Under the Income Tax Act, 1961, income generated from house property is subject to taxation. The Annual Value of any property is its taxable value and the owner who receives the income from the property is liable to pay the applicable tax.
Taxation is a key revenue generation stream that is instrumental in the governance of India. Taxes are applied on a variety of commodities, services, sources of income and utilities. The taxes thus imposed aim at the betterment of the same products or services that are offered to the general public.
What is House Property?
Any land appurtenant or building owned by an individual comes under ‘house property’. It includes shops, flats, factory sheds, office spaces, farm houses, and agricultural land. It also includes all kinds of house properties such as residential houses, cinema building, godowns, hotel building, workshop building, etc.
What is Income from House Property?
The legal owner of the property is liable to pay tax on the income from the house property. Self-occupied and rental property can be treated as sources of income from house property. To be taxed under the head ‘Income from House Property’, the income of the property should satisfy the below-given conditions:
- The owner of the house property should be the assessee.
- The property should comprise buildings, house, and/or land.
- The property can be used for any purpose except for the owner using it for any business or profession.
The taxable value of any property that falls under the House Property category is the annual value of the property or any land belonging to it. The tax will be accountable to the owner whom the income from the property is payable to.
Sections 22 to 27 of the Income Tax Act deal with the subject of taxation of Income from House Property. The brief of the sections are as follows –
- Section 22 – What is Taxable under Income from House Property (Annual Value of Property Explained)
- Section 23 – Determination of Annual Value
- Section 24 – Deductions allowed for Income from House Property
- Section 25 – Aspects or amounts not deductible for Income from House Property
- Section 25AA – Unrealised rent subsequently realised after 1.4.2001
- Section 25B – Arrears of rent received
- Section 26 – Property owned by co-owners
- Section 27 – Deemed ownership situations for taxing Income from House Property
What is Taxable as Income from House Property? Annual Value of Property
The annual value of a property is the amount of money that the property can ideally or actually realise in any given financial year.
The annual value of house properties other than those which are used for business or professional purposes is accountable as income from house property and needs to be calculated in order to figure out the tax for the same.
As per the Income Tax Act, the Annual Value of the property is the inherent capacity of the property to earn income and is taxed to the owner. As per the same, the taxable income could be either the Gross Annual Value (GAV), Net Annual Value (NAV) or Annual Value.
- Gross Annual Value of the property will be the highest of
- Rent received or receivable
- Fair Market Value
- Municipal valuation
- Net Annual Value will be the Gross Annual Value less the municipal taxes paid by the owner
- Annual Value is Net Annual Value less the Deductions as per section 24
In effect, if a person, firm or organisation has the ownership of a house property and has been paying the municipal taxes for the property as well as has the property let out, point 3, or the Annual Value will be amount that is finally taxable.
Determining Annual Value
The annual value of a property is the inherent capacity of the property to yield income. Keeping this statement in mind, the annual value of the property can be one of the following –
- The reasonable annual amount for which the property might be let out (determined by municipal valuation or market trends)
- The actual amount of annual rent received or receivable which exceeds the amount in point 1
- The actual amount of rent received which is less than the amounts of an annual rent and the amount in point 1
The annual value of the property will be the higher of –
- Where Rent Control Act is applicable –
- Standard Rent under the Rent Control Act
- Actual Rent received
- Where Rent Control Act is not applicable –
- Municipal Value
- Fair Rent
- Actual Rent Received
The annual value of a property will be taken as ‘nil’ if the property –
- Is occupied by the owner as his/her own residence
- Can’t be occupied by the owner because of limitations imposed due to employment, business or profession at another location and the owner needs to reside in the other location in a place of residence that doesn’t belong to him/her (if more than one house is owned, any other houses will have an annual value calculated as mentioned above)
Further to the valuation of the property, it is important to remember that municipal taxes borne by the landlord and paid on time are acceptable as exclusions, if an overdue tax is paid within the next financial year, it will be counted as an exclusion along with the paid municipal tax of the same year.
Deductions on Income from House Property
The deductions applicable for Income from House Property can be considered as the following as per Section 24:
- Deduction under Section 24(a) – 30% of Net Annual Value
- Deduction under Section 24(b) - interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property
Interest here is categorised as pre-construction and post-construction interest. While the former deals with the interest on loan from the date of borrowing to the day of repayment, the latter deals with the interest that is applicable after the house is completed and is considered the interest for the relevant year. Pre-construction interest can be aggregated and claimed for five successive financial years starting with the year in which the house was completed.
The interest on borrowed capital is calculated on payable basis and can be claimed even if no actual interest has been paid in the particular year and it is also claimable only by the actual person who used the borrowed funds for the purpose of construction.
If in case the interest on borrowed capital is payable to a non-resident of India, and there is no instance of tax paid on the same interest, such an interest will not be acceptable as a deduction. Additionally, interest payable on outstanding interest is also not an acceptable deduction. Brokerages and commissions on the loan or borrowed capital are not allowed as deductions and if the owner decides to take a fresh loan to pay off the earlier loan, the interest on the latest loan will be deductible.
Calculating Income from House Property:
The best possible way of describing how an income from house property is calculated, is through an example scenario.
Mr. Arun (A) and Mr. Bhavesh (B) have been friends since childhood and after getting suitable jobs, they decide to own a house together. They apply for a loan and start the construction of the house. The house is constructed within a year and they become the bona fide co-owners of the property. Having built a fairly large house, they decide to rent out the first floor while sharing the ground floor themselves. The scenario for the annual value of the house becomes thus:
|Gross Annual Value|
|Gross Annual Value will be higher of 5 or 6||3,00,000|
|Less Municipal Tax|
|Less Statutory Deduction|
|Less Interest on Borrowed Capital|
Thus, A and B will have to pay taxes for the annual amount of Rs. 126,000 only and since they are co-owners of the building with the ground and first floors, the tax amount will be divided among them equally. It can be seen that though both the floors are present as property, only the first floor has been taken into account for calculating the annual value of the income from house property. As the owners are occupying the ground floor for their personal use, that is excluded from the income from house property.
If in case, A and B had been staying in non-owned houses at other locations, the annual value of the above mentioned house would have been nil. If they had owned other houses though, they could have chosen any one of them to be excluded from the income from house property category.
Exclusions to Income from House Property:
Though the computation of income from house property basically covers every possible building or house that can ever exist, there are a few exclusions to the same. The following house properties are excluded from the income computation –
- Property occupied by owner for the purpose of own residence
- Single property ownership but the house is not being used as residence as the owner stays elsewhere due to limitations of employability
- Farmhouses contributing to agricultural income
- Any one palace in the occupation of an ex-ruler
- Property of a local authority
- Property of any registered trade union
- Property of a member of a Scheduled Tribe;
- Statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both
- Any corporation established by the government for promoting the interests of members of a minority group
- Any cooperative society formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both
- Property Income from the letting of warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities
- Any institution for the development of ‘Khadi and village Industries’
- Self-occupied house property of an individual, which has not been rented throughout the previous year
- House property held for any charitable purposes
- Property of any political party