02 House Property Notes 23

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Income From House Property

Charging Section
Section 22 is the charging section of this chapter it provides that
The annual value of
● property
● comprising of building and land appurtenant thereto,
● of which the assessee is the owner,
● is chargeable to tax under the head house property after deductions under section 24.
Building + Land Appurtenant thereto

● The term house property shall include
○ not only the buildings
○ but also the lands appurtenant thereto i.e. the term house property shall include even any open land which is part
and parcel of the building.
● Income from letting out of vacant land is, however, taxable under the head income from other sources.
Sale
If the income is from sale of house property
● it will be taxable under the head Capital Gains,
● however if the sale or purchase is part of a business,
○ income is taxable under the head Business/ Profession
Residential or Commercial
● House property includes all types of properties i.e. residential houses, shops, godowns, cinema building, workshop building, hotel
buildings etc.
● If any person has any hotel building which has been let out, income from such hotel building shall be taxable under the
head house property, but if he is running the hotel business or he is running the business of providing paying guest
accommodation, income shall be taxable under the head Business/Profession.
● Similarly, if he is engaged in the business or warehousing, income is taxable under the head Business/Profession.
● The income earned by an assessee engaged in the business of letting out of properties on rent would be taxable as business
income
For his own business

● Property which is occupied by the assessee for his own business or profession shall not be assessed under the head house
property will be assessed under the head business and profession.
● Where the property is let out with the object of carrying business of the assessee more effectively and efficiently, then the
rental income is taxable under the business head.
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Properties outside India

● Taxability will depend on residential status
Methods of computation of income from house property
Particulars Amount
Gross Annual Value
Less: Municipal taxes paid by the owner
Annual value (Net Annual Value)
Less: Deduction under section 24

1. Standard Deduction @ 30% of NAV
2. Interest on Borrowed Capital
a. Current year interest
b. Pre Construction Interest
Income from house property

Annual Value
Annual value has been defined in Section 23 of Income-tax Act 1961. The different cases covered by the definition are as follows.
Annual value in case of property which is let out throughout the previous year
The annual value of any property shall be deemed to be-
a. The sum for which the property might reasonably be expected to let from year to year (Popularly Known as Expected rent);or
b. If the actual rent received or receivable is in excess of the sum referred to in clause(a), the amount so received; or
In other words actual rent or expected rent whichever is higher will be GAV.
NOTES
1. Expected Rent = Municipal value or Fair rental value whichever is higher. But it cannot exceed standard rent.
2. Municipal Value is the value determined by the municipal authorities for levying municipal taxes.
3. Fair rental value means which can be earned by the similar property in the similar locality.
4. Standard rent is the rent fixed by the rent control act.
5. Expected rent is also known as Annual Lettable value (ALV).
6. Actual rent received or receivable shall include any amount spent by the tenant to discharge the liability of the landlord. If
the tenant (has a business of gas cylinders ) pays rent of Rs. 5,000 p.m. and 5 gas cylinders every month free to the
landlord. Value of each gas cylinder is Rs. 400, then total rent shall be 5,000 +2,000(5*400). In other words, actual actual
rent shall be calculated.
7. If the owner of the house bears certain obligations of the tenant, then it shall be deducted from the actual rent.
8. Any repair etc. under the contract of rent shall not be added back in the actual rent.
9. A non-refundable deposit will be included in the rent received or receivable on a pro-rata basis.
10. A refundable deposit shall not be added in the actual rent.
11. If no details are given to compute the ER/ALV then we will take AR a ER (but remember that ER is taken for full year)
Municipal taxes paid

1. Municipal taxes paid by the owner shall be deducted in the year in which it is paid by him irrespective of the period to which
it relates.
2. If GAV is nil municipal taxes paid shall not be deducted.
3. If Municipal taxes paid are greater than GAV then they shall be deducted and in that case NAV will be negative.
4. In case of property situated outside India taxes levied by the local authority of the country in which the property is situated is
deductible.
5. Municipal taxes are always computed on Municipal value irrespective of the fact that whether GAV=MV or GAV=FRV . etc.
6. Municipal taxes paid in case of PLO/PSO shall be deducted for the whole year.
7. A municipal tax includes water tax, house tax, fire tax and sewerage tax etc. but does not include any tax imposed by the
state.
Partly let out partly self-occupied

● Gav Computation will be the same as in the case of property which is let out throughout the previous year.

● In case of PLO/PSO ER shall be taken for the whole year. The ER of the whole year shall be compared with AR of the
actual let out period.
● Expected rent is always computed for 12 months except when construction is completed or house is purchased in the middle
of the year.
Unrealized Rent
The actual rent received or receivable should not include any amount of rent which is not capable of being realised. Provided that the
following conditions are satisfied.
1. Defaulting tenant has vacated property or steps have been taken to compel him to vacate the property and
2. The defaulting tenant is not in occupation of any other property of the assessee and
3. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the
assessing officer that legal proceedings would be useless.
4. The tenancy was bonafide.
In other words any unrealized rent can be deducted from Actual Rent received or receivable only if the above mentioned four
conditions are satisfied.
Example - PK , a British national, is a resident and ordinarily resident in India during the P.Y 20XX-YY. He owns a house in
London which he has let out at £ 10,000 p.m. The municipal taxes paid to the Municipal Corporation of London is £ 8,000 during
the P.Y. 20XX-YY. The value of one £ in Indian rupee to be taken at Rs. 82.50. Compute Rajesh’s taxable income for the A.Y.
20YY-ZZ.
Solution:
For the P.Y. 20XX-YY , Mr. PK, a British national, is resident and ordinarily resident in India. Therefore, income received by him by
way of rent of the house property located in London is to be included in the total income of India. Municipal taxes paid in London
are to be allowed as deduction from the gross annual value.
Computation of income from house property of Mr. Rajesh for A.Y. 20YY-ZZ
Particulars Rs.
Gross Annual Value (Rs 10,000 * 12* 82.50) 99,00,000
Less: Municipal taxes paid (Rs 8,000*82.50) 6,60,000
Net Annual value (NAV) 92,40,000
Less: Deduction under section 24
(a) 30% of NAV=30% of Rs. 92,40,000 27,72,000
Income from house property 64,68,000

Annual value in case of property which is partly let out and partly vacant.
In that case GAV shall be calculated in the following manner.
1. Despite vacancy actual rent is greater than expected rent then actual rent shall be considered as GAV.
2. If actual rent is less than expected rent owing to vacancy, then actual rent shall be GAV.
3. If actual rent is less than expected rent NOT DUE TO VACANCY , then GAV shall be expected rent.
Alternate Approach to understand this concept.

1. Calculate Proportionate Expected rent (PER)=ER* Actual period of let out/12
○ For example, let out period is 9 months ER=12000*9/12=9000
2. Now compare it with Actual rent (For example 800 per month)
○ 800*9=7200 is the actual rent
○ Since 7200 (AR) is less than 9000 (PER) therefore AR<ER because of reasons other than vacancy therefore
GAV=ER for 12 months=12000
3. Now suppose our actual rent is 1200 per month
○ Then 1200*9=10800 (AR) is greater than PER (9000) therefore GAV=AR= 10800, since AR<ER because of vacancy.
4. Even if AR=PER GAV=AR


Self-occupied property or unoccupied property Section 23(2)
Where the property consists of a house or part of a house which—

a. is in the occupation of the owner for the purposes of his own residence; or
b. cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried
on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house
or part of the house shall be taken to be nil.
More than two properties for self-occupation

Where the assessee owns more than two properties for self-occupation, then the GAV from any two properties, at the option of the
assessee, shall be nil.
● The other self-occupied/unoccupied properties shall be treated as “deemed let out properties”.
● This option can be changed year after year in a manner beneficial to the assessee.
● In case of deemed let-out property, the ER shall be taken as the GAV. As no AR will be there.
● The question of considering actual rent received/receivable does not arise. Consequently, no adjustment is necessary on account
of property remaining vacant or unrealized rent.
● Municipal taxes actually paid by the owner during the previous year, in respect of the deemed let out properties, can be
claimed as a deduction.
Property held as stock in trade

Annual value of house property will be charged under the head “Income from house property”, where it is held by the assessee as
stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as NIL for a period of TWO year from the end
of the financial year in which the certificate of completion of construction of the property is obtained
from the competent authority, if such property is not let-out during such period. [Section 23(5)]

Section 25A-special provision for arrears of rent and unrealised rent received
The amount of
● Arrears of rent received from a tenant or
● The unrealised rent realised subsequently from a tenant,
As the case may be, by an assessee shall be deemed to be the income from house property in respect of the financial year in which
such rent is received or realised,
And shall be included in the total income of the assessee under the head “Income from house property”.
Whether the assessee is the owner of the property or not in that financial year.
A sum equal to thirty percent of the arrears of rent or the unrealised rent referred to in sub-section (1) shall be allowed as a
deduction.
Question
Mr. Anand sold his residential house property in March, 20XX . In June, 20XX , he recovered rent of Rs. 10,000 from Mr. Gaurav,
to whom he had let out his house for two years from April 2010 to March 2012. He could not realise two months rent of Rs.
20,000 from him and to that extent his actual rent was reduced while computing income from house property for A.Y. 2012-13.
Further, he had let out his property from April, 2012 to February, 2017 To Mr. Satish. In April, 2014, he had increased the rent
from Rs. 12,000 to Rs. 15,000 per month and the same was a subject matter of dispute. In September , 20XX , the matter was
finally settled and Mr. Anand received Rs. 69,000 as arrears of rent for the period April 2014 to February, 2017.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand, and if so in which year?
Solution
Since the unrealised rent was recovered in the P.Y. 20XX-YY , the same would be taxable in the A.Y. 20YY-ZZ under section 25A,
irrespective of the fact that Mr. Anand was not the owner of the house in that year. Further , the arrears of rent was also received
in the P.Y. 20XX-YY, and hence the same would be taxable in the A.Y.20YY-ZZ under section 25A, even though Mr. Anand was
not the owner of the house in that year.
A deduction of unrealised rent recovered and arrears of rent would be allowed while computing income from the house property of
Mr. Anand for A.Y. 20YY-ZZ.
Computation of income from the house property of Mr. Anand for A.Y. 20YY-ZZ
Particulars Rs.
Unrealised rent 10000
Arrears of rent 69000
Total 79000
Deduction @ 30% 23700
Income from house property 55300
Deduction from income from house property section -24

Income chargeable under the head Income from house property shall be computed after making the following deductions:
1. A sum equal to 30% of the annual value (standard deduction)
2. Where the property has been acquired , constructed, repaired, renewed or reconstructed with borrowed capital, the amount of
any interest payable on such capital.
Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction or, as the case may be, the
aggregate of the amount of the deduction shall not exceed thirty thousand rupees.
Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or afte
mindr the 1st day of April, 1999 and such acquisition or construction is completed within 5 years from the end of the financial year in
which capital was borrowed, the amount of deduction or, as the case may be, the aggregate of the amounts of deduction under this
clause shall not exceed two lakh rupees.
Explanation.—Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital
borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part
thereof allowed as a deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the
said previous year and for each of the four immediately succeeding previous years:
Provided also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to
whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of
such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be
repaid as a new loan.
Explanation.—For the purposes of this proviso, the expression "new loan" means the whole or any part of a loan taken by the assessee
subsequent to the capital borrowed, for the purpose of repayment of such capital.
Provided also that the aggregate of the amounts of deduction under the first and second provisos shall not exceed two lakh rupees.
Notes:-
1. No deduction is allowed for any brokerages or commission for arranging loans.
2. Interest on fresh loan taken to repay the original loan is allowed as deduction.
3. Interest on unpaid interest is not deductible.
4. Interest on principal amount shall be allowed deduction when it becomes payable, even if unpaid.
5. Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with interest due thereon,
the seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the borrower. In such a case,
unpaid purchase price can be treated as capital borrowed for acquiring property and interest paid thereon can be allowed as
deduction under section 24.
6. Section 25. Interest chargeable under this act which is payable outside India shall not be allowed to be deducted if
a. Tax has not been paid or deducted from such interest. (या तो TDS डिडक्ट और पे हो जाए )
b. There is no person in India who may be treated as an agent under section 163. (या इं डिया में कोई एजेंट हो )


Properties owned by co-owners section 26
Sometimes the property consisting of buildings or the buildings and lands appurtenant thereto is owned by two or more persons, who
are known as co-owners. In such cases the share of each such person in the income from property, as computed in accordance with
section 22-25, shall be included in its total income as under.
Where the house property owned by the co-owner is self occupied by each of the co-owner , the annual value of the property for each
of such co-owner shall be nil and each of the co-owner shall be entitled to the deduction of 30,000 or 2,00,000 under section 24 on
account of interest on borrowed money.
However, the aggregate deduction of interest of each co-owner in respect of interest payable on loan taken for co-owned house
property and interest, if any, payable on loan taken for another property mentioned under section 23(2) owned by him cannot exceed
Rs. 30,000 / Rs. 2,00,000 as the case may be
As regards, the property or part of the property which is owned by co-owner is let out , the income from such property or part thereof
shall be first computed as if this property is owned by one owner and thereafter the income so computed shall be apportioned
amongst each co-owner as per their definite share.
Assessee must be the owner of the property
● Owner means a person who is entitled to receive income from the house property.
● He need not be a registered owner.
● Owner may be freehold or leasehold.
● The assessee must be the owner in the previous year he need not be owner in the assessment year.
● In case of disputed ownership, till the judgement from a court of law, Income tax department will decide in whose hands
income shall be taxable.
● In case of subletting since assessee is not the owner of the building sublet, hence the income derived there from shall not be
taxable as income of house property (Taxable under head other sources).
Deemed Owner -section 27.
Transfer to a spouse.
If an individual transfers any house property to his or her spouse
● otherwise than for adequate consideration, the transferor in that case deemed to be the owner of the property so transferred.
● This would, however, not cover cases where property is transferred to a spouse in connection with an agreement to live apart.
Transfer to a child.
If an individual transfer any house property to his or her minor child otherwise than for adequate consideration, the transfer in that
case is deemed to be the owner of the house property so transferred. This would, however, not cover cases where a property is
transferred to a minor married daughter.

Holder of an impartible state.

The holder of an impartible shall be deemed to be the individual owner of all properties comprised in the estate. The impartible estate
as the world itself suggests, is a property that is not legally divisible.
Member of a cooperative society etc.

A member of a cooperative society, company or other association of persons to whom a building or part thereof is alloted or leased
under a house building schemes of a society, company, association , shall be deemed to be the owner of that building a part thereof
deemed to be the owner of that building a part thereof allotted to him although the cooperative society company association is the
legal owner of that building.
Part performance of the contract (Person having possession of a property)

Person was allowed to take or retain the 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 shall be deemed owner of that house property.
Person having rights in a property for a period not less than 12 years.
A person who acquires any right in or with respect to any building or part thereof by virtue of lease transactions and that lease is for
not less than 12 years in that case the person shall be deemed to be the owner of that building or part thereof this will not cover the
situations where any right by way of lease needs to be renewed from month to month basis or for a period not exceeding one year.

Answer the following-

1. Mr. Raj transfers a property of market value Rs. 38,00,000 to his wife out of natural love & affection. The income from
such property is Rs 2,00,000. How will the property income be taxed.
2. Mr. Amit gifts a property valuing Rs. 10,00,000 to his minor child. The annual income from such property is Rs. 2,00,000.
How will the property income be taxed?
3. If in the above case Mr. Amit has gifted the house property to his minor married daughter, then what would answer have
been?
4. Mr. Anuj gives his house property to Mr. Dinesh on lease for 20 years. However, the lease is to be renewed by Mr. Dinesh
every year. How will the property income be taxed?
5. If in the above case Mr. Anuj gives his house property on lease to Mr. Dinesh for 2 years & Mr. Dinesh can get the lease
renewed for another 2 years on payment of a specified sum & so on for indefinite period, then what would your answer
have been ?
Answer
1. In this case, Mr. Raj has transferred his house property to his wife out of natural love & affection i.e. otherwise than for
adequate consideration . Therefore, he will be the deemed owner of such property & hence income of Rs 2,00,000 will be
assessed in the hands of Mr. Raj as “Income from House Property”
2. Here, Mr. Amit has gifted the property to his minor child i.e. without any adequate consideration. Therefore, Mr. Amit is
the deemed owner of such property & the income of Rs. 2,00,000 from the said property shall be taxable in his hands.
3. In case , an individual transfers the property without adequate consideration to his minor married daughter, then he shall
not treated as deemed owner in respect of such property as per section 27. Hence, the income from such property will be
taxed in the hands of the minor married daughter.
4. In this case, the lease is for 20 years i.e. for more than 12 years, but the same is to be renewed every year by Mr. Dinesh
i.e. for a period of not more than one year. Thus, Mr. Dinesh is not treated as the deemed owner of such property & the
income from such property will be taxable for Mr. Anuj.
5. Here, the lease is for the 2 years but Mr. Dinesh can renew it after every 2 years for indefinite period, which implies that
the lease can be for more than 12 years. Thus, Mr. Dinesh will be the deemed owner of such property & income therefrom
will be taxable in his hands.

Composite rent.
● When rent is received in respect of

○ building as well as for different services provided in the building for example
○ Lifts, Security, Power backup
■ In this case
➢ Sum attributable to different services shall be taxable under head PGBP/OS.
➢ Sum attributable to use of property shall be taxable under the head HP.
● When rent is received in respect of
○ building as well as for
○ other assets like furniture, plant and machinery.
■ In this case
➢ if letting out of building and other assets are not separable then the amount received as rent will
be taxable under head PGBP/OS. Even if the sum received for two is fixed separately.
➢ If letting out of building and other assets are separable then rent for building shall be taxable under
head house property and rent from other assets shall be taxable under the head PGBP/OS. This
shall be applicable even if rent is not separately fixed.


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Income From House Property

Building + Land Appurtenant thereto

For his own business

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Properties outside India

Methods of computation of income from house property

Less: Municipal taxes paid by the owner

Annual value (Net Annual Value)

Less: Deduction under section 24

Income from house property

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Municipal taxes paid

Partly let out partly self-occupied

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Alternate Approach to understand this concept.

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Self-occupied property or unoccupied property Section 23(2)

Where the property consists of a house or part of a house which—

More than two properties for self-occupation

Property held as stock in trade

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Deduction from income from house property section -24

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Properties owned by co-owners section 26

Assessee must be the owner of the property

Deemed Owner -section 27.

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Holder of an impartible state.

Member of a cooperative society etc.

Part performance of the contract (Person having possession of a property)

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Answer the following-

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● When rent is received in respect of

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