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:
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
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|
|(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)]||₹………….|
|4.||Income Chargeable under the head||₹………….|
|“Income from House Property” (2-3)|
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.
Ownership includes both free-hold and lease-hold rights and also includes deemed ownership.
[section 23(1)(a)]- Annual Value of House Property
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 4 factors which are normally taken into consideration . These are :
- Actual rent received or receivable
- Municipal value
- Fair rent of the property
- Standard rent
Tax Treatment of ‘Unrealised Rent’ [Explanation to Section 23(1)]
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;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(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.
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).
[Section 23(5)]- No Notional income for house property held as stock-in-trade for a period upto 2 years
Where the property—
— consisting of any building or land appurtenant thereto is held as stock-in-trade:
— 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 2 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.
[Section 25]- Interest when not deductible from “Income from House Property”
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.
[Section 25A]- Special provision for Arrears of Rent and Unrealised Rent received subsequently
(1) [Section 25A(1)]- Arrears of rent or unrealized rent received subsequently to be taxed under the head “Income from House Property:
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) [Section 25A(2)]- Standard deduction @ 30% to be allowed from such arrears of rent or unrealized rent :
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.
[Section 26]- Property owned by Co-owners – for computing House Property Income
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 co-owners is self occupied by each of the co-owner, the annual value of the property for each of such co-owner shall be nil and each of the co-owner shall be entitled to the maximum deduction of ₹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.
Can Annual Value (Net Annual Value) be Negative? – for computing House Property Income
The Annual Value (NAV) can be negative only when the municipal taxes paid by the owner are more than the gross annual value.
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 ₹30,000/2,00,000.
Naturally, therefore, there may be a loss in respect of such property/(ies) up to a maximum of ₹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.
[Section 24]- Deductions from income from House Property
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.
Any interest paid on outstanding amount of interest, will not be allowed as Deduction.
Amendment made by the Finance Act, 2020
If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC, he/it will not be entitled to claim loss under the head “Income from house property” with any other head of income. Further, such loss shall be deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.
Deemed Ownership [Section 27] for the purpose of Section 22 to 26 for computing House Property Income
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:
[Section 27(i)]- Transfer to a spouse:
If an individual transfers 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.
[Section 27(i)]- Transfer to a minor child:
If an individual transfers 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 discussed under Chapter 9.
[Section 27(ii)]- Holder of an impartible estate:
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.
[Section 27(iii)]- Member of a Co-operative Society, etc.:
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.
[Section 27(iiia)]- Person in possession of a property:
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.
[Section 27(iiib)]- Person having right in a property for a period not less than 12 years:
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.