Study Income From House Property

Income from house property Basic Concepts: Section 22 to 27 of the Income Tax Act deal with taxability of income in respect of house property. The following basic conditions must be satisfied for income to be taxed under this head:• • •

The property consists of buildings or land adjacent thereto The assessee must own property The property must not be used for the purpose of business or profession of the assessee. It must be used only for renting out so as to derive rental income.

Therefore any income from a property which is not owned by the assessee will not be treated as "income from house property" but as other income and other provisions of the Income Tax Act will apply in this connection. Deemed Owner In certain cases, the assessee, though not the owner of the property, is deemed to be the owner of the property i.e. he is treated as owner of the property and income from that property will be treated as income from house property. The following are such situations:1. The individual who transfer any property for inadequate consideration or who gifts that property of his spouse or to a minor child other than a married daughter will be treated as deemed owner of that property. ie though legally the owner of the property is spouse or minor child, the income from that property will be treated as income of this person who has transferred such property. 2. The holder of an impartable estate will be treated as the owner of that entire property for example where an HUF jointly holds property on behalf of all its members, then joint HUF will be treated as the owner though legally the property in the name of an individual member of family. 3. A member of co-op society, company or other association of persons to whom a building has been allotted under a house building scheme of society will also be treated as deemed owner of that property 4. A person who has satisfied the provisions of section 53A of the transfer of property act will be treated as deemed owner of that property. Section 53A of the Transfer of Property Act deals with situations where though the agreement for buying of property has not been registered with the appropriate authority, the person who has purchased the property will be treated as the owner of the property. 5. A person who has acquired right by way of long term lease of property will be treated as the owner of that property and income from that property will be taxable in his hands as under house property income. For this purpose long term lease means lease for period of more than 12 years. Income form House Property which is exempt ie Though there is income from house property, such income will not be taxable under the Indian Income Tax Law. The following are such situations:• • • • • • •

Income from a farmhouse used for agricultural purposes Property income earned by a local authority Income from property earned by trade union or association of trade union Income from house property earned by a political party Income from property held for charitable purposes Property used for own business or profession. If such property yields any income, such income will be treated as business income and not house property income One property which is used by an individual assessee or an HUF assessee for purpose of self occupation only and not for renting out to any person will be treated as exempt property and income from that property will not be treated as taxable income.

For the purposes of understanding the provisions of this chapter, let us divide the house properties into different categories:-

• •

Self Occupied Properties (SOP) Let Out Properties

If an individual or HUF assessee has only one property, that property will be treated as self occupied. Accordingly, there will not be any taxable income in respect of such property. However, if the assessee owns more than one property all of which are not rented out but are self occupied, then the assessee, at his option, may choose any one property as self occupied by him and the remaining properties though not actually let out, will be deemed to be let out ie they will be assumed to have been let out and a notional rental value will be treated as taxable income in the hands of the owner of such property. Such properties are known as properties deemed to have been let out. In respect of properties deemed to have been let out, a notional rental value will be treated as taxable income even if no rent has actually been received by the assessee. In order to determine the notional rental value, the highest of the following will be treated as taxable income:• •

Municipal Rental Value Fair Rental Value of a similar property in a similar locality.

However if the higher of the above two exceeds the standard rent of the property determined in accordance with the Rent Control Act applicable at the concerned locality, then the standard rent will be treated as taxable rental value of such property. Therefore in respect of self-occupied property, one property will be treated as an exempt property and in respect of other properties, a notional rental value will be treated as taxable income in the hands of the owner of the property. In respect properties, which have been let out, the amount of rent received will be treated as taxable rental income of the property. However the following are the provisions in this connection:Taxable rental value will be the highest of the following:• • •

Municipal Rental Value of the Property Fair Rental Value of a similar Property in a similar locality Rent actually received by the assessee in respect of the property in given previous year.

However if Rent Control Act is applicable in the locality where the house is situated, then the taxable value cannot exceed the standard rent fixed in accordance with the Rent Control Act except where the rent actually received exceeds the standard rent. Compute the rental value in the following cases:I

II

III

IV

V

Municipal Value

50

50

50

50

50

Rent Receivable

52

52

57

57

60

Fair Rental Value

56

56

56

58

61

Standard Rent under Rent Act

NA

55

55

55

73

Rental Value will be

56

55

57

57

61

The following are the different situations which may arise in computing the value of income from house property:1. Where the self occupied property is treated as an exempt property and has been self occupied through out the year. In such a case since this property is treated as an exempt property no taxable income will arise from such property. 2. Where a property has been self occupied for part of the year and let out for part of the year, one must calculate the annual rental value of the property in accordance with the above provisions and take a proportion of that annual value depending upon the period for which the property has been self occupied and has been let out as taxable income. 3. Where property has been let out throughout the previous year in such a case, the annual rental value will be calculated in accordance with the above provisions.

4. A property which is not actually let out but which is deemed to be let out. In such a case this property will be treated as if the property has been actually let out and the same provisions which as are applied to the property which is actually let out will apply. 5.Where the assessee has only one property which cannot be occupied by him because he has to reside at some other place on account of his employment, business or profession carried on at some other place. Such a property will be deemed to be self-occupied though not actually self occupied and all the provisions of self-occupied property apply. From the amount of annual rental value, there are certain deductions, which are available to the assessee to get the amount of taxable income from house property. The following are such deductions:• •

Under section 23, municipal taxes paid by the owner of the property will be allowed as a deduction form the annual value in order to get the amount of taxable income. Under section 24, the following expenses will be allowed as deductions from the amount arrived at after deducting municipal taxes from the annual rental value:-

i Repairs and Collection Charges. 30 % of the net adjusted annual rental value is allowed as deduction for repair and collection charges irrespective of whether the assessee has actually incurred the expenses or not. However if the repairs are borne by the tenant, this deduction will not be allowed in the hands of the owner of the property. ii Interest on Borrowed Money: Interest paid or payable on monies borrowed for purchase, construction, repair, renewal or reconstruction of house property will be allowed as a deduction. In case of a self occupied property treated as such, maximum deduction will be restricted to Rs30,000 and if the borrowing is made for acquisition / construction of house property after 1 April 1999 and the acquisition / construction is completed by 31 March 2003, instead of Rs30,000, Rs1,50,000 will be deductible. Where the house property has been acquired or constructed with borrowed money, the interest on such borrowed money for the period prior to the previous year in which the property had been acquired or constructed shall be deductible in five equal annual installments starting from the previous year in which the house has been acquired or constructed. In case of the exempt of self occupied property, maximum interest to be allowed as a deduction will be Rs30,000 per year. Where the assesssee is the owner of a house property which has been let out and has received any amount by way of arrears of rent not charged to income tax in earlier years, the amounts of such arrears will be taxable in the year of receipt. However, 30 % of such arrears will be allowed as a deduction on account of repairs and collection charges. Apart from the above mentioned deductions, no other expenses can be claimed as a deductions in obtaining the income from house property ie expenses such as maintenance expenditure, salary of watchman, water supply charges, electricity charges etc. cannot be claimed as a deduction in obtaining the taxable income from house property. Another important point is that in case of house property which is claimed to be self occupied, none of the above expenses except interest upto Rs30,000 per annum will be allowed as a deduction. Hints for Tax Planning 1.In case a person has more than one house properties, all of which are self-occupied, he should opt for that property whose rateable value as per municipal records is highest to be treated as self occupied. The other properties may be treated as deemed to be let out and taxed at a lower figure. 2.Expenses such as municipal taxes and property taxes which are allowed as a deduction only on payment basis must be paid during the relevant previous year. 3.Since interest paid outside India is allowed as a deduction only if tax has been deducted at source, adequate tax must be deducted on such payments in order to claim deduction. For example A owns two houses, I & II. House I is let out throughout the previous year. House II is self occupied for nine months and let out for three months on a monthly rent of Rs5,000. Determine Taxable income, given the following details:House I Municipal Value

House II 40,000

50,000

Fair Rent

50,000

48,000

Rent Received

48,000

15,000

Municipal Taxes paid

4,000

5,000

Insurance Premium (not yet paid)

2,000

2,500

Ground Rent

1,000

1,500

Maintenance Charges

3,000

3,500

Electricity Bill

5,000

6,000

Statement of Income House I Gross Rental Value (For House II @ 5000 * 12) Less : Municipal Taxes paid

House II 40,000

-4,000

Net Rental Value

60,000 -5,000

36,000

55,000

Less : Adjustment for Self-occupation (55000/12*9) Net Adjusted Value

0

-41,250 36,000

13,750

Less : Deduction u/s 24 Repairs & Collection Charges(1/4)

Taxable Income

-10,800

25,200

-4,125

9,625