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 House II
Municipal Value 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 House II

Gross Rental Value (For House II @ 5000 * 12) 40,000 60,000

Less : Municipal Taxes paid -4,000 -5,000

Net Rental Value 36,000 55,000

Less : Adjustment for Self-occupation

(55000/12*9) 0 -41,250

Net Adjusted Value 36,000 13,750

Less : Deduction u/s 24

Repairs & Collection Charges(1/4) -10,800 -4,125

Taxable Income 25,200 9,625