Rental income from a property being building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the head 'Income from house property'. This is taxed in the hands of the owner of the property.
Rental income from sub-letting
Rental income of a person other than the owner cannot be charged to tax under the head 'Income from house property'. Hence, rental income received by a tenant from sub-letting cannot be charged to tax under the head 'Income from house property'. Such income is taxable under the head 'Income from other sources' or profits and gains from business or profession, as the case may be.
Rental Income of a Shop
Shop being a building, rental income will be charged to tax under the head 'Income from house property'.
In the following cases a person may not be the registered owner of the property, but he will be treated as the owner (i.e., deemed owner) of the property and rental income from property will be charged to tax in his hands:
If an individual transfers his or her house property to his/her spouse (not being a transfer in connection with an agreement to live apart) or to his/her minor child (not being married daughter) without adequate consideration, then the transferor will be deemed as owner of the property.
Holder of impartible estate is deemed as the owner of the property comprised in the estate.
A member of co-operative society, company or other association of persons to whom a building (or part of it) is allotted or leased under house building scheme of the society, company or association, as the case may be, is treated as deemed owner of the property.
A person acquiring property by satisfying the conditions of section 53A of the Transfer of Property Act, will be treated as deemed owner (although he may not be the registered owner). Section 53A of said Act prescribes following conditions:
There must be an agreement in writing.
The purchase consideration is paid or the purchaser is willing to pay it.
Purchaser has taken the possession of the property in pursuance of the agreement.
In case of lease of a property for a period not less than 12 years (whether originally fixed or provision for extension exists), lessee is deemed to be the owner of the property. However, any right by way of lease from month-to-month or for a period not exceeding one year is not covered by this provision.
When apart from recovering rent of the building, in some cases the owner gets rent of other assets (like furniture) or he charges for different services provided in the building (for instance, charges for lifts, security, air conditioning, etc.). The amount so recovered is known as 'composite rent'.
The composite rent is to be bifurcated and the sum attributable to the use of property will be charged to tax under the head 'Income from house property' and charges for various services will be charged to tax under the head 'Profits and gains of business and profession' or 'Income from other sources' (as the case may be).
If letting out of building and letting out of other assets are non-separable (i.e., both the lettings are composite and not separable), entire rent is taxed under the head 'Profits and gains of business or profession' or 'Income from other sources'.
Computation of Annual Value
Gross annual value of a property which is let-out throughout the year is determined in the following manner:
Compute reasonable expected rent of the property
Reasonable expected rent will be higher of the following:
Municipal value of the property (For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property.)
Fair rent of the property (Fair Rent is the reasonable expected rent which the property can fetch. It can be determined on the basis of rent fetched by a similar property in the same or similar locality.)
If a property is covered under Rent Control Act, then the reasonable expected rent cannot exceed standard rent. Standard Rent is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.
Compute actual rent of the property
Actual rent means the rent for which the property is let out during the year. While computing actual rent, rent pertaining to vacancy period is not to be deducted. However, unrealised rent* is to be deducted from actual rent if conditions specified in this regard are satisfied.
* Unrealised rent is the rent of the property which the owner of the property could not recover from the tenant, i.e., rent not paid by the tenant. If following conditions are satisfied, then unrealised rent is to be deducted from actual rent of the year:
The tenancy is bona fide.
The defaulting tenant has vacated the property, or steps have been taken to compel him to vacate the property.
The defaulting tenant is not in occupation of any other property of the taxpayer.
The taxpayer has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless.
Compute gross annual value
Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to be the gross annual value.
(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent received, whichever is higher).
Computation of gross annual value in the case of a property which is vacant for some time during the year
Where the property or any part of the property is let 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 reasonable expected rent than the actual rent so received or receivable (as reduced by the vacant allowance) shall be considered to be the Gross Annual Value of the property.
It may be noted that if the let out property was vacant for whole or any part of the previous year and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause (a) above, then the amount actually received/receivable shall be taken into account while computing the G.A.V. If any portion of the rent is unrealisable, (condition of unrealisability of rent are laid down in Rule 4 of I.T. Rules) then the same shall not be included in the actual rent received/receivable while computing the G.A.V.
Net Annual Value (N.A.V.) is the G.A.V. less the municipal taxes paid by the owner. Only municipal taxes paid by the owner during the year can be deducted. Hence, municipal taxes due but not paid during the year cannot be deducted or taxes borne by the tenant cannot be deducted.
Annual Value is the N.A.V. less the deductions available u/s 24.
Deduction under section 24(a) @ 30% of Net Annual Value.
Deduction under section 24(b) on account of interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property. The provisions in this regard are as follows :
Interest is classified as pre-construction period interest and post construction period interest.
Post-construction period interest is the interest pertaining to the relevant year (i.e., the year for which income is being computed).
Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following:
Date of repayment of loan; or
31st March immediately prior to the date of completion of the construction/acquisition of the property.
Interest pertaining to pre-construction period is allowed as deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed. Thus, total deduction available to the taxpayer under section 24(b) on account of interest will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post construction period (if any).
Deduction in case of let-out property
Deduction under section 24(b) for interest accrued on loan taken for the purpose of purchase, construction, repair, renewal or reconstruction of the property is available upto ₹ 2 lacs.
Municipal taxes including service-taxes levied by any local authority in respect of house property is allowed as deduction, if:
Taxes are borne by the owner; and
Taxes are actually paid by him during the year.
Deduction in case of Self occupied property
A self-occupied property means a property owned by the taxpayer which is occupied throughout the year by the owner for the purposes of his own residence and is not actually let out during the whole or any part of the year. Thus, a property not occupied by the owner for his residence cannot be treated as a self occupied property. However, there is one exception to this rule. If the following conditions are satisfied, then the property can be treated as self-occupied and the annual value of a property will be 'Nil', even though the property is not occupied by the owner throughout the year for his residence:
The taxpayer owns the property;
Such property cannot actually be occupied by him owing to his employment, business or profession carried on at any other place and he has to reside at that other place in a building not owned by him;
The property mentioned in (a) above (or part thereof) is not actually let out at any time during the year;
No other benefit is derived from such property.
In case of a self occupied property, the limit for deduction is ₹ 2,00,000 (w.e.f. 01.04.2015. Earlier ₹ 150,000/-) or ₹ 30,000, as the case may be.
If all the following conditions are satisfied, then the limit in respect of interest on borrowed capital will be Rs.2,00,000/- :
Capital is borrowed on or after 1-4-1999.
Capital is borrowed for the purpose of acquisition or construction (i.e., not for repair, renewal, reconstruction).
Acquisition or construction is completed within 3 years from the end of the financial year in which the capital was borrowed.
The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for acquisition or construction of the property.
If any of the above condition is not satisfied, then the limit will be reduced to ₹ 30,000.
In case of a self occupied property, deduction under Section 24(a) (30% of Net Asset Value) and deduction for municipal taxes is not available.
Deduction for interest on housing loan [Section 80EE] :
As per Section 80EE of the Income-tax Act, deduction of up to ₹ 50,000 is allowed to an Individual towards interest on loan taken for acquisition of a residential house property.
However, the deduction is allowed subject to following conditions:
the loan should be sanctioned by the financial institution during the during the FY 2016-17;
the amount of loan should not exceed ₹ 35 Lakh;
the value of residential house property should not exceed ₹ 50 lakh;
the assessee should not own any residential house property on the date of sanction of loan.
The deduction is available from Assessment Year 2017-18 and subsequent assessment years.
Some Important Points
In case of a self occupied property, the annual value is taken as nil. Deduction u/s 24 for interest paid may still be claimed therefrom. The resulting loss may be set off against income under other heads but can not be carried forward.
If more than one property is owned and all are used for self occupation purposes only, then any one can be opted as self occupied, the others are deemed to be let out.
Annual value of one house away from workplace which is not let out can be taken as NIL, provided that it is the only house owned and it is not let out.
Municipal taxes paid by the taxpayer upto 31st March can only be deducted. Outstanding Municipal taxes paid in next year cannot be deducted. If taxes are paid by tenant also cannot be deducted.
If tax incidence is attracted under section 22 in respect of a property situated in foreign country, annual value will be computed as if the property is situated in India.
If a self-occupied property is let-out for the part of the year, the house property will be taken as let-out property and no concession shall be available for the duration during which the property was self-occupied.
If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion of self occupied property or period of self occupation, as the case may be is to be excluded from the annual value. Each part of the property shall be considered as separate property and income will be computed accordingly.
As per section 25B, where an assessee, being the owner of any property consisting of any building or lands appurtenant there to which may have been let to a tenant, receives any arrears of rent not charged to income tax for any previous year, then such arrears shall be taxed as the income of the previous year in which the same is received after deducting therefrom a sum equal to 30% of the amount of arrears in respect of repairs/collection charges.
It may be noted that the above provision shall apply whether or not the assessee remains the owner of the property in the year of receipt of such arrears.
Frequently Asked Questions
Unlike the other heads of income, Income from house property is a notional income based on a concept called 'Annual value'. This is the value a property is expected to fetch if it is let out. It may be more than the actual rent being received if let out. If it is not let out the expected market/fair rent will be considered as 'annual value' for the purpose of taxation. Property includes the building and the land surrounding it.
Yes, provided the property is not used for business purpose.
The person should own the property.
No. You can claim any one as self occupied. Incomes from buildings situated in or near agricultural farm are considered exempt provided they are used for dwelling of the farm owner/cultivator or for related purposes of storage etc.
Yes. As already mentioned in earlier question, income from house property is a notional income and only in respect of one residential unit, if self occupied, it will be considered as 'nil'. In case of the other residential unit, marketable rental value will have to be offered for tax.
No. The net taxable income from the property must be calculated first and then apportioned between the co-owners. In this process of calculation maximum interest payable of Rs.1.5 lakh can be considered only once.
The calculation will have to be made separately for the various properties.
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