Law

Taxation of Income under the head – House Property

Keywords:- Ownership, Income, House Property, Tax Law, Annual Value

Written By: Vrinda Agrawal

Topics Covered:

• The conditions to be satisfied for income to be chargeable under the head house property 
• What is Annual Value?
• What is Deemed Ownership? 
• How does Income arise from House Property?
• What is meant by co-ownership and what is its tax treatment etc.
• House Property Incomes exempted from Tax

INTRODUCTION

The taxability of a person’s income under the Income Tax Act 1961 determines whether or not such income is taxable. Section 4(1) of the Income Tax Act imposes a tax on an assessee’s entire income (subject to statutory exclusions). Section 5 defines the extent of total income, which varies depending on where you live. The heads of income under which an assessee’s income will fall are listed in Section 14. Different sections of the Act deal with the rules for computing income and the permitted deductions under various heads of income.

Sections 22 to 27 deal with Income under the Head House Property.

Income under the head House Property can be calculated:

Section 22 of the Act states the Basis of  Charge = Section 23 (Annual Value) – Section 24 (Deduction from Annual Value).

Income from House properties can arise in two ways:

1. Income arising from the sale of House Property
   • Property held as Stock in Trade – Income taxable under the head ‘Profits and Gains from Business & Profession’ (Section 28-44DB)
   • Property held as Investment – Income under the head ‘Capital Gain’(Section 45-55A)
2. Income arising from letting out of house property
   • Property held as Stock in Trade – Income taxable under the head Profits and Gains from Business & Profession (Section 28 – 44DB)
   • Property held as Investment – Income under the head ‘Capital Gain’ (Section 22 – 27)

GROSS ANNUAL VALUE

The Gross Annual Value of a property is the value at which the property might reasonably be expected to be let from year to year. It is more like a notional rent that one could have earned in case the property had been let out. Even if the property is not let out, the notional rent or deemed rent receivable is taxable.

ANNUAL VALUE

Annual value means the sum for which the property might reasonably be let out year after year. So the focus of the law is on the earning capacity of the house and not the actual income only. To ascertain the annual value, the following four factors should be considered-

1. Rent received or receivable – It refers to the actual rent received or receivable for the year.
2. Fair Rent – It means rent of a similar type of property in the same locality.
3. Municipal Value – The value assessed by the Municipal Authority to impose the municipal tax.
4. Standard Rent – Rent is fixed under the Rent Control Act.

ThiNet Annual Value is calculated as gross annual value less municipal taxes paid.

Income (under this head means Annual Value) is taxable under the head house property if two conditions are satisfied:

1. There shall be a house property which shall include a building or land appurtenant (i.e. any land which is attached to the building) thereto.

This section will not include any land (if there is any income through the lending of such land, its taxability would be under the head of other sources) or buildings under construction.

2. The assessee should be the owner of such house property.

In the section 

• The building includes residential, factories, buildings, offices, shops, etc.
• Rent of vacant land would be taxable under the head of other sources
• The ownership of the house property must exist in the previous year, not necessarily be in the assessment year.
• Income earned by the assessee engaged in the business of ‘letting out’ would be taxable as Profits and Gains from Business & Profession.
• Property that is sublet would be taxable under the head of other sources.
• Where the owner uses his house property for his business or profession, then income from such a house is taxable under the head ‘Profits and gains of business or Profession’ and not under the head ‘income from house property’.
• Where a tenant keeps a sub-tenant in his/her rented premises then income from such sub-lease is taxable under the head ‘income from other sources’ as the assessee is not the legal owner of the house.

COMPOSITE RENT

1. Rent received for building and other services like PG House

Priority I: Apportionment between House Property and Profits and Gains from Business & Profession (will be decided by the assessee itself)

Priority II: If apportionment is not possible, the intention of the assessee is to be taken into consideration, if the assessee’s main business is to let out the property then the income would be taxable under the head of house property but if the intention was to run a business activity, in such case the income would be taxable under the head of Profits and Gains from Business & Profession.

2. Rent received for building and other assets like plant and machinery, furniture 

(i) In the case where separate letting out is not possible:- 

If the main business activity is to let out the property in such case the income would be taxable under Profits and Gains from Business & Profession or if it is not the main business of the assessee then in such case the income would be taxable under other sources

(ii) Separate letting out is possible:- Apportionment between house property and Profits and Gains from Business & Profession/other sources

HOW IS ANNUAL VALUE DETERMINED

Where let out property is vacant for part of the year [Section 23(1)] 

In the case where the property is vacant for part of the year, in such case, the expected rent would be lower than the actual rent received or receivable. In such a case the actual rent becomes the Gross Annual Value.

Where property is self-occupied / unoccupied [Section 23(2)] 

Where the property or part of the property is self-occupied or hasn’t been let out during any part of the preceding year, in such case the annual value of that part would be taken as NIL. The sole deduction permitted in relation to such a house is for interest on borrowed capital under Section 24(1)(vi), but only up to Rs.30,000 or Rs.2,00,000, depending on the case. In other words, such a residence could result in a loss of this extent.

Self-occupied house property is utilized for residential purposes. This could be the home of the taxpayer’s family, including parents, spouses, and children. For income tax purposes, a vacant house property is considered self-occupied.

The benefit of treating the properties as self-occupied has been expanded to 2 houses for FY 2019-20 and beyond. For income tax purposes, an owner can now declare his two homes as self-occupied and the remaining house as to be let out. In this case, the annual value of the property will be determined as per the case of the let-out property. 

Where the property is partly let out and partly self-occupied during the PY [Section 23(3)] 

1. Property is let out Partly:

When a part of the house is self-occupied for the entire year and another portion is self-occupied for a part of the year, the annual value of the house is calculated by using the following:

The proportional annual value for the self-occupied component of the house for the entire year shall be reduced from the complete annual value of the house. As well as the annual value for the let-out portion for a part of the year shall be the balance as per the above-mentioned provision. 

2. If the house is let out during any part of the year PY and self-occupied for the remaining year:

Since the house was let out for a part of the year and was self-occupied for the rest of the year, the gross annual value is calculated as the rent that could have been received in case the property was let out for the whole year. The period of self-occupation is irrelevant.

The Gross annual value is taken as higher of the

a) Expected rent by letting out the property for the whole year i.e. higher the municipal valuation or fair rent,

b) Actual rent received or receivable only for the period it was let out

3. Self-occupied House remaining vacant : 

The assessee can claim non-occupation or vacancy allowance during the previous year for the period during which the individual was not able to occupy the self-occupied property for residential purposes, and had to live in a property that did not belong to him (for business or professional or employment purpose only)  and for that reason, his house remained vacant. Also, the Annual value for such property would be nil for the time the property remained vacant. 

The above-mentioned concession will only be made available in the house property that was not let out during the period and no other benefit was taken from such property.

Only a deduction of up to Rs.2,00,000 for interest on borrowed capital is allowed if the following conditions are met: 

1. Capital is borrowed for the purchase or construction of property; 

2. Capital is borrowed on or after April 1, 1999, and such acquisition or construction is completed within five years (3 years up to assessment year 16-17) from the end of the financial year in which capital was borrowed.

Further, if any of the aforementioned conditions are not met, the maximum deduction allowed is only Rs.30,000.

Deemed to be let-out property [Section 23(4)] 

1. When a taxpayer owns more than two house properties, the law mandates that only two such properties can be treated as self-occupied while the third one will be deemed to be let out.
2. Municipal Taxes paid by the owner for the whole year allowed as a deduction 
3. The Expected Rent becomes the Gross Annual Value of the house property and is partly let out for a part of the year.

Notional income from house property held as stock in trade [Section 23(5)]

Where the 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; 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, which shall be taken to be NIL.

                                       :- Business of Letting Out

House of Property                      

                                       :- Business of Purchase/Sale  

1. Up to 2 year — Vacant — Gross Annual Value = NIL
2. After 2 Years — Deemed Let out — Taxable under House Property

INADMISSIBLE DEDUCTIONS (SECTION 25)

Interest payable outside India under the Act will not be permitted as a deduction if no tax has been deducted from it and no person in India may be considered an agent.

Unrealized Rent: It means rent that is not recovered by the owner from the tenant it is like bad debts or friends it is deductible while calculating actual rent if the following four conditions of rule 4 are satisfied:

1. The tenancy should be bonafide
2.  The tenant should have vacated that house’s property
3. Such tenants should not occupy any other house property of the same assessee
4. Reasonable steps should have been taken for the recovery of a realized rent.

So, Actual Rent = Rent Received + Receivable – Unrealised Rent

TREATMENT OF UNREALIZED RENT / ARREAR OF RENT (SECTION 25A) 

It confers that the value of rent received in arrears{rents under dispute} or the amount of unrealized rent realized subsequent by an individual shall be imposed to income tax in the previous year in which such rent is obtained or realized, regardless of whether the individual is the property owner in that previous year. Rent arrears or unrealized rent realized later by taxpayer will be allowed as a deduction in the amount of 30%.

Recovery is taxable in the year in which it is recovered under the head house property, whether the assessee is the owner of the property or not in that FY. Any expenditure incurred for such recovery shall be ignored.

Accordingly, Taxable Amount = Recovery X 70% (30% Standard Deduction)

INCOME FROM CO-OWNED PROPERTY (SECTION 26) 

If your property is owned by two or more persons and their respective shares are characterized as well as ascertainable. Then the share of each such person in the income from house property shall be calculated by the provisions of Sections 22 to 25 of the Income Tax Act, 1961, as outlined in Section 26 of the Income Tax Act, 1961.

In a situation when the co-owners house property is self-occupied, the Annual Value for each of them shall be understood as NIL. In the case of Interest on Borrowed Capital, each Co-Owner is entitled to a deduction of INR 30000 / INR 200,000; as the case may be.

Thus, if two or more people jointly acquire a single property and then rent it out, all of the co-owners can reduce income tax by the method of apportionment amongst the co-owners according to their shares. 

STATUTORY STANDARD DEDUCTION

Every SSC shall be allowed on notional expenditure equal to 30% of the net annual value of the house. For the various expenditures incurred by him.

So, actual expenditure incurred by the accessory shall not be taken into consideration.

DEEMED OWNERSHIP

Section 27 of the Act states about Deemed Ownership where the transferor will be presumed to be the owner in case:

1. A person who transfers property to his minor child (not being a married daughter) to his or her spouse (other than in accordance with an arrangement to live apart) without proper consideration is presumed to be the owner of such property.

Thus, if a person transfers another asset, and his or her spouse or minor child purchases real estate with that asset, then that person is not considered a presumed owner.

For Example: If Mr.X gives his wife Rs.1,00,00,000 and she uses that money to buy a house; herein Mr. X would not be considered as a presumed owner. The income from that property is taxable in his wife’s hands.

2. If a company or cooperative society allows the property to its shareholders/members, the company as well as cooperative society is technically the owner of such property. However, the shareholder/member to whom the property is allotted is considered to be the property’s deemed owner.
3. If a buyer takes possession of a property without registering the sale deed; the buyer would be considered the property’s owner.

So, if a person who is permitted to take or keep possession of a building (or part thereof) in partial fulfillment of a contract of the nature described in section 53A of the Transfer of Property Act, 1882, is regarded to be the owner of that building (or part thereof).

4. Any individual who obtains any privileges (eliminating any rights granted under a month-to-month lease or for any such transaction as mentioned in section 269UA(f) [i.e. if a person takes a house on lease for 12 months or more, Persons who buy properties based on Power of Attorney]

HOUSE PROPERTY INCOMES – EXEMPTED FROM TAX 

1. Section 10 exempts tax revenue derived from buildings in and near agricultural land that is used to generate agricultural income (1). For example, renting or leasing a farmhouse or a storeroom.
2. Section 10(20) exempts income generated from property confined to local authorities accordingly.
3. Section 13A exempts income generated from house property of a political party from taxation.
4. Revenue generated from the property that belongs to any approved scientific research association would be tax-free under Section 10(21).
5. Section 10(23C) exempts income from any educational and medical institutions property from taxation accordingly.
6. According to Section 11, income from property used for charity or religious purposes is tax-free.
7. Section 10(24) exempts the property income of certified trade unions from taxation.
8. According to Section 10(19A), exempts the annual worth of one palace owned by an ex-ruler of Indian states from taxation, although other palaces are subject to taxation.
9. Section 23(2) exempts the net value of two self-occupied properties used for personal purposes from taxation.
10. Section 22 of the Act exempts income from property utilized for one’s own business or profession.

REFERENCES

1. https://indiankanoon.org/
2. https://taxguru.in/
3. https://www.icsi.edu/media/webmodules/TAX_LAWS_june2020.pdf
4. CA Vivek Gaba Sir
5. CA Vipul Shah

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