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BASIS OF CHARGE

Basis of charge of income of house property is Annual Value Basis. Annual Value is the
capacity of house property to generate income.

As per section 22 The annual value of property consisting of any buildings or lands
appurtenant thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried on by him,
the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the
head Income from House Property

Tax is charged on income from the buildings or lands appurtenant thereto: The buildings
include residential buildings, buildings let out for business or profession or auditoriums for
entertainment programmes. The location of the building is immaterial. It may be situated in
India or abroad. In case building is used by assessee for his own business/profession its
income cannot be charged under head house property.

House property should be used for any purpose other than Business or profession of
Assessee.

Tax is charged on income from lands appurtenant to buildings: In case land is appurtenant to
the building only then the income from such land can be charged under head house property
else it will be charge under head other sources.

Tax is charged from the owner of the buildings and land appurtenant thereto: Income for
house property can be taxed only in hands of the owner of the house property. Where the
recipient of the income from house property is not the owner of the building, the income is
not chargeable under this head but under the head Income from Business or Other Sources.

DEEMED OWNERSHIP
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 or minor child: an individual who transfers otherwise than for
adequate consideration any house property to his or her spouse, not being a transfer in
connection with an agreement to live apart, or to a minor child not being a married daughter;

Holder of an impartible estate:the holder of an impartible estate as the individual owner of all
the properties comprised in the estate;

Member of a co-operative society: 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 the
society, company or association, as the case may be, of that building or part thereof;

Person in possession of a property: A person who is allowed to take or retain 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, 1882. This would be applicable if following
conditions are satisfied.

Possession is handed over to the buyer


Sale consideration or major part of sale consideration has been paid or is promised to
be paid.
Sale deed has not been executed.

Person having right in a property for a period not less than 12 years: A person who acquires
any right in respect of a house property for 12yrs of more is deemed owner of the property.

COMPOSITE RENT
Meaning of composite rent: The owner of a property may sometimes receive rent in respect
of building as well as other assets like say, furniture, plant and machinery or for different
services provided in the building, for e.g. lifts, security, power backup. The amount so
received is known as composite rent.

Tax treatment of composite rent


Where composite rent includes rent of building and charges for different services (lifts,
security etc.): In that case the composite rent is be split up and the sum attributable to use of
property is to be assessed under section 22 as income from house property. The sum
attributable to use of services is to charged to tax under the head Profits and gains of business
or profession or under the head Income from other sources.

Where composite rent is received from letting out of building and other assets (like
furniture) and the two lettings are not separable:
(a) If the letting out of building and other assets are not separable i.e. the other party does not
accept letting out of buildings without other assets, then the rent is taxable either as business
income or income from other sources;
(b) This is applicable even if sum receivable for the two lettings is fixed separately.

Where composite rent is received from letting out of buildings and other assets and the two
lettings are separable:
(a) If building is let out along with other assets, but the two lettings are separable i.e. letting out
of one is acceptable to the other party without letting out of the other, then income from
letting out of building is taxable under Income from house property;
(b) Income from letting out of other assets is taxable as business income or income from other
sources;
(c) This is applicable even if a composite rent is received by the assessee from his tenant for the
two lettings.

PROPERTY INCOMES EXEMPT FROM TAX


Income from a farm house
Annual value of one palace in the occupation of an ex-ruler
Property income of a local authority
Property income of an approved scientific research association
Property income of an educational institution and hospital
Property income of a political party
Income from property used for own business or profession
Annual value of one self occupied property

DETERMINATION OF ANNUAL VALUE U/S 23


Annual Value is calculated on the basis of the Following.

Actual Rent Received/Receivable: It is the actual rent that was received or could have been
received from the tenant. It includes rent received in cash, kind or any other obligation of the
assessee paid by the tenant. It does not include rent for the period during which the property
remains vacant. Moreover, it does not include the rent that the tax payer is unable to realize,
if certain conditions are satisfied.

Municipal Valuation: Municipal value is the value determined by the municipal authorities
for levying municipal taxes on house property.

Fair Rental Value: It is the rent normally charged for similar house properties in the same
locality.

Standard Rent: Standard Rent is the maximum rent which a person can legally recover from
his tenant under a Rent Control Act. If a property is covered under the Rent Control Act, its
reasonable expected rent cannot exceed the standard rent.

CALCULATION OF GAV IN CASE WHEN HOUSE PROPERTY IS LET OUT FOR


WHOLE OR PART OF YEAR.

When Std Rent is not applicable

Expected Rent is higher of FRV/MV


GAV is higher of Expected Rent/Actual Rent

When Std Rent is applicable

Expected Rent is higher of FRV/MV however not more than Std Rent
GAV is higher of Expected Rent/Actual Rent

House Property Which Is Let but Was Vacant During Whole or Part of Previous Year

(1) Expected rent (which is higher of fair rent and municipal value subject to a maximum of
Standard rent.)
(2) Actual Receivable after deducting unrealized rent
(3) Higher of (1) or (2)
(4) Calculate loss due to vacancy
(5) GROSS ANNUAL VALUE= (3)-(4)

So where the property is let and was vacant during the whole or any part of the previous year,
gross annual value in this case will be calculated as under:

Situation GAV
a. If rent received or receivable by the owner in respect of The amount so received or
such property is less than reasonable expected rent, owing receivable.
to such vacancy,- Section 23(1)(c)
b. If rent received or receivable by the owner in respect of Reasonable expected rent
such property is less than reasonable expected rent, partly Less loss due to such vacancy.
because of such vacancy and partly because of any other
reason. [Circular No. 14/2001]

HOUSE PROPERTY WHICH IS LET FOR PART OF YEAR AND SELF


OCCUPIED FOR OTHER PART OF THE YEAR.

When Std. Rent is not applicable

Expected Rent is higher of FRV/MV


GAV is higher of Expected Rent/Actual Rent

When Std Rent is applicable

Expected Rent is higher of FRV/MV however not more than Std Rent
GAV is higher of Expected Rent/Actual Rent
In this case expected rent is taken for whole of the year. While calculation expected rent of
house property duration during which house property is self occupied is taken as on rent. So
the expected value is for full year and actual rent is for the period during which house
property is on rent.

Calculation of Net Annual Value

Net Annual Value is calculated as follows

GAV
Less Unrealised Rent
Less Municipal Taxes Paid
NAV

UNREALISED RENT
Unrealised Rent is allowed as deduction if following conditions are fulfilled

a) Tenancy is bona fide


b) Defaulting tenant has vacated the house property or steps have been taken to compel his to
vacate the property
c) Defaulting tenant is not in occupation of any other property of the assessee
d) Assessee has taken all reasonable steps to institute legal proceedings for the recovery of
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

Unrealised rent when subsequently realized

Where the assessee cannot realise rent from a property let to a tenant and subsequently the
assessee has realised any amount in respect of such rent, the amount so realised shall be
deemed to be income chargeable under the head Income from house property and accordingly
charged to income-tax as the income of that previous year in which such rent is
realised whether or not the assessee is the owner of that property in the previous year.
Recovery of unrealised rent and arrears of rent Section 25AA, 25B
Unrealised rent: Unrealised rent is deducted from actual rent in determination of annual
value under section 23, subject to fulfillment of conditions under Rule 4. Subsequently, when
the amount is realised it gets taxed under section 25AA in the year of receipt, whether or not
the assessee is the owner of the property in that year.

Municipal Taxes

Deduction for municipal taxes is allowed from GAV if

Municipal Tax is paid by the assessee. In case it is paid by the tenant it will not be
allowed as deduction.
Deduction is allowed on cash basis. In case municipal tax is paid for any other year
(past/future) deduction will be allowed in the year in which such taxes are actually paid.
Even if property is situated outside of India taxes paid in that country will be allowed
as deduction.

Calculation of Income from House Property

Net Annual Value is calculated as follows

GAV
Less Unrealised Rent
Less Municipal Taxes Paid
NAV
Less Deductions U/s 24
Standard Deduction i.e. 30% of NAV
Interest on Borrowed Capital .
Income form House property

Standard Deduction
It is equal to 30% of the Net annual value.

VALUE OF HOUSE PROPERTY WHICH IS SELF OCCUPIED FOR WHOLE OF


THE YEAR

Net Annual Value = Nil


Less Interest on Borrowed Capital
Income from House property

Net Annual Value of following house property is always taken as NIL

It is self occupied by the owner for his own residence for whole of the year
Can be self occupied by the owner due to his profession, employment, business being
carried on at any other place and he does not owns any residential house property at such
place.

INTEREST ON BORROWED CAPITAL


In case property has been acquired, constructed, repaired, renewed or reconstructed with
borrowed capital, the amount of any interest payable on such capital.
When property is on rent for whole of the year or part of the year entire interest on borrowed
capital for the relevant previous year will be allowed as deduction.

Interest on borrowed capital for pre construction period: Pre construction period means the
year previous to the previous year in which house property was completed. Interest for such
period will be allowed as deduction in five previous years starting from the previous year in
which house property is actually completed.

For example if loan is acquired on 1 May 2005 and house property is completed on 31 Jan
2010. The period from 1 May 2005 to 31 March 2009 will be taken as pre construction
period.

Limit of Interest on Borrowed Capital: Interest on borrowed capital is maximum to Rs.


1,50,000 in case of when house property is self occupied for whole of the year if both of the
following conditions are fulfilled.

House property is constructed or acquired with borrowed capital on or after 1 April


1999.
Such construction or acquisition is completed within 3 years of the end of the
financial year in which the capital is borrowed.

In case any or both conditions are not fulfilled then maximum deduction allowed is Rs.
30,000. In case capital is borrowed for repair, renewal or reconstruction then maximum limit
is Rs. 30,000.

Maximum deduction will be the actual amount or 150,000/30,000 whichever is less. In such
case there can be Loss from House property.

When assessee has more than one house property and both are self occupied

Where the assessee has occupied more than one house for the purposes of residence for
himself and family members, he has to make a choice of one house only in respect of which
he would like to claim exemption. Other self-occupied houses will be treated as if they were
let out and their annual value will be determined in the same manner as we have discussed in
the case of let out property.

Income from House property which is partly Self Occupied and partly Let Out
In such case Annual value of portion house property let out will be calculated separately and
the Annual Value of portion of house property self occupied will be calculated separately.

Municipal Value, Fair Rental Value and Standard Rent if not given proportionally needs to be
calculated separately.

Similarly Municipal Taxes and Interest on Borrowed Capital will also be proportionally
distributed.

In case one floor is self occupied and other floor is on rent it will be considered as one unit
which is partly self occupied and partly on rent.
Property owned by co-owners and is self occupied by them
As per Section 26 where the property consisting of building is owned by two or more persons
and their respective shares are definite and ascertainable, the share of each such person shall
be included in his total income and share of each co owner shall be computed as if each such
person is individually entitled to the relief provided in Section 23(2) that is Rs.
1,50,000/30,000.

Property owned by co-owners and is partly self occupied by them and Partly on Rent
In this case income from part of property let out will be calculated as if it is owned by one
owner only and will be then appropriated among each holder as per his share.

Negative NAV
NAV can be Negative only when property is let out and Municipal Taxes paid on such house
property is more than GAV

Loss Under Head House Property


Loss under Head House Property can be under following conditions

When property is let out and Deduction under Section 24 is more than GAV
When property is self occupied for whole of the year and such property has been
acquired, constructed, repaired, renewed or reconstructed with borrowed capital.

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