Income from House Property

Sections 22-27
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.

The property should consist of building or land appurtenant thereto:

"Building" means a structure made up of any material (wood, mud, stones, bricks or concrete) and which
can be used as a dwelling house, store house, office, factory,music hall, dance hall, lecture hall, theatre,
stadium or swimming pool.

Important points:

» A structure is building even if it is for temporary purpose.

» Roof is not always essential for a structure to be a building as it depends upon the use for which that
structure is to be used. If it is to be used as stadium or swimming pool, roof is not required whereas in other
cases roof is important. Therefore, roof is essential for a structure to be regarded as residential building and
not for non-residential building.

» An incomplete structure or structure in ruin without a roof or without doors can not be called as building.

“Lands appurtenant thereto”: Appurtenant means attached to that building. Therefore, any land which is
attached to the building is also covered under Section 22. The land attached to residential building may be in
the form of path attaching that building to the street, compounds, courtyards, backyards, playground,
kitchen, garden, motor garage, any parking space, stable, cattle shed, coach room, etc. However, the land
attached to non-residential building may be in the form of path/road connecting that building to the road, or
connecting one department to other department, parking space, playground for the benefit of the employee,
etc. As, for the land to be covered under this head of income it must be attached to the building therefore
following incomes are not covered under this head of income:

(1) Rent from vacant plot of land as there is no building but only land is there.

(2) Ground rent (rent of ground where building is constructed).

(3) Income from building sites, till building is built.

The assessee should be owner of the property

Second condition for the property to be taxable under this head is that assessee should be owner of the
property. An owner does not mean only a legal owner i.e., registered owner of the house property.
However, it also includes a Deemed Owner.

Deemed Owner [Section 27]: Following persons are deemed to be owners of the house property even
though not legal/registered owner of the house property:
(1) Transfer of house property to Spouse or minor child [Section 27(1)]: if an individual transfers the
house property to his spouse or minor child without adequate consideration then that individual
(transferor) is deemed owner of that house property i.e., Mr. A transfers house property worth Rs. 50,00,000
to Mrs. A without consideration then Mr. A would be deemed owner of the house property.

Exceptions

(a) In following cases if property is transferred to spouse then that individual (transferor) is not deemed
owner of that house property:

• Where property is transferred under an agreement to live apart;

• Where adequate (sufficient) consideration is given by the spouse (transferee).

(b) In following cases if property is transferred to the minor child then that individual (transferor) is not
deemed owner of that house property.

• Where property is transferred to a married minor daughter;

• Where adequate (sufficient) consideration is given by the minor child.

Important Point: If inadequate consideration is given by the transferee then transferor will be deemed
owner of proportionate share i.e., Mr. A transfers house property worth Rs. 50 Lac to Mrs. A and she
transfers jewellery/shares worth Rs. 25 Lac then Mr. A would be deemed owner of the 50% share of the
house property.

(2) A holder of impartible estate (Section 27(ii)): The Holder of impartible estate is deemed owner of all
the property in the estate. An impartible estate is a property which cannot be divided and to which an
assessee succeeds under law e.g.. since a temple cannot be divided so any family member succeed to it under
law is deemed owner of that temple.

(3) A member of a company/co-operative society/A0Ps under House Building Scheme (Section 27(iii)):
A- member of a company/co-operative society/AOPs to whom a or a part thereof is allotted or given on lease
under House Building Scheme of that company/co-operative society/AOPs is deemed owner of that house
property.

(4) A person acquiring property under section 53A of the Transfer of Property Act (Section 27(iv)): A
person who acquires actual physical possession of an immovable property under section 53A of the Transfer
of Property Act, 1882, is deemed owner of that property even if it is not registered in his name. However,
following conditions should be fulfilled under section 53A of the Transfer of Property Act, 1882:

(i) There should be a written agreement for the transfer of an immovable property between buyer and
seller.

(ii) The buyer should have paid a part of the consideration and should be ready to pay remaining
consideration. Here important fact is that the purchaser is ready to make payment whenever the payment
becomes due. [Sushma Rani Bonsai v CIT (2007) 165 Taxman 145 (Del) (Mag.)].

(iii) The buyer should acquire actual physical possession of the property. It is enough if transferee has, by
virtue of that transaction, a right to enter upon and exercise acts of possession effectively, [Authority for
Advance Rulings v Jasbir Singh Sarkaria, In Re (2007) 164 Taxman 108 (AAR-New Delhi)].

(5) A Person having rights In a building under section 269 UA(f) of the Income-tax Act (Section 27(v)): If
a person acquires a right in a building under section 269UA(f) of the Income-tax Act, 1961 then he is deemed
owner of that house property. Section 269 UA(f) talks about lease for 12 years where the period of 12 years
may be fixed initially or after the extension.

Exceptions: In the following exceptional cases, Lessee would not be deemed owner of the house property:

(i) If original lease period is less than one year.

(ii) If original lease is from month to month.
 Examples

(1) Mr. A, owner of a house property, gives that house property on lease to Mr. B for 20 years at lease
rent of Rs 20,000 per month. Mr. B becomes deemed owner of the house property.

(2) Mr. A, owner of a house property, gives that house property on lease to Mr. B for a period of 6 years
at lease rent of Rs 20,000 per month. Mr. B has a right to renew the lease for further period of 6 years
after the expiry of lease. As aggregate period of lease is more than 12 years therefore, Mr. B becomes
deemed owner of the house property.

(3) Mr. A, owner of a house property, gives that house property on lease to Mr. B for a period of 11
months at lease rent of Rs 20,000 per month. Mr. B has a right to renew the lease for further period of 50
years after the expiry of 11 months. Though aggregate period of lease is more than 12 years but original
lease period is less than 12 months therefore, Mr. B is not deemed owner of the house property.

(4) Mr. A, owner of a house property, gives that house property on lease to Mr. B for a period of one
month at lease rent of Rs. 20,000 per month. Mr. B has a right to renew the lease but every time it would
be renewed for a period of one month for further period of 50 years. Though aggregate period of lease is
more than 12 years but original lease is on month to month therefore, Mr. B is not deemed owner of the
house property.

Important points:

 Income from subletting is not taxable under this Head of income as assessee (receiver of rent) is
not owner of the house property and it is taxable as either profit or gain of business and
profession or as 'income'.
 If ownership is in dispute in the court of law then :
(a) Any person, who receives rent of the house property as owner, in case property is let out,
would be assessee for tax under section 22.
(b) Any person, who enjoys the possession of the house property as owner, in case property is
not let out, would be assessee for tax under section 22.

However, once matter is decided by the court then person declared by the court as owner would be assessee
for tax under section 22.

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

For a house property to be taxable under this Head of income it should not be used by the assessee for
his own business or profession such as office, godown, factory, music hall, dance hall, lecture hall, theatre,
stadium or swimming pool. Therefore, if it is used by assessee for himself then it should be used for
residential purpose and if it is let out then it can be used by the tenant for residential purpose or for business
or profession i.e., commercial purpose (office, godown, factory, music hall, dance once hall, lecture hall,
theatre, stadium or swimming pool).

Where residential quarters situated in the factory campus were given to employees by the assessee at
nominal rent of Rs.100/month, the purpose of letting of the residential quarters is to run the business
efficiently and smoothly. Therefore the residential quarters will be treated as house property used by the
assessee for his business. Hence, annual value will not be chargeable to tax under this head of income (under
Section 22) and rent of Rs.100/month from workers is business income [CIT v Delhi Cloth and General
Mills Ltd (1966) 591 TR 152 (P&H)].

Further, where a few rooms in the factory were let out by the company to Government at nominal rent for
locating a branch of' nationalized bank, post office, police station, central excise office and railway station
quarters for carrying on its business efficiently and smoothly. It was held that as letting of was incidental to
business of the company therefore, annual value will not be chargeable to tax under this head of income
(under section 22) and rent is business income of the company [CIT v National Newsprint and Paper Mills
(1978)114 ITR 388 (MP)].
Important Points:

 Income from house property is not taxable under this head of income (under section 22): Income
from house property is not taxable under this head of income in the following cases:

(a) If it is used by the assessee for his own business or profession i.e., commercial purpose (office,
godown, factory, music hall, dance hall, lecture hall. theatre, stadium or swimming pool).

(b) If it is let out by the assessee and letting of is incidental to business so that assessee could run its
business efficiently and smoothly.

 Composite rent: Sometimes owner charges rent from tenant not only for the house property but also
as service charges/hire charges for various facilities/ plants, machinery, etc. provided with the
house. Such total rent is known as composite rent. It can be of two types:
(a) Composite rent which include rent for house property and service charges for various
facilities provided along with the house such as lift, gas, etc.: Where rent is received by the
assessee as rent for house property and also as service charges for various facilities provided along
with the house such as gas, lift, water, electricity and ward, air conditioning, etc. then composite rent
shall be split up and part of the rent attributable to house property shall be income under this head
of income and remaining part of composite rent received for rendering services shall be assessable
as income from other sources.
(b) Composite rent which Includes rent for house property and hire charges of plant, etc.: Where
rent is received by the assessee as rent for house property and also as hire charges for plant,
furniture and machinery belonging to owner then composite rent may or may not be separable.
(i) Where it is separable: Where letting of property is separable from letting of other assets like
plant, machinery and furniture and rent from house property is separable from the hire charges for
machinery, plant or furniture then rent for house shall be taxable under this head and remaining
composite rent (i.e. hire charges) for plant, machinery and furniture would be taxable either under
head "Profit and Gains of Business or Profession" or "Income from Other Sources".
(ii) Where it is not separable: Where letting of property is inseparable from letting of other assets
like plant, machinery and furniture and rent from house property is not separable from the hire
charges for machinery, plant or furniture then whole composite rent shall be taxable either under
head "Profit and Gains of Business or Profession" or "Income from Other Sources" and not under the
head of "house property".
 Income from house property in foreign country: Where assessee is resident or resident and
ordinarily resident in India and he has property in foreign country then income from such house
property from foreign country would be taxable in i the hands of assessee. It is immaterial whether
such income is brought into India or not. However, if assessee is not resident in India or resident but
not ordinarily resident in India then income from house property situated in foreign country will be
taxable in India only where it is received in India during the previous year.
 Income from house property is not taxable under this head of Income: In following cases income
from house property is not chargeable to tax:

(a) Farm House: Income from any building owned or occupied by an agriculturist or receiver of rent or
revenue of such land provided that-

(i) such building is situated in the agricultural land or the immediate vicinity of agriculture land; and

(ii) is used as a dwelling house or a store house or other out-house.

(b) Property used by assessee for his own business or profession: Where house property is used by
assessee for his own business or profession then property shall be chargeable to tax under head "Profits or
Gains from Business or Profession" and not tinder this head of income.

(c) Self-occupied house property: Where house property is used by assessee for his own residential
purposes then annual value shall be nil.

(d) Property for charitable purposes: Where property is used for charitable religious purposes then
income from such property is exempted under section 11.
(e) Property of Registered Trade Union or Local authority: Where property is held by registered trade
union or local authority then income from such property is not taxable.

(f) House Property (Palace) of ex-ruler: Where house property is owned by an ex-ruler then annual value
of that house property is not taxable.

Income from house property

Where above conditions are fulfilled then income from house property shall be gross Annual Value minus
deductions e.g.,

Income from house property = Gross Annual Value - Deductions

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)]

Gross Annual Value of Let Out House Property [LOHP] [Section 23(1)]

In case of let out House Property [LOHP], gross annual value is,—

(a) Reasonable expected rent

Or

(b) Actual rent received or receivable by the assessee,

whichever is higher provided section 23(1)(c) is not applicable.

However, section 23(1)(c) is applicable when Actual rent received or receivable by the assessee is less than
Reasonable expected rent due to vacancy.

(a) Reasonable expected rent is

(a) 1 Municipal value

Or

(a) 2 Fair rent

Whichever is higher

(a) 1 Municipal value: Municipal value is values as assessed by the local authority for imposing municipal
taxes.

(a) 2 Fair rent: Fair rent is rent of same or similar property situated in same or similar locality.
However, two properties can never be similar in every aspect but if property in neighborhood is comparable
in some aspect to property in question then rent of such property in neighborhood will be considered to
decide Reasonable expected rent.

The Supreme Court of India held that Reasonable expected rent cannot exceed standard rent if Rent Control
Act is applicable in that area. It means the standard rent is the maximum amount of Reasonable expected
rent. [Sheila Kaushish v CIT (1981) 7 ITR I (SC)]; Amolak Ram Khosla v CIT (1981) 7 1TR 51 (SC) and
Dr. Balbir Singh v MCD (1985) 152 ITR 388 (SC)].
Therefore, Reasonable expected rent is

(a) 1 Municipal value

Or

(a) 2 Fair rent

Whichever is higher subject to the maximum of standard rent if Rent Control Act is applicable.

(b) Actual rent received or receivable by the assessee (R): Actual rent received or receivable by the
assessee does not include unrealized rent (R2) and rent for the vacant period (R3).

Therefore, R= RI - R2 - R3.

Where,

RI = Annual rent for the previous year for which property is let out

R2 = unrealized rent

R3= rent for the vacant period.

Annual rent for the previous year for which property is let out (RI): "Annual rent” means: (a) where the
property is let throughout the year ending on the valuation date i.e., the previous year, the actual rent
received or receivable by the owner in respect of such year;

(b) where the property is let for only a part of the previous year, the amount which bears the same
proportion to the amount of actual rent received or receivable by the owner for the period for which the
property is let out as the period of twelve months bears to the number of months (including part of a month)
for which the property is let out during the previous year.

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.
6 ×1000+ 4 ×1500
It remains vacant for the balance 2 months. The annual rent would be: × 12=Rs 14,400
10
Unrealized rent (R2): Rent, which could not be realized by the owner (assessee) because of some dispute
with tenant, is known as unrealized rent. It is to be reduced from annual rent if conditions laid down under
Rule 4 of Income-tax Rules, 1962 are fulfilled:

(i) If tenancy is bona fide.

(ii) The tenant is not occupying any other property of the assessee.
(iii) All the reasonable steps had been taken by the assessee to get the house property vacated.
(iv) All the reasonable steps had been taken by the assessee to institute legal proceedings for recovery of
rent and the Assessing Officer is satisfied that legal proceedings would be useless.

Rent for the vacant period (R3): If the property remained vacant for some time during the current
previous year the rent of the vacant period is to be reduced from annual rent. Example 1: If the property is
let out for 12 months @ Rs 5,000 pm and the tenant vacated the property after 10 months or property is let
out for 10 months only. Then,

Actual rent received or receivable by the assessee (R) = R I -R2-R3

Annual Rent (R1) = Rs 60,000 (Rs 5,000 x 12)

Unrealised Rent (R2) = Nil as there is no unrealized rent

Rent for vacant period (R3) = 2 10,000 (Rs 5,000 x 2)

Therefore, R = Rs 60,000 — Rs 10,000 = Rs 50,000

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.

Actual rent received or receivable by the assessee (R) = RI -R2-R3

6 ×1000+ 4 ×1500
The annual rent (R1) = × 12=Rs 14,400
10
Unrealized Rent (R2) = Nil

Rent for vacant period (R3) = Rs 2400/- i.e. (Rs 1200 x 2 as rent for one month is Rs 1200 i.e. 14,400/12)

Therefore, actual rent received or receivable = Rs 14,400−¿ Rs 2,400/- = Rs 12,000

When Actual rent received or receivable by the assessee is less than Reasonable expected rent due to
vacancy [Section 23(I)(c)]: If following conditions are fulfilled then the Actual rent received or receivable
by the assessee (R) would be Annual value of the house property: (i) The property is let out property but
whole or any part of the property remained vacant during the whole or any part of the previous year. It is
not compulsory that the property should be actually let out during the previous year, the intention to let out
is important. Therefore, if the property is held by the assessee for letting out and reasonable efforts are
made to find the tenant and assessee could not succeed in letting out then this condition is fulfilled.

The words 'property is let' in Section 23(1)(c) do not talk of actual letting out but talk about intention to let
out; if property is held by owner for letting out and efforts are made to let it out, that property is covered by
this clause [Premsudha Export (P.) Ltd v CIT (2007) 17 SOT 293 (Mum)].

(ii) Actual rent received or receivable by the assessee is less than Reasonable expected rent.

(iii)This loss in the rent is only due to vacancy and not due to any other factor.

Where loss in rent is partly due to vacancy and partly due to other factors like letting out the Property at
lower rent or unrealized rent then mode of computation is not provided in the Act and it is very clear that
intention of the legislature is to give relief to the assessee whose property remained vacant. Therefore, in
such situation there are following three possibilities [CIT v Chandenlal Maganlal (2002) 120 Taxman 38
Guj]:

Possibilities Gross Annual Value of Let Out House

Property

1. When Actual rent received or (b)Actual rent received or receivable by the

receivable is less than Reasonable assessee (R)
expected rent only due to vacancy i.e.,
(b) Actual rent receivable by the
assessee (R)
<
(a) Reasonable expected rent only
due to vacancy
2. When Actual rent received or (a) Reasonable Loss due to
receivable is less than Reasonable expected vacancy
expected rent partly due to vacancy rent −
and partly due to other factors (letting
out the property at lower rent or
unrealized rent) i.e.,
(b) Actual rent receivable by the
assessee (R)
<
(a) Reasonable expected rent only
due to vacancy and partly due to
other factors (letting out the
property at lower rent or
unrealized rent)
 3. When Actual rent received or (a) Reasonable expected rent
receivable is less than Reasonable
expected rent only due to factors other
than vacancy factors (letting out the
property at lower rent or unrealized
rent) i.e.,
(b) Actual rent receivable by the
assessee (R)
<
(a) Reasonable expected rent only
due to factors other than vacancy
(letting out the property at lower
rent or unrealized rent)

6.2.b Gross Annual Value of Self Occupied Residential House Property [SORHP] [Section 23(2)]:

— Where

(a) Property is used by assessee throughout the previous year for his (or family member) own residential
purpose;

Or

(b) Such property could not be occupied by the assessee throughout the previous year for his (or family
member) own residential purpose because either due to employment or business or profession
assessee is residing at some other place and no other benefit is derived from such property
 Then Gross Annual Value would be Nil.

A house for residential purpose does not require a compulsory residence; it only requires that house
should be available for residential purpose of the assessee all the time. Where the assessee has retained
exclusive control over possession of a house owned by him, though he may not be actually present in the
house and when he is away from it, he is still in constructive possession of his residential house and as
such he cannot be denied the benefit under section 23(2)(a). [CIT v Deepak Seth (2005) 1 SOT 35
(Del)].

Can a vacant property be treated as Self-occupied House property?

A vacant property shall be treated as Self-occupied House property with Gross Annual Value Nil if
following conditions are fulfilled:

(i) The assessee owns a house property.

(ii) The said property could not be occupied by the assessee throughout the previous year for his (or
family member) own residential purpose because either due to employment or business or
profession assessee is residing at some other place in a house property not owned by him.
(iii) The said property is not let out for whole or part of the previous year.
(iv) No other benefit is derived from such property.

Example: Mr. A owns a house in Chandigarh. During previous year 2009-10, he was working in Delhi
and was residing in a rented accommodation there. His house in Chandigarh remained vacant
throughout the previous year 2009-10 and he did not take any other benefit from that house. As all the
conditions laid down under section 23(2)(b) are fulfilled therefore vacant house in Chandigarh is self-
occupied house property.

However, where above conditions are not fulfilled then vacant house shall not be treated as self-
occupied property.
 Example: Mr. A owns a house in Chandigarh. He is also working in Chandigarh during previous year
2012-13. He was residing with his father in Chandigarh. Here condition (ii) as mentioned under section
23(2) (b) is not fulfilled therefore the vacant house shall not be treated as self-occupied house property.

Further Delhi High Court held that Section 23(2)(b) would apply to all those cases where under the
provisions of the Constitution, officials and dignitaries reside in official residence instead of their own
residence because of their office [CIT v Justice Avadh Bihari Rohatgi (1981) 21 Taxman 409 (Del)].

Important points:

 Only Individual or HUF can have the benefit of Section 23(2): Section 23(2) can be applied if
assessee is an individual or HUF as any other person like company, partnership firm, AOPs/BOIs,
Local Authority and any other artificial judicial person cannot occupy the property for his (or family
member) own residential purpose.
 Where the house property is occupied for residential purposes not in the capacity of the owner:
If the house property is occupied for residential purposes not in the capacity of the owner but as an
employee then it will be let out house property and Gross Annual Value will be determined according
to Section 23(1). Where assessee lets out his own house property to his employer-company which in
turn was allotted to assessee as rent free accommodation (perquisite). Assessee was not entitled for
benefit of Section 23(2) as he occupied the property not in the capacity of the owner but as an
employee therefore, it will be let out house property and Gross Annual Value will be determined
according to Section 23(1) [D. R. Sunder Raj v CIT (1979) 2 Taxman 458 (AP) ].
 If more than one property is occupied by the assessee during previous year: If more than one
property is occupied by the assessee during previous year for residential purpose then depending
upon assessee's discretion one house property will be treated as self-occupied house property and
Gross Annual Value will be determined according to Section 23(2) i.e., nil. However, remaining will
be "Deemed to be Let Out house property/s" and gross Annual Value will be determined according to
Section 23(1) i.e.,
(a) Reasonable expected rent; or
(b) Actual rent received or receivable by the assessee
whichever is higher. However, Section 23(1)(c) will not be applicable. As in such situation actual
rent received/receivable is nil. Therefore,

Gross Annual Value = Reasonable expected rent.

 Where property is partly Self Occupied and partly let out [Section 23(3)]: If the house
property consist of two or more independent residential units and one or more units are
occupied by the assessee for own residential purposes and remaining units are let out then
Gross Annual Value of:
(a) the Let out units will be determined according to Section 23(1); and
(b) the self-occupied units will be determined according to Section 23(2) i.e., nil.
 Where property is Self-Occupied for the part of the previous year and let out for
remaining Previous year [Section 23(3)]: If the house property is Self-Occupied for a part of
the previous year and let out for the remaining previous year then Gross Annual Value of the
property:
(a) For the let out period will be determined according to Section 23(1); and (b) for the self-
occupied period will be determined according to Section 23(2) i.e., nil.

Deductions

1. Deductions regarding Let Out House Property [LOHP]

2. Deductions regarding Self-Occupied Residential House Property [SORHP]

Deductions regarding Let Out House Property [LOHP]

From the Gross Annual Value as calculated under section 23(1) give following deductions: n Municipal taxes
levied by local authority and paid by assessee [Proviso to Section 23]

Municipal taxes levied by local authority in respect of the house property will be deducted if following
conditions are fulfilled:
(i) these taxes arc borne by the assessee; and

(ii) such taxes are actually paid by the assessee.

Important points:

 Municipal taxes include service tax also.

 No deduction can be claimed on payable basis but only on paid basis. Therefore, Municipal
taxes levied by local authority and not paid by assessee during previous year are not
deductible.
 Municipal taxes of past previous years paid by the assessee in current previous year are
deductible.
 Where house property is situated outside India and Municipal taxes levied by local authority
of that foreign country and paid by assessee during previous year then such Municipal taxes
are also deductible.
 As municipal tax must be paid by assessee (landlord) therefore, Municipal taxes levied by
local authority and paid by tenant are not deductible.
Net Annual Value (NAV) = GAV - Municipal taxes

Standard Deduction [Section 24(a)]

30% of Net Annual Value is to be deducted from Net Annual Value as Standard Deduction.

Important points:

 Standard deduction is given for expenditure incurred by the assessee in letting out the house
property.
 The actual expenditure incurred by the assessee is not important and amount of standard deduction
is fixed i.e. 30% of annual value.

Interest on borrowed capital [Section 24(b)]

Where capital is borrowed by the assessee for the purpose of purchase, reconstruction, repair, renovation or
construction of the house property and he is paying interest on such borrowed capital then interest
paid/payable during current previous year is allowed as deduction.

Important points:

 For claiming deduction there should be sufficient connection among borrowed capital, interest and
house property i.e., if borrowed capital is not spent on house property but somewhere else then no
deduction can be claimed under section 24(b).
 Deduction is allowed on annual interest even if interest is not paid/payable annually i.e. interest is
paid/payable monthly, quarterly or half-yearly.
 Deduction can be claimed on "accrual basis" and not on paid basis. Therefore, where interest has
become due during previous year but has not been paid by assessee then he can claim deduction.
 Interest is deductible without maximum ceiling. i.e. whatever amount is payable as interest is
allowed as deduction.
 Deduction is allowed even if neither principal nor interest is charged on property i.e., whether it is
unsecured or secured loan and whether any right/interest in the property is given as security.
 Interest on unpaid interest is not allowed as deduction [Shew Kissen Bhatter v C1T (1973) 89 ITR
6].
 Any brokerage or commission for arranging loan is not allowed as deduction.
 Interest on fresh loan taken to repay earlier loan taken for such purpose is allowed as deduction. In a
recent case a question before Mumbai High Court was that whether deduction can be claimed if first
loan was interest free loan and fresh loan is taken to repay it? The court answered it in affirmative.
[ITO v Makrupa Chemical (P) Ltd. (2007) 12 SOT 68 (Mum)]
 Where property is allotted by government [Estate Office] to assessee on instalment basis and
interest is payable on such instalment then there is relationship of creditor and debtor between
Estate Officer and assessee. Hence, such interest on instalment constitutes interest on capital
borrowed under section 24(b) and allowed as deduction. [CIT v Master Sukhwant Singh (2005)
196 CTR (P&H) 122].
  Such deduction will be allowed from the previous year when such purchase, reconstruction, repair,
renovation, or construction of the house property is completed.
 Payment to a municipal corporation for regularizing unauthorized construction is not deductible,
[CIT v Piccadily Hotels (P) Ltd. (2005) 97 1TD 564 (Chd.)].
 Amount spent by an assessee towards stamp duty for drawing up lease deed and registration
thereof, would not be deducted from rent received, [CIT v Premnath Motors (P.) Ltd. (2007) 163
Taxman 383 (Raj)]
 Deduction of interest under section 24(b) cannot be denied on the ground that interest was paid on
funds borrowed for acquisition of plot and not house property, since in Section 24(b) the word
'property' is used and not the words `house property', [CIT v Amrit Lal Adlakha (2007) II SOT 674
(Asr.) (SMC II)]. Therefore, interest is deductible if capital is borrowed to purchase a plot of land and
not for the purpose of construction of building on it. However, deduction can be claimed during
previous year when construction of house is complete.
 If capital is borrowed from outside India and interest is payable outside India no deduction can be
claimed if on such interest neither any tax is paid or deducted at source nor recipient is having any
representative/agent in India to pay tax on such amount so received [Section 25].

Interest of Pre-construction period [Explanation to Section 24]

Where capital is borrowed by the assessee for the purpose of purchase or reconstruction of house property
then assessee can claim deduction relating to interest of Pre-construction period. For this aggregate the
interest of Pre-construction period and divide, it into five equal instalments and first instalment allowed as
deduction in the previous year in which house is acquired or construct is completed. Remaining four
instalments will be allowed as deduction in the four immediately succeeding previous years.

What is Pre-construction Period?

Pre-construction Period means

− period commencing on the date of borrowing capital; and

− ending on:
(a) March 31 immediately preceding the date of completion of construction/ date of acquisition
or
(b) date of repayment of loan

Whichever is earlier

Deductions regarding Self occupied House Property [SORHP]

The Gross Annual Value as calculated under section 23(2) is always nil. From GAV give following deductions:

Interest on borrowed capital [Sections24(b)]

Where capital is borrowed by the assessee for the purpose of purchase, reconstruction, repair,
renovation or construction of the self-occupied house property and he is paying interest on such borrowed
capital then maximum amount of deduction regarding interest is Rs 30,000.

However, maximum amount of deduction is Rs 1,50,000 if following conditions are fulfilled:

(i) Capital is borrowed on or after April 1, 1999.

(ii) Capital is borrowed for acquisition and construction of a house property.
(iii) The acquisition and construction is completed within three years from the end of financial year in
which capital was borrowed.
(iv) The certificate from the creditor must be attached with return of income:
 that interest is payable in respect of loan given for acquisition or construction of house
property or repayment of the principal amount outstanding under earlier loan taken for
such acquisition or construction of house property.

There is no condition of date of commencement of acquisition or construction of house property it may

have started before or after April 1, 1999. But capital must be borrowed on or after April 1, 1999. Therefore,
if above conditions are fulfilled maximum deduction regarding interest would be Rs 1,50,000.
Amendment of section 24 by the Finance (No. 2) Act, 2014 [with effect from the 1st day of April, 2015]:
In section 24 (b), for the words "one lakh fifty thousand rupees". the words "two lakh rupees" shall be
substituted. Therefore, maximum deduction for house loan interest in case of SOHP will be two lakh rupees
instead of one lakh fifty thousand rupees from the said date.

Interest of Pre-construction period [Explanation to Section 24]

Where capital is borrowed by the assessee for the purpose of purchase or reconstruction of house
property then assessee can claim deduction relating to interest of Pre-construction period. For this
aggregate the interest of Pre-construction period and divide, it into five equal instalments and first
instalment is allowed as deduction in the previous year in which house is acquired or construction is
completed. Remaining four instalments will be allowed as deduction in the four immediately succeeding
assessment years. [same as in case of LOHP].

Example: Mr. A takes loan of Rs 4,00,000 @15% p.a. for construction of house on June 10, 2004 and
construction of the house is completed on January 15, 2010. Find the deduction regarding interest if date of
repayment is:

(i) January 16,2015 or

(ii) June 30, 2011 or
(iii) October 31, 2007.

Solution:

(i) Date of repayment is January 16, 2015.

Therefore, Pre construction period is from June 10, 2004 – March 31, 2009.
The interest from June 10, 2004 – March 31, 2009 is Rs 2,88,490 the single annual instalment is
Rs 57.700 ( Rs 2,88,490/5)

Deduction 2009- 2010-211 2011- 2012- 2013- 2014-

regarding 2010 2012 2013 2014 2015

Current Rs 60,000 Rs 60,000 Rs 60,000 Rs 60,000 Rs 60,000 Rs 47,670

years
interest

Pre- Rs 57,700 Rs 57,700 Rs 57,700 Rs 57,700 Rs 57,700 Nil

construction
Period
interest

Total Rs 1,17,710 Rs 1,17,710 Rs 1,17,710 Rs 1,17,710 Rs 1,17,710 Rs 47,760

deduction

(ii) Date of repayment is June 30, 2011.

Therefore, Pre-construction period is from June 10,2004 – March 31,2009.
The interest from June 10, 2004 - March 31,2009 is Rs 2,88,490. The single annual instalment is
Rs 57,700 (Rs 2,88,490/5)
Previous years

Deduction 2009- 2010-211 2011- 2012- 2013- 2014-

regarding 2010 2012 2013 2014 2015

Current Rs 60,000 Rs 60,000 Rs 14,790 Nil Nil Nil

years
interest

Pre- Rs 57,700 Rs 57,700 Rs 57,700 Rs 57,700 Rs 57,700 Nil

constructio
n Period
interest

Total Rs Rs 1,17,700 Rs 72,490 Rs 57,700 Rs 57,700 Nil

deduction

(iii)Date of repayment is October 31, 2007.

Therefore, Pre-construction Period is from June 10, 2004 - October 31, 2007.
The interest from June 10, 2004 – October 31, 2007 is Rs 2,03,150.
Therefore, the single annual instalment is Rs 40,700 (Rs 2,03,150/5).

Deduction 2009- 2010-211 2011- 2012- 2013- 2014-

regarding 2010 2012 2013 2014 2015

Current Nil Nil Nil Nil Nil Nil

years
interest

Pre- Rs 40,700 Rs 40,700 Rs 40,700 Rs 40,700 Rs 40,700 Nil

constructio
n Period
interest

Total Rs 40,700 Rs 40,700 Rs 40,700 Rs 40,700 Rs 40,700 Nil

deduction

Difference in Deductions for LOHP and SOHP

Let Out House Property [LOHP] Self-Occupied Residential House Property

[SOHP]

(i) Municipal taxes levied by (i) Not allowed

local authority and paid by
assessee [Proviso to Section
23]
(ii) Standard Deduction Section
24 (a)
(iii) Interest on borrowed
capital [Sections 24(b)] No
maximum limit
(iv) Interest of Pre-
construction period
[Explanation to Section 24]
(ii) Not allowed
(iii) Interest on borrowed capital
[Sections 24(b)] Maximum limit is
Rs 30,000 or Rs 1,50,000 in
exceptional cases.
(iv) Interest of Pre-construction
period [Explanation to Section
24] same as case in LOHP

Other Important Sections:

Where unrealized rent is realized subsequently [Sections 25A and 25AA]:

(i) Where unrealized rent was of the previous year 2000-2001 or of earlier previous year and was
realized in assessment year 2001-2002 or earlier assessment year or where unrealized rent
was allowed as deduction in assessment year 2001-2002 or in earlier assessment year [Section
25A]: Where under the earlier law assessee has claimed deduction regarding unrealised rent in the
 assessment year 2001-2002 or in earlier assessment year and assessee has realized any amount in
respect of such rent during any assessment year i.e., 2001-2002 or earlier assessment year i.e. 2000-
01 and so on then amount so realized would be "income from house property" of the previous year
in which it is realised.

Important points:
 Section 25A is applicable where unrealized rent is of the previous year 2000-2001 or of
earlier previous year.
 Assessee will not be eligible for any deduction under section 23 or 24.
 The amount recovered would be taxable even if house is not owned by the assessee in the
year of recovery.
(ii) Where unrealized rent was of the previous year 2001-2002 or of subsequent previous year and
was realized in assessment year 2002-2003 or subsequent assessment year [Section 25AA]:
Where assessee cannot realize the rent of the previous year 2001-2002 or of subsequent previous
year and was realized in assessment year 2002-2003 or subsequent year then amount so realized
would be "income from house property" of the previous year in which it is realized.

Important points:
 Section 25AA is applicable where unrealized rent is of the previous Year 2001-2002 or of
subsequent previous year.
 The amount so realized should not be included in Gross Annual Value earlier and should be
deducted from Annual rent as unrealized rent (R2).
 If the amount so realized is already included in Gross Annual Value earlier and was not
deducted from Annual rent as unrealized rent (R2) because conditions laid down in Rule 4 of
Income-tax Rules, 1962 are not fulfilled then Section 25AA will not be applicable. And
assessee will not be eligible for any deduction under section 23 or 24.
 The amount recovered would be taxable even if house is not owned by the assessee in the
year of recovery.

Arrear of rent received in current previous year [Section 25B]

Where assessee is or was owner of house property consisting of buildings or lands appurtenant thereto
and receives any amount as arrears of rent in current previous year then amount so received after giving
standard deduction (30% of that amount) shall be "income from House Property” provided it was not
charged to tax earlier.

Section 25B would be applicable even if assessee is not owner of the house property in the current
previous year in which rent is received.

Example: Mr. A owns a house property given on monthly rent of Rs 10,000 to a company. Rent was
increased on April 15, 2014 from Rs 10,000 to Rs 15,000 with retrospective effect from April 1, 2013.

Solution: The arrears of rent of Rs 60,000 (Rs 5,000 × 12), of the previous year 2013-2014) received in
the previous year 2014-15 would be "income from House Property" after giving Standard deduction of 30%.

Arrears of rent received in the previous year 2014-15 = Rs 60,000

Standard deduction = Rs 18,000 (30/100 × 60,000)

Therefore, "income from House Property" during previous year 2014-15 under section 25B = Rs 60,000
− Rs 18,000 = Rs 42,000

This income is in addition to "income from house property" of current previous year (2014-15) as
calculated according to Section 23 after giving deduction under section 24.

House property jointly owned by two or more persons [Section 26]

Where two or more persons jointly own a house property consisting of buildings or lands appurtenant
thereto then such persons are known as co-owners. Further, where respective shares of co-owners are:
 (a) definite and ascertainable then such co-owners shall not be assessed as AOPs but the proportionate
share of each co-owner in the income from house property as calculated in accordance with sections
22-25 shall be included in his Total Income.
(b) not definite and ascertainable then each co-owner shall be deemed to have equal share in the house
property. Hence, proportionate share of each co-owner in the income from house property as
calculated in accordance with sections 22-25 shall be included in his Total income.

Computation of income of Jointly owned House property:

(a) Where such jointly owned House property is let out house property then annual value will be
first determined according to Section 23(1) as if a single person owns such property. Thereafter,
income from house property so calculated shall be distributed amongst each co-owner as per
their share (equal share in case their respective shares are not definite and ascertainable and
proportionate share In case their respective shares are definite and ascertainable).
(b) Where such jointly owned House property is self-occupied house property then annual value for
each of such co-owner will be nil [Section 23 (2)]. But each of such co-owner is entitled to
deduction of Rs 30,000 or Rs 1,50,000 (in exceptional cases) regarding annual interest for loan
under section 24(b)

Example 1: Mr. A, Mr. B and Mr. C, are co-owners of a house property and their shares are definite
and ascertainable i.e., Mr. A – 50% share , Mr. B – 25% and Mr. C – 25% share. The house property
was constructed on December 15, 2008 and annual interest payable for loan taken for construction
is Rs 2,00,000.

− The property is let-out house property with Gross Annual Value Rs 4,00,000.
− Municipal taxes paid in current previous year is Rs 20,000.

Find out income under head “Income from House property” for Mr. A, Mr. B and Mr. C

Solution:

Net Annual value = Gross Annual Value – Municipal taxes paid

= Rs 4,00,000 – Rs 20,000

= Rs 3,80,000

(i) Standard Deduction = Rs 1,14,000

[30% of Rs 3,80,000 = 30/100 × Rs 3,80,000]
(ii) Deduction regarding interest on loan taken for construction = Rs2,00,000
Income from house property = Rs 66,000
= [Rs 3,80,000 – ( Rs 1,14,000 + Rs 2,00,000)]
Income from house property of Mr. A = 50% of Rs 66,000
= Rs 33,000
Income from house property of Mr. B = 25% of Rs 66,000
= Rs 16,500
Income from house property of Mr. C = 25% of Rs 66,00
= Rs 16,500

Example 2: Mr. A, Mr. B and Mr. C, are co-owners of a house property and their shares are not definite
and ascertainable. The house property was constructed on December 15, 2008 and annual interest payable
for loan taken for construction is Rs 2,00,000.

The property is let-out house property with

− Gross Annual value Rs 4,00,000.

− Municipal taxes paid in current previous year Rs 20,000

Find out income under the head “Income from house property” for Mr. A, Mr. B, and Mr. C

Solution:

Net Annual value = Gross Annual Value – Municipal taxes paid

 = Rs 4,00,000 – Rs 20,000

= Rs 3,80,000

(i) Standard Deduction = Rs 1,14,000

[30% of Rs 3,80,000 = 30/100 × Rs 3,80,000]
(ii) Deduction regarding interest on loan taken for construction = Rs 2,00,000
Income from house property = Rs 66,000
= [Rs 3,80,000 – ( Rs 1,14,000 + Rs 2,00,000)]
Income from house property of Mr. A = 1/3 of Rs 66,000
= Rs 22,000
Income from house property of Mr. B = 1/3 of Rs 66,000
= Rs 22,000
Income from house property of Mr. C = 1/3 of Rs 66,000
= Rs 22,000

Example 3: Mr. A, Mr. B and Mr. C, are co-owners of a house property and their shares are definite and
ascertainable i.e., Mr. A – 50% share , Mr. B – 25% and Mr. C – 25% share. The house property was
constructed on December 15, 2008 and annual interest payable for loan taken for construction is Rs
2,00,000. The property is self-occupied house property with –

− Municipal taxes paid in current previous year Rs 20,000

− Loan was taken on December 15, 2006

Find out income under the head “Income from house property” for Mr. A, Mr. B, and Mr. C

Solution:

Net Annual value = Nil

Deduction regarding interest on loan taken for construction = Rs 1,50,000

Income from house property = (-) Rs 1,50,000

Income from house property of Mr. A = 50% of (-) Rs 1,50,000

= (-) Rs 75,000

Income from house property of Mr. B = 25% of (-) Rs 1,50,000

= (-) Rs 37,500

Income from house property of Mr. C = 25% of (-) Rs 1,50,000

= (-) Rs 37,500

Example 4: Mr. A, Mr. B and Mr. C, are co-owners of a house property and their shares are not definite
and ascertainable. The house property was constructed on December 15, 2008 and annual interest payable
for loan taken for construction is Rs 2,00,000. The property is self-occupied house property with –

− Municipal taxes paid in current previous year Rs 20,000

− Loan was taken on December 15, 2006

Find out income under the head “Income from house property” for Mr. A, Mr. B, and Mr. C

Solution:

Net Annual value = Nil

Deduction regarding interest on loan taken for construction = Rs 1,50,000

Income from house property = (-) Rs 1,50,000

 Income from house property of Mr. A = 1/3 of (-) Rs 1,50,000

= (-) Rs 50,000

Income from house property of Mr. B = 1/3 of (-) Rs 1,50,000

= (-) Rs 50,000

Income from house property of Mr. C = 1/3 of (-) Rs 1,50,000

= (-) Rs 50,000

Whether income from property be loss?

Let-out house property: In such property there can be loss under head Income from house property, if

(i) Municipal taxes paid in current previous year are more than Gross annual value;
Or
(ii) Annual interest payable by assessee for loan taken for construction, acquisition, repair, etc. is more
than Net Annual Value.

Self-occupied house property: As in such cases annual value is always Nil. Therefore if annual interest is
payable by assessee for loan taken for construction, acquisition, repair, etc. then income from house
property is always negative.