INCOME FROM HOUSE PROPERTY

As per sec. 22, the annual value of property consisting of any building or
land appurtenant thereto of which assessee is the owner, other than such
portion of such property as he may occupy for the purposes of any business or
profession carried on by him shall be chargeable to income tax under the head
“Income from house property.”

CHARGEABILITY [SEC. 22]

Annual value of the property shall be taxable under the head “Income from
house property” subject to the following:

House Property Owner Not used in Business

or Profession

• There must be a • Assessee is the • Such property is not

property consisting owner (including used for the purpose
of any building or deemed owner) of of taxable business or
land appurtenant that property. profession carried on
thereto. by the owner.

Ingredients "income from house property": Section 22

1. property should consist of any buildings or lands appurtenant (attached or connected to

any building) thereto.
2. the assessee should be the owner of such property,
3. the property should not be used for the purposes of the business or profession of the
assessee which is chargeable to tax,

THEN the charge under the head is on ''annual value" of the property.
Condition 1: Building or land appurtenant thereto
Under the head ''income from house property" the tax is payable on buildings and lands appurtenant
thereto.
Thus the land which is not appurtenant (attached or connected to any building) is excluded and
income derived merely from such not appurtenant land will be taxable as "income from other
sources" unless it is agricultural income.
Building : the term "building' means a structure possessing annual value. therefore, it would include
building shops, godowns, docks, wharfs, bridges and the like. Property situated outside India also
comes within the preview of this section if the owner is a resident in India.
According to webster's new international dictionary 'building' means "that which is built; specifically,
as new generally used, a fabric, or edifice, framed or constructed, designed to stand more or less
permanently, and covering a space of land, for use as a dwelling house, store house, factory, shelter
for beasts or some other useful purpose. building in this sense does not include a mere wall, fence,
monument, hoarding or similar structure, though designed for permanent use where it stands; not a
steam boat, ship or other vessel of navigation."
Existence of a roof is not always necessary for a structure to be regarded as a building. Eg a large
stadium or an open air swimming pool constructed at a considerable expense would be a building as
it is a permanent, structure and designed for a useful purpose. the question as to what is "building"
must always be a question of degree—a question depending upon facts and circumstances of each
case [ghanshiam das verses debt prasad, ].
The expression "building" includes the ground upon which the wall stands and the ground within
those walls [d.g. gouse & co. verses state of kerala,].

Condition 2: Owner
The assessee should be the owner of the property: it is only the owner of house property who is
liable to pay tax under this head of income. If the assessee is not the owner of a house property he
is not assessable under this head.

Any person other than the owner, even though he is in receipt of rent shall not be liable to tax
under this head.
For example, income from sub-letting is not taxable under this head but under the head ‘Income
from other sources’. E.g. Mr. X being a tenant of a house property acquired it at a monthly rent of
` 10,000 from Mr. Y (owner of such house property). Mr. X sublets the property to Mr. Z for a
monthly rent of ` 12,000. Income from subletting being ` 2,000 p.m. is taxable as business
income or as income from other sources.
Owner includes legal owner, beneficial owner and deemed owner.
Legal owner: Legal owner means a person who has the legal title of the property as per the
Transfer of Property Act, Registration Act, etc.
Beneficial owner: For income tax purpose it is not necessary that the property must be
registered in the name of the assessee. If the assessee is enjoying the property as an owner to
full extent he will be treated as a beneficial owner of such property and will be charged under
the head ‘Income from house property’.
Fictional owner or Deemed owner [Sec. 27]
The charge under this head is on the legal owner of house property. there are, however,
certain exceptions to this rule incorporated by section 27 where the charge of tax is on a
deemed owner and not on a legal owner. these cases are as follows:

1) Transfer to spouse or minor child [Sec. 27(i)]:

An individual who transfers, otherwise than for adequate consideration, any house
 property to his or her spouse, not being a transfer in connection with an agreement to
live apart, or to a minor child, not being a married daughter, shall be deemed to be the
owner of house property so transferred.

 E.g.: Mr. X transfers his house property worth ` 5,00,000 to Mrs. X out of love and
affection. In such case, though Mrs. X is the legal owner but Mr. X will be liable to tax as
deemed owner of such property.

Note: In case of transfer to spouse, marriage should subsist on both the days i.e., on
the day of transfer as well as on the day when income arises.

Transferred property must be a house property. E.g. Mr. X transfers cash of `

5,00,000 to Mrs. X and Mrs. X purchases a house property from such cash, then such
transfer of cash and subsequent purchase of property shall not attract provision of sec.
27(i). However, the income from such property shall be clubbed in the hands of Mr. X as
per the provision of sec. 64(1)(iv) [For detail refer chapter Clubbing of Income].
2) The holder of an impartible estate [Sec. 27(ii)]: The holder of an impartible estate
(property which is not legally divisible) is treated as deemed owner of house property.
Impartible estate is an estate to which the assessee has succeeded by grant or
covenant.
3) Property held by a member of a company, society or any other association
[Sec. 27(iii)]: Property held by a member of a company, co-operative society or
other association of persons to whom a building or a part thereof is allotted or leased
under House Building Scheme of the company or association, is treated as deemed
owner of that building or a part thereof.
4) A person who acquired a property u/s 53A of the Transfer of Property Act
[Sec. 27(iiia)]: A person who is allowed to take or retain possession of any building
(or part thereof) in part performance of a contract u/s 53A of the Transfer of Property
Act, 1882, is deemed as the owner of that building (or part thereof).
 Taxpoint:
 Assessee has taken the possession of the property.
 He has partly performed or promised to perform the contract i.e., he has paid (or is
ready to pay) a part of the consideration.
 The contract must be in writing. Though sale-deed might not be executed in favour
of the buyer, still certain other document like ‘power of attorney’ or ‘agreement to
sell’ has been executed.
5) Lessee of a building u/s 269UA(f) [Sec. 27(iiib)]: A person who acquires any rights
(excluding any rights by way of a lease from month to month or for a period not exceeding
one year) in or with respect to any building or part thereof by virtue of any such
transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the
owner of that building or part thereof.
Notes:
a) Lease period should not be less than 12 years [as per sec. 269UA(f)] including extension period.

b) Above provision does not include any right by way of lease from month to month or for a
period not exceeding 1 year.

The test of ownership or deemed ownership is required to be satisfied in the previous year and
not in the assessment year. as said earlier, it is the owner of house property, who is liable to pay
 tax under this head of income. therefore, before a person is asked to pay tax it is decided by the
assessing officer as to who is the owner of the property subject to the right of appeal. the
assessment proceeding cannot be held up on account of dispute relating to the ownership of
property. the person who receives income shall be asked to pay tax.

Condition 3: Property is not used for business or profession carried on by the assessee
Section 22 does not apply if the property, or a portion of it is occupied by the assessee for the purposes of his
own business or profession and the profits of such annual business or profession are assessable to tax, the annual
value in respect of such property or portion of it is not taxable under this section. therefore, where the profits of such
business are not chargeable to tax the annual value of such house property shall be computed and charged.

The rule that income from ownership of house property is taxable under the head "income from house
property" has the following two exceptions:

1) letting is subservient to the main business: if the letting is only incidental and subservient to
the main business of the assessee, rental income is not taxable under the head "income from
house property" but is chargeable as business income as held in c.i.t, verses delhi cloth and
general mills co. ltd., (1969) 59 itr 152 (punjab).

2) hiring of complex: in some cases, income is received not only from letting out of property but
also from incidental services and facilities, for example, a furnished paying guest accommodation,
a well equipped theatre, a safe deposit vault. in such cases income cannot be said to be derived
from mere ownership of property but because of services rendered and facilities provided. in such
cases income may be assessed as business income or income from other sources depending on
the facts and circumstances.

Further, if the owner of a house property gets a composite rent for the property as well as for
services rendered to the tenants, composite rent is to be split up and the sum which is
attributable to the use of property is to be assessed in the form of annual value under section 22
and amount which is charged to tax under the head "profits and gain of business or profession" or
under the head "income from other services".
Condition 4: The charge under the head is on ''annual value" of the property.

The assessee has to pay tax on the annual value of the house property. it is not the rent received
which is put to charge but the annual value of the house property which is important for the
purposes of section 22.

according to section 23 ( l ) ' (as it stood earlier) "the annual value of any property shall be deemed
to be the sum for which the property might reasonably be expected to let from year to year." but
the definition of annual value was modified by taxation laws (amendment) act, 1975 by adding
another clause which is reproduced later on this page.

thus it has been expressly provided that the tax shall be payable by the assessee in respect of the
bona fide annual value irrespective of the question whether he receives that or not. It is clear that
the income from property is thus an artificially defined income and the liability arises from the fact
that the assessee is the owner of the property. it is further provided in the section that the owner
occupies the property he has to pay tax calculated in the manner provided therein. therefore, by
reason of the fact that the property is not let out the assessee does not escape taxation in CIT V/s
beman behari saha (1968)61 ITR 815 (cal.) the calcutta high court observed that "even where a
property is not let and even where it does not produce any income, the income-tax officer is to
proceed on the basis of a notional income, which the property might reasonably be expected to
yield from year to year,"

The annual value of house property is ascertained by taking into consideration all relevant facts
such as demand for houses in the locality, rent paid for similar houses in the same locality, the type
of building, cost of construction, valuation by the municipality, or any other authority, the premium,
if any, paid by the tenant, statutory limitation of rent by rent control act, actual rent received and
so on.

"annual value" shall be deemed to be

(a) the sum for which property might reasonably be expected to let from year to year, or

(b) where the property is let and the annual rent received or receivable by the owner in respect
thereof is in excess of the sum referred to in (a) the amount so received or receivable.

act 14 of 2001 (w.e.f. 1-4-2002) again modified the definition of annual value by adding clause (c)
as follows:

"23 annual value how determined—

(1) for the purposes of section 22, 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; or

(b) where the property or any part of the property is let and the actual rent received or receivable
by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so
received or receivable; or

(c) where the property or any part of the property is let and was vacant during like whole or any
part of the previous year and owing to such vacancy the actual rent received or receivable by the
owner in respect thereof is less than the sum referred to in clause (a), the amount so received or
receivable:

provided that the taxes levied by any local authority in respect of the property shall be deducted in
determining the annual value of the property of that previous year in which such taxes are actually
paid by him.
(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.

(3) the provisions of sub-section (2) shall not apply if—

(a) the house or part of the house is actually let during the whole or any part of the previous year;
or

(b) any other benefit there from is derived by the owner.

(4) where the property referred to in sub-section (2) consists of more than one house—

(a) the provisions of that sub-section shall apply only in respect of one of such homes, which the
assessee may, at his option, specify in behalf;

(b) the annual value of the house or houses, other than the house in respect of which the assessee
has exercised an option under clause (a), shall be determined under sub-section (i) as if such house
or houses had been let. " (called it deemed Let out Property)

section 23 deal with the annual value of house property. after computation of annual value,
deductions prescribed under section 24 are required to be allowed so as to arrive at the taxable
income from house property.

The income from house property given below is NOT chargeable to tax and is excluded from the
total income:

1. income from property held for charitable or religious purpose (section 11).

2. property used for own business or profession (section 22).

3. annual value of any one place of an ex-ruler [section 10 (19A)].

Taxpoint: If the ex-ruler has a house property and the part of which is self-occupied and
remaining let out then only the self occupied part of the house property shall be exempted.

4. income from house property belonging to:

(a) local authority [section 10(20)];
(b) approved scientific research association [section 10(21)];
(c) registered trade unions [section 10(24)];
(d) political party (section 13A).

5. House property of an educational institution [Sec. 10(23C)].

6. House property of a person being resident of Ladakh [Sec. 10(26A)]
7. A farm house [Sec. 10(1)]
8. income from self-occupied house property.
 Types of house properties and their treatment: -

All the building properties are divided into the following three categories for the purpose of
ascertaining the annual value and income from house property:

(1) let-out house property [section 23(1)];

(2) self-occupied house property or unoccupied house property [section 23(2) (a) and (b)]; and
(3) deemed let-out house property [section 23(4)].

1) let-out house property [section 23(1)]. In this case gross annual value is determined as follows:

step 1. calculate reasonable expected rent of the property. reasonable expected rent of the property is
deemed to be the sum for which the property might reasonably be expected to let-out from year to
year. in majority of the cases, the reasonable expected rent can be determined by comparing the fair
rent with the municipal valuation. higher of the two is considered as the reasonable expected rent.
however, where the property is subject to standard rent, the municipal valuation/fair rent cannot
exceed the standard rent.

step 2. find out rent actually received or receivable.

step 3. compare reasonable expected rent with the actual rent received or receivable. if actual rent is
more than the reasonable expected rent then the actual rent would be gross annual value. if actual
rent is less than the reasonable expected rent due to the fact that the property remained vacant, the
rent actually received or receivable is taken on the gross annual value. if actual rent is less than the
reasonable expected rent because of any other factors, then reasonable expected rent is taken as the
gross annual value.

Steps Partic Amount

ulars
1st Compute Reasonable Expected Rent [RER]
Gross Municipal Value (a) ****
Fair Rent (b) ****
Higher of the (a) and (b) [A] ****
Standard Rent [B] ****
Reasonable Expected Rent [Lower of (A and ****
B)] [C]
2nd Actual Rent Received or Receivable (ARR) – Unrealised Rent of the current year ****
(UR) [D]
3rd Gross Annual Value
Higher of C and D shall be considered as ****
GAV
Gross Annual Value (GAV)
Normally, income tax is charged on income, but under the head ‘Income from house property’, tax is
not charged on the rent earned from house property but on the inherent earning capacity of the
house property. Such earning capacity is termed as Annual Value. Annual value is determined
considering the following factors:

A) Actual Rent Receivable [ARR]

Any sum receivable as rent of the house property for the previous year is an evidence for
determining the earning capacity of the building. Such actual rent receivable is to be computed on
accrual basis.
B) Gross Municipal Value
It means the annual value of the property decided by municipality on which they charge municipal
tax. Such valuation may also be taken as evidence of earning capacity of a property.
C) Fair or Notional rent of the property
Fair or notional rent of a property means rent fetched by a similar property in the same or similar
locality. Though two properties might not be exactly similar still it is an indicator of rent reasonably
expected from the property. An inflated or deflated rent due to emergency, relationship and such
other conditions need to be adjusted to determine fair rent.
For instance, a property was let out to a friend for a monthly rent of ` 2,000 which might be let out to
another person at the rate of ` 2,500 p.m. In such case, fair rent of the property shall be ` 2,500
p.m.
D) Standard rent under the Rent Control Act
Standard rent is the maximum rent, which a person can legally recover from his tenant under the
Rent Control Act prevailing in the State in which the property is situated. A landlord cannot
reasonably expect to receive from a tenant any amount more than Standard Rent.
Reasonable Expected Rent cannot exceed Standard Rent but can be lower than Standard Rent

E) Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual
Rent Receivable, provided the following conditions are satisfied:
(i) The tenancy is bona fide;

(ii) The defaulting tenant has vacated the property or steps have been taken to compel him to vacate
the property;
(iii) The assessee has taken all reasonable steps to institute legal proceeding for the recovery of the
unpaid rent or has satisfied the Assessing Officer that legal proceedings would be worthless.

Computation at a glance
Computation of Income from house property of …………. for the Assessment Year ……….

Particulars Details Amount

Gross Annual Value (GAV) ****
Less: Municipal tax ****
Net Annual Value (NAV) ****
Less: Deductions u/s
24(a) Standard deduction [30% of NAV] ****
 24(b) Interest on borrowed capital **** ****
Income from house property ****

F) TAXES LEVIED BY LOCAL AUTHORITY (MUNICIPAL TAX) [PROVISO TO SEC. 23(1)]

Tax levied by the municipality or local authority is deductible from Gross Annual Value (GAV)
subject to the following conditions:
1. It should be actually paid during the previous year.
2. It must be paid by the assessee.
Taxpoint: Unpaid municipal tax or municipal tax paid by tenant shall not be allowed as deduction.
3. It must be related to the previous year or any year preceding the previous year.

G) DEDUCTIONS U/S 24

Deduction u/s 24

Standard Deduction [Sec. 24(a)] Interest on Loan [Sec. 24(b)]

The list of deduction u/s 24 is exhaustive i.e., no deduction can be claimed in respect of expenditures
which are not specified under this section e.g., no deduction is allowed for repairs, collection charges,
insurance, ground rent, land revenue, etc

1. Standard deduction u/s 24(a)

30% of the net annual value is allowed as standard deduction in respect of all expenditures (other than
interest on borrowed capital) irrespective of the actual expenditure incurred.
Note: Where NAV is negative or zero, standard deduction u/s 24(a) is not available.

2. Interest on loan or borrowed capital u/s 24(b)

Interest payable on amount borrowed for the purpose of purchase, construction, renovation, repairing,
extension, renewal or reconstruction of house property can be claimed as deduction on accrual basis.

2) Self-Occupied house property [section 23(2)(a)]

As per sec. 23(2)(a), a house property shall be termed as self-occupied property where such property or
part thereof:
• is in the occupation of the owner for the purposes of his own residence;
• is not actually let out during the whole or any part of the previous year; and
• no other benefit there from is derived by the owner.
Treatment: The annual value of such house or part of the house shall be taken to be nil.
If an assessee occupies more than two house properties as self-occupied, he is allowed to treat only
two houses as self-occupied at his option. The remaining self-occupied house property(ies) shall be
treated as ‘Deemed to be let out’.
Computation of taxable income of self-occupied property
Net annual value of self-occupied property shall be taken as nil. As a consequence,
deduction u/s 24(a) (standard deduction) shall also be nil. Interest on loan u/s 24(b) shall be
allowed, subject to certain ceiling.
Computation at a glance

Particulars Amou
nt
Net Annual Value Nil
Less: Interest on borrowed capital u/s 24(b) ***
Income from house property (***)
Standard deduction u/s 24(a) is not available

Net Annual value

Net Annual value of two self-occupied house properties, at the choice of the assessee, is taken as
nil. He can choose those house properties as self-occupied through which tax liability can be reduced.

Interest on loan u/s 24(b)

Interest on loan taken for construction, acquisition, repair, renovation or extension is allowed
according to thefollowing table:s

Maximum
Conditions Interest
allowed in
aggregate
Where loan is taken on or after 1/4/1999 and following conditions are satisfied - `
1. Loan is utilized for construction or acquisition of house property on or after 1-4-1999; 2,00,000

2. Such construction or acquisition is completed within 5 years from the end of the financial
year in which the capital was borrowed; and
3. The lender certifies that such interest is payable in respect of the loan used for the
acquisition or construction of the house or as refinance of the earlier loan outstanding
(principal amount) taken for the acquisition or construction of the house.
In any other case ` 30,000
Taxpoint: In any case, deduction in respect of interest on loan on self-occupied properties cannot exceed
` 2,00,000 in a year.

In nutshell, treatment of interest on loan is as under:

Nature of property When loan was taken Purpose of loan Allowable (Maximum limit)2,
3

Self-occupied On or after 01/04/1999 Construction or purchase of house ` 2,00,000

property1
Self-occupied On or after 01/04/1999 For Repairs of house property ` 30,000
Self-occupied Before 01/04/1999 Construction or purchase of house ` 30,000
property
Self-occupied Before 01/04/1999 For Repairs of house property ` 30,000
Let-out Any time Construction or purchase of house No maximum limit
property
3) Deemed let-out house property [section 23(4)]
Where the assessee occupies more than two house properties as self-occupied or has more than two
unoccupied properties, then for any two of them, benefit u/s 23(2) can be claimed (at the choice of the
assessee) and remaining property or properties shall be treated as ‘deemed to be let out’.

where the assessee cannot realize rent from a property let to a tenant and subsequently the
assessee has realized any amount in respect of such rent, the amount so realized shall be
deemed to be income chargeable under the head "income from house property'' and accordingly
charged to income tax as the income of that previous year in which such rent is realized whether
or not the assessee is the owner of that property in that previous year. "

Illustration 1. [Computation of Reasonable Expected Rent]

Calculate Reasonable Expected Rent from the following details:

Particulars House 1 House 2 House 3 House 4 House 5

Gross Municipal Value (a) 10,000 12,000 12,000 18,000 16,000
Fair Rent (b) 8,000 16,000 16,000 10,000 17,000
Higher of the [(a) and (b)] [A] 10,000 16,000 16,000 18,000 17,000
Standard Rent as per Rent Control Act [B] 10,000 14,000 N.A 8,000 20,000
Reasonable Expected Rent [Lower of [(A) & (B)] 10,000 14,000 16,000 8,000 17,000
Illustration 2
Mr. Rajendra owns two house properties both of which are let out. Compute his income from the following details:

Particulars H1 H2
Situated at Gaya Mumbai
Gross Municipal value 1,00,000 2,00,000
Fair rent 95,000 2,10,000
Standard rent 90,000 2,00,000
Actual rent receivable 1,00,000 1,80,000
Unrealised rent of current year 8,000 2,000
Municipal tax 10% 1,000
Fire insurance 2,000 1,200
Repairs Nil 2,000
Interest on loan for construction (@ 12%) 10,000 Nil

Other Information:
(a) Municipal tax of H1 is still unpaid, while, that of H2 is half paid by tenant.
Solution:
Computation of income from house property of Mr. Rajesh for the A.Y. 2021-22

Particulars Details Amount Amount

H1: Let out
Gross Annual Value# 92,000
Less: Municipal tax Nil
Net Annual Value 92,000
Less: Deduction u/s 24
(a) Standard deduction (30% of NAV) 27,600
(b) Interest on loan 10,000 37,600 54,400
H2: Let out
Gross Annual Value# 2,00,000
Less: Municipal tax 500
Net Annual Value 1,99,500
Less: Deduction u/s 24
(a) Standard deduction (30% of NAV) 59,850
(b) Interest on loan Nil 59,850 1,39,650
Income from House Property 1,94,050
Note: Unpaid municipal tax and municipal tax paid by tenant is not allowed.
#. Computation of Gross Annual Value

Particulars Details H1 H2
Reasonable Expected Rent Higher of GMV or FR subject to SR 90,000 2,00,000
Actual Rent Receivable – Unrealised Rent 92,000 1,78,000
Gross Annual Value Higher of above 92,000 2,00,000