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.
Property in the general term refers to any building and/or any attached land or plot to the building. The building could be a house, an office building, a warehouse, factory, hall, shop, an auditorium etc. and the associated land could be a garage, garden, parking space, playground or anything else. Any such property, excepting vacant plots or houses will be treated as house property as per the Income Tax Act of 1961.
What is Income from House Property?
Income from House Property can be treated as notional as well as realistic. It may not necessarily entail income or rent actually received but the potential income that the property is capable of yielding. Self-occupied and rental property can be treated as sources of income from house property.
Being an income even in the notional sense, income from House Property is also taxable, excepting cases where the property is actually being used for 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
News About Tax on Income from House Property
Special government funds to build on rental housing stock
The Ministry of Housing & Urban Poverty Alleviation, which is almost done confirming the National Rental Housing Policy, will probably recommend setting up a special fund at the Centre and State level to encourage rental housing stock. The rough draft entails Coupons for Rental Houses to be given by the State governments to urban people who are not financially well-off. ‘Rental Housing Vouchers’ is a tried and tested method in US and have been fruitful there. Gujarat has already sent a proposal to the Central Government regarding the same methodology and is presently under consideration. The vouchers shall be provided to the recognized recipients for shelling out monthly rent either completely or in instalments as per the discretion of the corresponding State governments. Another praiseworthy proposal is to treat rental stock the same as residential building for property tax.
5th May 2016