rs.2,00,000 if certificate mentioned in point 2 in box given below is obtained
(b) In any other case, i.e., borrowed for repairs or renewal or conditions mentioned in clause (a) are not satisfied	Actual interest payable subject to maximum of ₹30,000

Note.—Where the assessee has opted for two houses to be treated as self-occupied, the deduction of amount of interest given above shall in aggregate remain Rs.30,000 or Rs.2,00,000, as the case may be, whether assessee has opted for one residential house or two residential houses to be self-occupied.

Thus the aggregate of the amount of deduction of interest in the case of first and second self-occupied house shall not exceed Rs.2,00,000.

Note – W.e.f. A.Y. 2021-22, if an individual or HUF opts to be taxed under section 115BAC, he/it shall not be entitled to deduction of the above interest of Rs.30,000 or Rs.2,00,000, as the case may be.

1. It may be noted that the deduction of interest of Rs.30,000 is allowed for purpose of repair or renewal or reconstruction of house property where as the deduction to the maximum of Rs.2,00,000 is allowed only for acquisition or construction of house property, subject to other conditions being satisfied. Further, if conditions mentioned in para (a) are not satisfied i.e. capital is borrowed before 1.4.1999 or house is not completed within 5 years (3 years upto A.Y. 2016-17) of the end of the financial year in which the capital is borrowed, deduction of interest shall be allowed to the maximum of Rs.30,000.

2. For getting deduction of interest of maximum of Rs.2,00,000, it will be necessary to obtain a certificate from the person to whom such interest is payable specifying the amount of interest payable by the assessee for the purpose of acquisition/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.

3. It may be observed that for let out/deemed to be let out property, the entire interest is allowed as deduction whereas in case of one or two self-occupied property the interest shall be allowed to the maximum of Rs.30,000 or Rs.2,00,000 as the case may be.

EXAMPLE-1:

Assessee has one house property at Vasant Kunj in Delhi. He stays with his family in this house. The rent of similar property in the neighbourhood is Rs.56,000 per annum. The municipal valuation is Rs.28,000. Municipal taxes paid in respect of the property are Rs.5,000 (including Rs.1,000 for an earlier year). The house was constructed in 2000 with a loan of Rs.20,00,000 taken from HDFC. During the previous year 2021-22, the assessee refunded Rs.2,80,000 which includes Rs.2,18,000 as current year interest. Compute the income from house property for assessment year 2022-23.

(b) What would be the deduction on account of interest if the loan was taken on or after 1.4.2011 and the property was completed in December, 2013.

SOLUTION :

	Rs.
(a) Annual value of one house used for self-occupation	Nil
Less: Deductions u/s 24(1) Interest on money borrowed ₹2,18,000 but restricted to max. ₹30,000	(-) 30,000
Loss from house property	(-) 30,000
(b) The deduction in this case will be ₹2,18,000 subject to a maximum of ₹2,00,000. Therefore, the loss for house property shall be ₹2,00,000.

EXAMPLE-2:

X has 3 houses, all of which are self-occupied. The particulars of the houses are as under:

Particulars	Ist House	IInd House	IIIrd House
Municipal Value	60,000	90,000	72,000
Fair Rental Value	72,000	1,20,000	80,000
Standard rent	—	1,00,000	—
Date of completion	1.1.1996	1.10.1996	1.9.2016
Municipal taxes	6,000 paid during the year	9,000 paid during the year	7,000 paid during the year

Suggest which two houses should be opted by X to be assessed as self-occupied so that his tax liability is minimum.

SOLUTION :

Assume all houses are deemed to be let out

Particulars	Deemed to be let out Ist House	Deemed to be let out IInd House	Deemed to be let out IIIrd House
Gross Annual Value	72,000	1,00,000	80,000
Less: Municipal taxes	6,000	9,000	7,000
Net Annual Value	66,000	91,000	73,000
Less: Statutory deduction @ 30%	19,800	27,300	21,900
Net annual value	46,200	63,700	51,100

If house I & II is opted to be self-occupied the income of house property shall be:	Rs.
House I	Nil
House II	Nil
House III	51,100
	51,100
If house II & III is opted to be self-occupied the income of house property shall be:
House I	46,200
House II	Nil
House III	Nil
	46,200
If house I & III is opted to be self-occupied the income of house property shall be:
House I	Nil
House II	63,700
House III	Nil
	63,700

Therefore, he should opt for house II & III to be self-occupied.

5. Deductions from Income from House Property (Section 24)

Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely: —

(a) Standard deduction:

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.

(b) 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 (as reduced by any part thereof allowed as a deduction under any other provisions of the Income-tax Act) 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.

1. Where a fresh loan has been raised to repay the original loan if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the ITO, the interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi). (Circular No. 28, dated 20.8.1969).

2. Interest on interest is not deductible. The assessee is entitled to deduct only the interest payable by him on the capital borrowed, and not the additional interest which because of his failure to pay the interest on the due date is considered as a part of the loan. [CIT v Saifuddin M. Moonum 1990 Tax LR 328 (Bom)].

3. Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as deduction. [Circular No. 28, dated 20.8.1969].

4. The assessee shall be not allowed any other deduction on account of any expenses incurred in relation to such house property.

5. The deduction in respect of a self-occupied house has been discussed later in the Chapter.

Any interest paid on outstanding amount of interest, will not be allowed as deduction. [Shew Kissen Bhatter v CIT (1973) 89 ITR 61 (SC)].

EXAMPLE:

The assessee took a loan of ₹6,00,000 on 1.4.2019 from a bank for construction of a house on a piece of land he owns in Delhi. The loan carries an interest @ 10% per annum. The construction is completed on 15.6.2021. The entire loan is still outstanding. Compute the interest allowable for the assessment year 2022-23.

SOLUTION :


(i) Interest for the previous year 2021-22 on Rs.6,00,000 @ 10%	60,000
(ii) Interest for the pre-construction period i.e. from 1.4.2019 to 31.3.2021 (1/5th of Rs.1,20,000)	24,000
Total interest allowable	84,000

Although the property is completed on 15.6.2021, the interest for the entire previous year i.e. 1.4.2021 to 31.3.2022 will be treated as current year’s expenditure.

6. Computation of income of House Property which is partly Let and partly Self-occupied

In this case the annual value, deductions and the income of the part of the property which is let shall be computed separately under the let-out property and the income of the portion or the part of the property which is self-occupied shall be determined as per para 5.10 under the “self-occupied property” category.

E.g. where one unit is let out and the other unit is self-occupied, then the whole property cannot be taken as a single unit. Municipal value or fair rent if not given separately, shall be apportioned between the let-out portion and self-occupied portion on built up area basis.

Similarly, where, in a building the ground floor is self-occupied and first floor is let out or vice-versa, such a property shall not be treated as a single unit. Instead, income from first floor which is let shall be computed separately as per let out provisions and the floor which is self-occupied shall be computed separately as per self-occupied provisions. Municipal tax and interest shall also be apportioned on the basis of built up/floor area space.

EXAMPLE:

R owns a house property in Delhi. 60% of the property is let out for ₹15,000 p.m. and 40% portion is self-occupied by him.

Compute his income from house property from the following information submitted to you:

Particulars	Rs.
Municipal value of the house	2,00,000
Fair rent	22,000 p.m.
Standard rent	20,000 p.m.
Municipal taxes paid	30,000
Interest on money borrowed for purchase of house property which was acquired in 2011	1,80,000

SOLUTION :

Since 60% of the property is let and the balance self-occupied we shall compute the income separately.

(A) House property let:

Compute expected rent

It shall be 60% of municipal value or fair rent whichever is higher.

Hence, it shall be (60% of Rs.2,64,000) = Rs.1,58,400

However, if cannot exceed 60% of standard rent i.e. Rs.1,44,000.

# Expected rent is Rs.1,44,000

Actual rent = Rs.15,000 x 12 = Rs.1,80,000

Hence, GAV shall be higher of the above two i.e. Rs.1,80,000.

Compute net annual value		Rs.
Gross annual value		1,80,000
Less: 60% of Municipal tax paid		18,000
Net annual value		1,62,000
Less: Deductions
Standard deduction @ 30%	48,600
Interest on money borrowed (60% of Rs.1,80,000)	1,08,000	1,56,600
Income from portion let		5,400

(B) Self-occupied portion

Annual value	Nil
Less: Deduction 40% of interest of Rs.1,80,000	72,000
Income from self-occupied portion	(–) 72,000
Income from house property Rs.5,400 – 72,000 = (–) Rs.66,600.

7. No Notional Income for House Property held as Stock-in-trade for a period upto Two years [Section 23(5)]

Where the property—

— consisting of any building or land appurtenant thereto is held as stock-in-trade:

and

— the property or any part of the property is not let during the whole or any part of the previous year,

the annual value of such property or part of the property shall be taken to be nil for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

EXAMPLE:

R Ltd. a builder has constructed a house property, the construction of which was completed on 15.12.2020. It has obtained a certificate of completion from the competent authority on 6.5.2021. In this case, the annual value of the house property till 31.3.2024 shall be taken as nil if it has not been let at all till that date. However, w.e.f. 1.4.2024, the notional annual value will have to be computed if such house property which is forming part of stock-in-trade was not let during the whole or any part of the previous year.

8. Interest when not deductible from “income from House Property” [Section 25]

Interest on borrowed money which is payable outside India shall not be allowed as deduction u/s 24(b), unless the tax on the same has been paid or deducted at source and in respect of which there is no person in India, who may be treated as agent of the recipient for such purpose.

9. Special Provisions for Arrears of Rent and Unrealised Rent received subsequently [Section 25A]

(1) Arrears of rent or unrealized rent received subsequently to be taxed under the head “Income from House Property [Section 25A (1)]:

The amount of—

— arrears of rent received from a tenant, or

— the unrealised rent realised subsequently from a tenant

by an assessee shall be deemed to be the income from house property in respect of the financial year in which such rent is received or realised, and shall be included in the total income of the assessee under the head “Income from house property”, whether the assessee is the owner of the property or not in that financial year.

(2) Standard deduction @ 30% to be allowed from such arrears of rent or unrealized rent [Section 25A (2)]:

A sum equal to 30% of the arrears of rent or the unrealised rent referred to in section 25A (1) shall be allowed as deduction.

10. Property owned by Co-owners [Section 26]

Sometimes the property consisting of buildings or the buildings and lands appurtenant thereto is owned by two or more persons, who are known as co-owners. In such cases, if their respective shares are definite and ascertainable, such persons shall not be assessed as an AOP in respect of such property, but the share of each such person in the income from the property, as computed in accordance with sections 22-25, shall be included in his total income as under:

(a) Where house property is self-occupied by each co-owner: Where the house property owned by the coowners is self-occupied by each of the co-owner, the annual value of the property for each of such coowner shall be nil and each of the co-owner shall be entitled to the maximum deduction of Rs.30,000/ 2,00,000 under section 24(b) on account of interest on borrowed money.

(b) Where the entire or part of the property is let: As regards, the property or part of the property which is owned by co-owners is let out, the income from such property or part thereof shall be first computed as if this property/part is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their definite share.

11. Can Annual Value (Net Annual Value) be negative?

The Annual Value (NAV) can be negative only when the municipal taxes paid by the owner are more than the gross annual value.

12. Can there be any Loss under the head “Income from House Property”

This brings us to the question as to whether there can be any loss under this head.

(i) In so far as income from one/two self-occupied property/(ies) is concerned, the annual value is taken as nil. No deductions are allowed except for interest on borrowed funds up to a maximum of Rs.30,000/2,00,000. Naturally, therefore, there may be a loss in respect of such property/(ies) up to a maximum of Rs.30,000/2,00,000, as the case may be.

(ii) In respect of any other type of house property, namely a house property which is fully let out or part of the year let out, etc., there are no restrictions on deductions and therefore, there can be loss under this head in respect of such properties due to municipal taxes as well as deductions. Similarly, deductions under section 24 in case of property deemed to be let out, can be more than net annual value.