Income From House Property

Contents
   
1 Preface
2 The Concept
3 Kind of property
4 Who is liable to pay ?
5 The concept of annual value
6 Determination of annual value of self-occupied property
7 Annual value of one house away from work place
8 Annual value of let out property
9 Other deductions
10 Special note relating to interest
11 Note regarding the deductions
12 If unrealized rent is subsequently, is it taxable ?
13 Can there be loss under the head income from house
property?
14 The treatment of such loss
15 Co-ownership of property

PREFACE

Among the various sources of income that a person can have, income from house
property is one of the important heads of income under the Income Tax Act. In most
cases it is rather easy to compute taxable income from house property. At times,
however, some complicated problems of computation of income are faced by the
taxpayers who do not have legal assistance.

This booklet brought out under Tax Payers Information Series attempts to solve this
problem by explaining the provisions relating to calculation of income from house
property in a non-legalistic and easy-to-understand language.

The booklet has gone through several editions since 1994 when it was first published by
this Directorate. This edition has been updated by Sh. I. Satish Kumar, an officer
working in the Regional Training Institute, Bangalore under the able guidance of Smt.
Manju Madhavan, Commissioner of Income-tax. Latest provisions as amended by the
Finance Act, 2001 have been incorporated in it.

It is my earnest hope that the booklet, as in the past, shall be found useful by the
taxpayers. Any suggestions for its improvement are welcome.

Rajiv Lal
New Delhi
Dated 19th November 2001

RAJIV LAL
Director of Income tax (RSP&PR)

Income from House Property

House Property is regarded as a source of income for Income-tax purposes.  Income

from house property is one of the heads of income under the Income tax Act.  Your
income from different heads like Salaries, Income from house property, profits and gains
of business or profession, capital gains and other sources are first determined and then
added to get your total income which is subjected to tax at the rates specified in the
Finance Act.  The Income tax Act has provided the manner of computation of income
under different heads giving the permissible deductions and exemptions under each
head of income.

The Concept

In ordinary parlance, your income from house property will presuppose that you have a
house from which you are deriving income in the form of rent.  The scope of income
from house property for the purpose of the Income tax Act is, however, much wider.  It
is quite possible that the house property in question is not giving you any rent as is the
case when it remains vacant throughout the year or you may be using it yourself for
self-occupation.  Yet, for the purpose of the Income-tax Act, you will have income from
house property.  For what is taxed under this head is not the actual rent but the inherent
capacity of the property to earn income.  This is technically known as the “annual value”
of the property.

The kind of property

The property that we have been speaking of should consist of buildings or land
appurtenant to such buildings.  Income from letting out of vacant plots of land when
there is no adjoining building will not be taxed under this head (but will be taxed as
income from other sources).  The existence of a building is, therefore, an essential
prerequisite.  Building will of course, include residential house (whether let out or self-
occupied), office building, factory building, godowns, flats etc.  And the purpose for 
which the building is used by the tenant is also immaterial.  Thus, income from letting
out godowns will be taken as income from house property.  It does not make any
difference at all if the property is owned by a limited company or  a firm.  However, if
the building or part thereof is used by the owner himself for the purpose of his own
business  then there will be no income from such portion of the house property.

Who is liable to pay ?

We have seen that the inherent capacity of a property consisting of any buildings or
lands appurtenant thereto is subjected to tax under the head income from house
property.  But in whose hands?  The answer is in the hands of the owner of the property.
The assessee must be the owner.  In case the assessee is not the owner, but gets rent
from sub-letting a property, the income will not be taxed as income from house property
(but will be considered as income from other sources).  Ownership will also include
deemed ownership.  As per Sec.27 of the Income tax Act, the following persons are to
be treated as deemed owner of house property for the purpose of charging to tax
income from house property:

1. An individual who has transferred his house property to his spouse (otherwise
than in connection with an agreement to live apart) or to a minor child (not being
a married daughter);
2. The holder of an impartible estate is deemed to be the individual owner of the
properties of the estate;
 3. A member of a Co-operative Society, Company etc., to whom a building or part
thereof has been allotted or leased under a house building scheme;
4. A person who is allowed to take or retain possession of a property in part
performance of a contract as defined in Section 53A of the Transfer of Property
Act; and
5. A person having long-term lease rights in a property under a lease agreement
extending to 12 years or more in the aggregate including the term for which the
lease may be extended.

Thus, when a flat is allotted by a Co-operative Society or a Company to its members/

shareholders who enjoy the flat, technically the Co-operative Society/Company may be
the owner.  However, in such situations the allottees are deemed to be owners and it is
the allottees who will be taxed under this head.  Persons who purchase properties on the
basis of Power of Attorney and under long-term leases (12 years & more) are also
deemed to be owners.  The concept of deemed owner is introduced to prevent misuse
like transferring properties in the name of spouse or minor child etc., and for assessment
of income in the hands of beneficial owner.

Ownership must be of the superstructure.  It is not necessary that the assessee should
also be the owner of the land.  Thus, when  someone takes a piece of land on lease and
constructs a building thereon, the income from such building will be taxed in his hands
as income from house property.

To sum up, it can be said that the inherent capacity to earn income of a property
consisting of buildings or lands, appurtenant thereto is charged to tax as income from
this property in the hands of the owner except in respect of the whole or such part of the
property as is used for the purpose of his own business or profession, the profits of
which are chargeable to Income-tax separately.

The concept of Annual Value:

The basis of calculating Income from House property is the “annual value”.  This is the
inherent capacity of the property to earn income and it has been defined as the
sum for which the property might reasonably be expected to let from year to
year.  It is not necessary, as we have seen earlier, that the property should actually be
let.  It is also not necessary that the reasonable return from property should be equal to
the actual rent realized when the property is, in fact, let out.  Where the actual rent
received is more than the reasonable return, it has been specifically provided
that the actual rent will be the annual value.  Where, however, the actual rent is
less than the reasonable rent (e.g., in case where the tenancy is affected by fraud,
emergency, close relationship or such other consideration), the latter will be the annual
value.  The municipal value of the property, the cost of construction, the standard rent,
if any, under the Rent Control Act, the rent of similar properties in the same locality are
all pointers to the determination of annual value.  However if the property is let and was
vacant during any part or whole of the year and due to such vacancy, the rent received
is less than the notional rent, such lesser amount shall be the Annual value. For
example, in case of a house, whose municipal valuation is Rs.24,000/- and actual rent
received is Rs.36,000/- the annual lettable value will be taken at Rs.36,000. If the actual
rent received were to be Rs.18,000, Rs.24,000/- would be the annual value for the
purpose of the Income-tax Act.

Determination of Annual Value of Self Occupied Property

Having understood the concept of Annual Value, we can now go into the details of its
actual determination.  Self-occupied house property does not generate any rent.  Yet
notional income from it was liable to tax and causing hardship to tax payers. Presently,
a preferential treatment is given to one self-occupied house property which has
not been actually let out at any time in which case, the annual value is taken as
‘Nil’.  If, one is fortunate enough to own more than one house property using all of them
for self-occupation, he is entitled to exercise an option in terms of which, the annual
value of one house property as specified by him will be taken at Nil. The annual value of
the other self occupied house property/ies will be determined on notional basis as if it
had been let out.

Annual Value of one house away from work place

Before going into the final stage of calculation of income from house property, let us
consider two more situations.  A person may own a house property, in Bangalore, which
he normally uses for his residence.  He is transferred to Chennai, where he does not own
any house property and stays in a rental accommodation.  In such a case, the house
property in Bangalore cannot be used for self-occupation and notional income, therefore,
would normally have been chargeable although he derives no benefit from the
property.  To save the tax payer from hardship in such situations, it has been
specifically provided that the annual value of such a property would be taken to
be nil subject to the following conditions:

 The assessee must be the owner of only one house property.

 He is not able to occupy the house property because of his employment, business
etc., away from the place where the property is situated.
 The property should not have been actually let or any benefit is derived
therefrom.
 He has to reside at the place of employment in a building not belonging to him.

Annual Value of let out property

In respect of a let out house property, the rent received is usually taken as the annual
lettable value as we have discussed earlier.  When, however, the rent is not indicative of
the actual earning capacity of the house, the notional value will have to be found out. 
The standard rent in the case of properties subject to Rent Control Legislation, the
annual lettable value fixed by the Municipalities, rent of similar property in the locality,
the cost of construction of the property are the facts which will determine such notional
annual value.  It must, however, be kept in mind that when the actual rent
received or receivable is higher than the notional annual value as calculated
above, the higher figure will be taken for the purpose of Income-tax.

From the annual value as determined above (referred to as annual lettable value in the
Return of Income) municipal taxes are to be deducted if the following conditions are
fulfilled:

o The property is let out during the whole or any part of the
previous year

(There is no such deduction in respect of one self-occupied house

property for which ‘nil’ annual value is adopted).
 o The Municipal taxes must be borne by the landlord
(If the Municipal taxes or any part thereof are borne by the tenant,
it will not be allowed).
o The Municipal taxes must be paid during the year
(Where the municipal taxes become due but have not been actually
paid, it will not be allowed. Similarly, the year to which the taxes
relate to, is also immaterial).

For the purpose of determining the Annual value, the actual rent shall not include the
rent which cannot be realised by the owner.  However, the following conditions (these
conditions are as per existing Rule 4 as on 29.06.2001.  The new rule has not yet been
framed) need to be satisfied for this:

(a) The tenancy is bona fide;

(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate
the property.

(c) The defaulting tenant is not in occupation of any other property of the assesse;

(d) The assesse has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfied the Assessing Officer that legal proceedings
would be useless ; and

(e) The annual value of the property to which the unpaid rent relates has been included
in the assessed income of the previous year during which that rent was due and tax has
been duly paid on such assessed income.

Other Deductions

From the annual value as determined above, further deductions are allowed.  It has to
be borne in mind that the deductions mentioned here (section 24) are exhaustive
and no other deductions are allowed.  The deductions admissible are as  under:

1. Repairs & Collection Charges:  30% of the Annual Value.  It is a statutory

deduction not dependent on the actual expenditure incurred on repairs or
collection by the owner. 
2. Interest:  When money is borrowed on interest and the property in question is
either acquired or constructed or repaired or reconstructed with such borrowed
funds, interest payable thereon is deducted from the annual value. The amount of
interest payable for the relevant year should be calculated and claimed as
deduction.  It is immaterial whether the interest has actually been paid during the
year or not.  However, there should be a clear link between the borrowal and the
construction/purchase etc., of the property. If money is borrowed for some other
purpose, interest payable thereon cannot be claimed as deduction.

Interest attributable to period prior to construction/acquisition

Money may be borrowed prior to the acquisition or construction of the property.  In such
a case, interest paid/payable before the final completion of construction or acquisition of
the property will be aggregated and allowed in five successive financial years starting
with the year in which the acquisition or construction is completed.  This deduction is
not allowed if the loan is utilized for repairs, renewal or reconstruction.

Example:  The assessee took a loan of Rs.3,00,000/- in April 1999 from a Bank for
construction of a house on a piece of land which he owns at Meerut.  The loan carried
interest @ 15% p.a.  The construction is completed in April 2001 and the house is given
on rent from May 2001.  Meanwhile he has already paid interest of Rs.90,000 (over and
above the yearly interest) in five equal instalments of Rs.18,000/- each starting from the
assessment year 2002-03.

Special Note relating to interest

1. In case the property is let out, the entire amount of interest accrued during the
year is deductible.  The borrowals may be for construction/acquisition or
repairs/renewals.  In the case of Self-occupied property, the deduction will be:

(a)either the actual amount accrued or Rs.30,000/- whichever is less.

(b when the borrowal is on or after 1.4.99 and construction or
) acquisition is before 1.4.2001-deduction is Rs.75,000/- applicable to
A.Y 2000-01.
(c) when borrowal is on or after 1.4.99 and construction or acquisition
is before 1.4.2003-deduction is Rs.1,00,000/- applicable to A.Y
2001-02.
(d when borrowal or acquisition  is before 1.4.2003- deduction is
) Rs.1,50,000/- applicable to A.Y 2002-03 and onwards.

2.
Thus in the case of Self-occupied property, if the borrowal is for repairs, renewals
or reconstruction, the deduction is restricted to Rs.30,000.  If the borrowal is for
construction/acquisition, higher deduction as noted  above is available.

3. A fresh loan may be raised exclusively to repay the original loan taken for
purchase/ construction etc., of the property. In such a case also, the interest on
the fresh loan will be allowable.

4. Interest payable on interest will not be allowed.

5. Brokerage or commission paid to arrange a loan for house construction will not be
allowed.

6. When interest is payable outside India, no deduction will be allowed unless tax is
deducted at source or someone in India is treated as agent of the non-resident.

Note regarding the deductions

1. In respect of self-occupied house property and a property away from work place,
the annual value has been taken as NIL and no other deduction other than
interest to the extent of Rs.30,000/- (Rs.150000/- as the case may be).

2. The deductions mentioned in the section are exhaustive.  Therefore, no

deduction, which is not mentioned here, will be allowed.  Thus there is no
provision for allowing deduction in respect of salary paid to a caretaker, stamp
 duty and registration charges in respect of lease of the house, interest on
enhanced ground rent etc.

3. When a house is built or acquired with borrowed funds to be repaid with interest,
there are two elements of repayment – repayment of principal and repayment of
interest.  It is the interest element alone on which deduction is allowed (subject
to the conditions already discussed) in computing income under the head
“Income from House Property”.   Repayment of principal upto a maximum
amount of Rs.20,000/- is eligible for rebate u/s.88 along with Life Insurance
Premium etc., subject to the conditions mentioned in that section.  Taxpayers,
therefore, should invariably give a break-up of the interest and principal when the
repayment consists of both the elements.

If unrealised rent is received subsequently, is it taxable ?

Where any rent cannot be realised, and subsequently if such amount is realized, such an
amount will be deemed to be the income from house property of that year in which it
was received.  We have seen earlier that the basic requirement for assessment of this
income is the ownership of the property.  However, in the cases where unrealised rent is
subsequently realised, it is not necessary that the assessee continues to be the owner of
the property in the year of receipt also.

Arrears of rent: When the owner of a building receives arrears of rent from such a
property, the same shall be deemed to be the income from house property of the year of
receipt.  30% of the receipt shall be allowed as deduction towards repairs, collection
charges etc., (prior to the A.Y 2002-03, the rate of deduction was 25%).  No other
deduction will be allowed. As in the case of unrealised rent, the assessee need not be the
owner of the property in the year of receipt.

Can there be loss under the head Income from House Property?

This brings us to the question whether there can be any loss under this head. In so far
as income from a self-occupied property is concerned and in respect of a property away
from workplace, the annual value is taken at nil, no other deductions are allowed except
for interest on borrowed capital upto a maximum of Rs.30,000.  In such cases,   there
may be loss upto a maximum of Rs.30,000 (or Rs.1,50,000 as the case may be).  In
respect of other type of house property, namely a house property that is let out, there
are no restrictions on deductions and therefore, there can be loss under this head :

The treatment of such loss

Once loss is determined in respect of house property, the next question would be
regarding the to be given to such losses.  The loss from one house property can be set
off against the income from another house property.  The remaining loss, if any, will be
set of against incomes under any other heads like salary.  In case the loss  does not get
wiped out completely, the balance will be carried forward to the next assessment year to
be set off against the income from house property of that year.  However, such carry
forward is restricted to eight assessment years only.
Examples

1. ‘A’ has a property, which is self-occupied. The net loss from this property is
Rs.15,000.  ‘A’ has income from salary of Rs.60,000.  The loss can be set off from
salary income (after standard deduction).

2. ‘A’ a salaried employee (salary Rs.85,000/- after standard deduction) has two
properties which  are let out.  The net loss from one property ‘X’ is Rs.20,000. 
The income from the other property ‘Y’ is Rs.14,000.  The loss from property ‘X’
can be set off against income from property ‘Y’.  There will still be a loss of
Rs.6,000/- in respect of property ‘X’.  This can be set off against his salary
income.

Co-ownership of property

In case of joint ownership of any property, when the share of each co-owner is definite
and ascertainable, it has been provided that each of the owners will be assessed
individually in respect of share of income from the property.  In other words, income
from the property will be determined and allocated to each co-owner according to his
share.  When each of the co-owners of a property uses it for his residence, each of them
will also get the concessional treatment in respect of one self-occupied property.