Income from Let Out Properties and its

Computation under ITA 1961

(Project Report)

Submitted to

Mr. Rana Navneet Roy

Faculty Law of Taxation

By

Arun Karoriya
B. A. LL. B. (Hons.) Student
Semester – V, Section – C, Roll No. 40

Hidayatullah National Law University

Uparwara Post, Abhanpur, New Raipur – 493661 (C.G.)
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 DECLARATION

I, Arun Karoriya, hereby declare that, the project work entitled, ‘Income from Let Out Properties and its
Computation under ITA 1961’ submitted to H.N.L.U., Raipur is record of an original work done by me
under the able guidance if Mr. Rana Navneet Roy, Faculty Member in political science, H.N.L.U., Raipur.

Arun Karoriya

Roll No. 40

20/08/2015

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 ACKNOWLEDGEMENTS

I would like to take this opportunity to express my deep sense of gratitude towards my course teacher, Mr.
Rana Navneet Roy for giving me constant guidance and encouragement throughout the course of the
project.

I would also like to thank the University for providing me the internet and library facilities which were
indispensable for getting relevant content on the subject, as well as subscriptions to online databases and
journals, which were instrumental in writing relevant text.

Arun Karoriya

Roll no. 40

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 TABLE OF CONTENTS

Introduction…………………………………………………………………….….…….….5

Objectives of the study……………………………………....................................................7

Concept of annual value…………………………………………………………………….8

Computation of income from let out properties…………………………………………….9

Conclusion………………………………………………………………………………….16

Reference…….……………………………………………………………………………..17

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INRODUCTION

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. House property is regarded as a
source of income for Income - Tax purposes. 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,
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 tax 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. Income from house property includes an income which has been charged from a
property which is an immoveable property i.e., house, building, certain land areas etc. Generally
for to calculate that an income is taxable or not which is generated from a house property there
are three conditions which are to be fulfilled which includes the property should consists of any
building or lands appurtenant thereto, assessee should be owner of the property and the property
should not be used by the owner for the purpose of any business or profession carried on by him,
the profits of which are chargeable to income tax. This is a general idea as to what all constitutes
under the income from house property. According to the Income Tax Act, under Section 22
details with respect to the handling of income from house property is given and then later on
from section 23 to 27 few complexities with respect to house property income have been dealt
with. This was a general idea with respect to house income property but there are few complex
issues which researcher shall be dealing in the research paper later on in detail such as deemed
owner, property acquired, subletting and cases where such income is not taxable.1

1
http://incometaxmanagement.com/Pages/Gross-Total-Income/House-Property/Computation-of-Income-from-
Let-Out-House-Property.html

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According to Section 22, the Annual value of house property consisting of buildings or lands
appurtenant thereto is chargeable to tax under this head if assessee is owner of that house
property and it is not used by the assessee for his own business or profession.

Essentials of Section 22

Following are the essentials for property to be taxable under this head of income:

I. The property should consist of building or land appurtenant thereto;

II. The assessee should be owner of the property;

III. It should not be used by the assessee for his own business or profession.

Gross Annual Value of the house property

For computing gross annual value, house property can be divided into two types:

(1) Let Out House Property [LOHP] [Section 23(1)]

(2) Self Occupied Residential House Property [SORHP] [Section 23(2)]

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 OBJECTIVES OF THE STUDY

This project seeks to give a brief idea about income from let out properties. Then, it gets into the
theory of annual value. Following are the objectives of the given project report:

 To understand what is income;

 To study the concept of annual income and income from let out properties;

 To study about computation of income from let out properties;

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CONCEPT OF ANNUAL VALUE

The basis of calculating Income from House property is the ³annual 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 let table 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.2

2
RATTAN, JYOTI. Taxation Laws, 6th Edition. New Delhi: Bharat Law House, 2014
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COMPUTATION OF INCOME FROM LET OUT PROPERTIES

Income from a let out house property is determined as under:

Gross annual value [see para 68.1]

Less: Municipal taxes [see para 68.2]

Net annual value

Less : Deduction under section 24 [see para 68.3)

- Standard deduction [see para 68.3-1]

- Interest on borrowed capital [see para 68.3-2)

Income from house property

68.1 Gross annual value [Sec. 23(I)]- Tax under the head "Income from house property' is not a
tax upon rent of a property. It is tax on inherent capacity of a building to yield income. The
standard selected as a measure of the income to be taxed is "annual value".

Gross annual value is determined as follows—

Step I Find out reasonable expected rent of the property [see para 68.1-1]

Step II Find out rent actually received or receivable after excluding unrealized rent but before.
deducting loss due to vacancy [see para 68.1-2)

Step III Find out which one is higher—amount computed in Step I or Step II.

Step IV Find out loss because of vacancy

Step V Step III minus Step IV is gross annual value [see para 68.1-3)

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68.1 -1 STEP I FIND OUT REASONABLE EXPECTED RENT [SEC. 23(1)(a)] -
Reasonable expected rent is deemed to be the sum for which the property might reasonably be
expected to be let out from year year.

In determining reasonable rent, several factors have to be taken into consideration, such location
of the property, annual ratable value of the property fixed by municipalities, rents similar
properties in neighborhood, rent which the property is likely to fetch having regard to demand
and supply, cost of construction of the property and nature and history of the property. These
factors play a vital role in determining reasonable expected rent of a house property. In a
majority of cases, however, expected rent can be determined by taking into consideration the
following factors:

a. municipal valuation of the property [see para 68.1-1a]; or

b. fair rent of the property [see para 68.1-1b]

the higher of (a) or (b is generally taken as expected rent.

If, however a property is covered by a rent control act, then the amount so computed cannot
exceed the ‘standard rent’ [see para 68.1-1c] determinable under the rent control act.

68.1-1a MUNICIPALVALUATION – for collecting municipal taxes, local authorities make a

periodical survey of all buildings in their jurisdiction. Such valuation may be taken as a strong
evidence representing the earning capacity of building. It cannot, however, be considered to be a
conclusive evidence. In some big cities like ( delhi Mumbai Chennai and Kolkata) municipal
authorities determine net ratable value after deducting 10 per cent of the gross ratable value on
account of repairs and an allowance for service taxes (such as sewerage tax and water tax) net
municipal valuation, therefore, requires an adjustment for determining expected rent for income-
tax purposes.

68.1-1bFAIR RENT OF THE PROPERTY - Fair rent of the property can be determined on
the basis of rent fetched by a similar property in the same or similar locality. Though two
properties cannot be alike in every respect, the evidence afforded by transactions of other parties

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in the matter of other properties in the neighborhood, more or less comparable with the property
in question, is relevant in arriving at reasonable expected rent.

68.1-1C STANDARD RENT UNDER RENT CONTROL ACTS - Standard rent is the
maximum rent which a person can legally recover from his tenant under a Rent Control Act. The
Supreme Court has observed in a few cases that a landlord cannot reasonably expect to receive
from a hypothetical tenant anything more than the standard rent under the Rent Control Act. This
rule is applicable even if a tenant has lost his right to apply for fixation of the standard rent. This
rule is also applicable to owner himself. In other words, if a property is covered under the Rent
Control Act, its reasonable expected rent cannot exceed the standard rent (fixed or determinable)
under the Rent Control Act.

68.1-1d PROVISION ILLUSTRATED - As mentioned earlier, the reasonable expected rent

under will be computed on the basis of three factors, namely— a municipal valuation (MV), h.
lair rent of the property (FR); and e. standard rent of the property (SR). The higher of (MV) and
(FR), subject to maximum of (SR) is reasonable expected rent.

Rent of the previous year (or that part of the previous year) for which the property is available
for letting out

Less : unrealized rent if a few conditions are satisfied [see para 68.1-2a}

Rent received/receivable before deducting loss due to vacancy

The following points should be noted—

1. Loss due to vacancy shall not be deducted from the computation of rent received or recievable
as given above. It shall be deducted under Step IV

2. Sometimes a tenant pays a composite rent of property as well as certain benefits provided by
the landlord. To determine rent received/receivable, composite rent must be disintegrated and it

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is only that part of it attributable to the let out of property which would form the basis for the
aforesaid calculation.

3. Occupier's (i.e., tenant's) share of municipal tax realized from the tenant cannot be added to
actual rent received/receivable, as it is the occupier's duty to pay municipal tax—CIT vs.
Gillanders Arbuthnot & Co. Ltd [19831 142 ITR 598 (Cal.).

4. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot
be added to rent received or receivable—CIT v. Parbutty Churn Law [1965] 57 (Cal.).

5. A non-refundable deposit will be included in rent received or receivable on pro rata basis.

6. A refundable deposit cannot be included in rent received or receivable.

7. Advance rent cannot be rent received/receivable of the year of receipt.

8. Commission paid by the owner of a property to a broker for rental income is not deductible

9. If maintenance charges are recovered from the tenant by a service provider (and not by the
landlord), such maintenance charges cannot be added to actual rent received/receivable
Conversely, if maintenance charges are collected by the landlord, it shall be excluded from actual
rent received/receivable in order to calculate rent of the property.

68.1-2a WHEN UNREALISED RENT SHALL BE EXCLUDED [EXPLN. TO SEC. 23(1)]

- Unrealised rent (which the (owner could not realise) shall be excluded from rent
received/receivable only if the following conditions are satisfied—

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 assessee; and

d. 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.

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68.2 Deduct municipal taxes - From the gross annual value computed above, deduct. municipal
taxes (including service taxes) levied by any local authority in respect of the property. Municipal
taxes are deductible only if (a) these taxes are borne by the owner, (b) are actually paid by him
during the previous year.

Municipal taxes, levied by local authority but not paid by the assessee during the previous Year
are not deductible. If property is situated in a foreign country, municipal taxes levied local
authority are deductible (if such taxes are paid by the owner). 3

The remaining amount left after deduction of municipal taxes is net annual value.

68.3 Deduction under section 24 - The following two deductions are available under Section
24—

a. standard deduction

b. interest on borrowed capital

The list of allowance of section 24 is exhaustive—Indian City Properties v. CIT; CIT V. H.G.
Gupta and Sons [1984] 149 ITR 253 (Delhi). In other words deduction can be claimed. For
instance, no deduction can be claimed in respect of expenses on insurance, ground rent, land
revenue, collection charges, electricity, water supply, salary of liftman4

68.3.-1STANDARD DEDUCTION [SEC. 24(a)] - 30 per cent of net annual value is deductible
irrespective of any expenditure incurred by the tax payer.

3
http://taxguru.in/income-tax/taxability-of-second-house-under-the-income-tax-act1961.html

4
http://www.slideshare.net/sanjaySDessai/computation-of-income-from-house-property-29165360

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68.3-2 Interest on borrowed capital [sec. 24(b)] – interest on borrowed capital is allowable as
deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or
reconstruction of the property.

The following points should also be kept in view :-

- if the capital is borrowed for the purpose of purchasing a plot of land, interest liability is
deductible even if construction is financed out of own funds.

- Interest on borrowed capital is borrowed capital is deductible on "accrual" basis. It can be

claimed as deduction early basis, even if the interest is not actually paid during the year.

- Deduction is available even if neither the principal nor the interest is a charge on property.

- Interest on unpaid interest is not deductible. 5

- No deduction is allowed for any brokerage or commission for arranging the loan.

- Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is
allowable as deduction—Circular No. 28, dated August 20, 1969. This rule is applicable even if
the first loan was interest -free loan.

- any interest chargeable under the Act, in the hands of recipient and payable out of India, on
which tax has not been paid or deducted at source, and in respect of which there is no person
who may be treated as an agent, is not deductible, by virtue of section 25, in computing income
chargeable under the head "Income from house property".

- Interest on borrowed capital (according to rules given in this para and para 68.3-2a) is
deductible fully without any maximum ceiling (in the case of a let out property).

- Transaction of allotment of a property to an assessee on instalment basis does give rise to

relationship of borrower and lender between the assessee and the estate officer and as such
interest paid by the assessee on instalments constitutes interest on borrowed capital.

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68.3-2a INTEREST OF PRE -CONSTRUCTION PERIOD - Interest payable by an assessee
in respect of funds borrowed for the acquisition or construction of a house property and
pertaining to a period prior to the previous year in which such property has been acquired or
constructed, to the extent it is not allowed as a deduction under any other provision of the Act,
will be deducted in five equal annual installments, commencing from the previous year in which
the house is acquired or constructed.

What is pre -construction period - Interest of pre -construction period is deductible in five equal
instalments. The first instalment is deductible in the year in which construction of Property is
completed or in which property is acquired. For this purpose "pre -construction Period' means the
period commencing on the date of borrowing and ending on (a) March 31 immediately prior to
the date of completion of construction/date of acquisition or (b) date of repayment of loan,
whichever is earlier.

Example 1: If property is let out @ Rs 5,000 pm then annual rent is Rs 60,000.

Example 2: A house property is let out for 6 months @ Rs 1.000 p.m. and for 4 months @
Rs 1,500 p.m. It remains vacant for the balance 2 months. The annual rent would
6×1000+4×1500
be: × 12 = 𝑅𝑠 14,400
10

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CONCLUSION

Under section 22 of the Income Tax Act, the annual value of house property, consisting of
buildings and lands appurtenant thereto, is taxable under the head ‘Income from house property’,
in the hands of the owner (or deemed owner) of the property, provided that the property is not
used by the assessee for the purpose of his own business or profession. For determining the
annual value of the house property, the actual rent received or receivable from the property, the
municipal valuation, the fair rental value and the standard rent under the Rent Control Act are
taken into account.

From the Gross Annual Value of the property, the Municipal Taxes are deducted to arrive at the
Net Annual Value. Section 24 of the Income Tax Act provides that 30% of the NAV and the
interest on borrowed capital shall be deducted from the NAV to obtain the taxable income from
house property. From this project it can be concluded that income from the let out property is
also taxable under income tax act 1961. We have to give tax according to our fair rent and
municipal value.

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REFERENCE

 Direct taxes - law & practice , taxman, dr. V. K. Singhania; dr. Kapil singhania
 RATTAN, JYOTI. Taxation Laws, 6th Edition. New Delhi: Bharat Law House, 2014
 Practical Approach to DIRECT & INDIRECT TAXES, Dr.Girish Ahuja & Dr.ravi Gupta
 http://incometaxmanagement.com/Pages/Gross-Total-Income/House-
Property/Computation-of-Income-from-Let-Out-House-Property.html
 http://taxguru.in/income-tax/taxability-of-second-house-under-the-income-tax-
act1961.html
 http://www.slideshare.net/sanjaySDessai/computation-of-income-from-house-property-
29165360

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