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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;
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.
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.
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.
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’, receivable.
owing 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
because of such vacancy and partly because of any other vacancy.
reason.
[Circular No. 14/2001]
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.
GAV
Less Unrealised Rent
Less Municipal Taxes Paid
NAV
UNREALISED RENT
Unrealised Rent is allowed as deduction if following conditions are fulfilled
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
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.
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.
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.
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.
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 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
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.