Advance Learning on Income from House Property (Practical)

Meaning of House Property:-

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

Tax Chargeability [Sec. 22]

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.

Deductions from income from house Property [Sec.24]

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. [Circular No. 363, dated 24.06.1983]

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. [Circular No. 28, dated 20-8-1969].

Example: ABC owns 3 house properties situated in Delhi.
The particulars of the houses are as under:

Compute the income under the head house property of all the 3 properties.

Solution:House I: As the house property is let out through out the previous year the annual value shall be determined as per clauses (a) and (b) of Sec. 23(1).

Since the property is let out and was vacant for part of the year and the actual rent received is less than the value determined u/s 23(1)(a), Sec. 23(1)(c) would be applicable.

Therefore, the gross annual value shall be the actual rent received or receivable,

Determination of Annual Value

What is Annual Value?

Income from house property is taxable on the basis of annual value. Even if the property is not let out, notional rent receivable is taxable as its annual value.

As per Sec. 23(1)(a) the annual value of any property shall be the sum for which the property might reasonably be expected to be let out from year-to-year. In determining the annual value there are four factors which are normally taken into consideration. These are: i) Actual rent received or receivable, ii) Municipal value, iii) Fair rent of the property, iv) Standard rent.

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

As per the Act the annual value is the value after deduction of Municipal taxes, if any, paid by the owner. But for the sake of convenience, the annual value may be determined in the following steps:

Step I: Determine the gross annual value.

Step II: From the gross annual value compared 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 the Income-tax Act is the annual value.

Example:- Mrs. X has let out one house property @ Rs. 62,000 p.m., Municipal Valuation Rs. 72,000 p.m., Fair Rent Rs. 90,000 p.m., Standard rent Rs. 1,00,000 p.m., Municipal Tax paid Rs. 40,000.

Compute Net Annual Value.

Solution:-

Computation of Income under the head House Property:

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

Category A. House property - Let out throughout the previous year.

Category B. House property- Let out and was vacant during the whole or part of the previous year

Category C. House Property- Part of the year let out and part of the year occupied for own residence

Category A.:- House property- Let out throughout the previous year

Step 1: Determining the gross annual value:

According to Sec. 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 out from year-to-year (i.e., expected rent); or

(b) Where the property or any part of the property is let out 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.

For calculating Gross Annual Value of the property which is let out, 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.

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.

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.

Category B.:- House Property- Let out and was vacant during the whole or part of the previous year:

According to Sec. 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 out from year-to-year, i.e., the expected rent; or

b) where the property or any part of the property is let out 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; or

c) where the property or any part of the property is let out 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 scenarios emerge:-

Scenario: Where the property is let out 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 be let out from year-to-year; or

2) actual rent received or receivable, whichever is higher.

Example:- Municipal Value of house is Rs.1,00,000, Fair Rent Rs. 1,40,000, Standard Rent Rs.1,30,000. The house property has been let out for Rs.13,000 p.m. and was vacant for one month during the previous year 2011-12. Municipal taxes paid during the year were Rs. 50,000. Compute the annual value for assessment year 2012-13.