INCOME FROM HOUSE PROPERTY

 

OVERVIEW

• The head Income from House Property in addition tocharges income from house property, it also chargesincome arising out of arising out of letting of a buildingincluding office, shop or land attached thereto. However, property occupied for the purposes of business or profession carried on by the assesse is not covered by this head of income.
• Taxes income from property earned by the owner who exercises rights on his own
• Only head of income where charging provision provides for taxing notional income i.e. income under this head may be charged irrespective of the fact that income has not been received.(In exceptional circumstances notional income is computed under the head capital gains and also under the head income from other sources but those are the cases where a certain amount / value of inflow is there to the person, it is the value charged to tax which is different from the value received).
• If a person owns a property which is lying vacant, notional income with respect to such property may be liable to tax.
• If the property is let out and the rent received is less than the fair rent thereof, it is the amount of fair rent which would be charged to tax.

The house properties are broadly classified as under for the purpose of charging the income relating to those properties -

Self-occupied	Let Out Property	Inherited Property
A self-occupied house property is used for one’s own residential purposes occupied by the taxpayer’s family A vacant house property is considered as self-occupied for the purpose of IncomeTax. Prior to FY 2019-20, except 1, all other house properties were considered deemedlet-out. However, as amended, from FY 2019-20,the benefit of considering the houses as self-occupied has been extended to 2houses.	A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes including deemed let out properties.	An inherited property i.e. one bequeathed from parents, grandparents etc. again, can either be a self-occupied one or a let out one based on its usage as discussed above.

CHARGEABILITY U/S. 22

a. Chargeable under the head?

Annual Value of the property consisting of any building or lands appurtenant thereto except such property which is used by the assessee for the purpose of business or profession, income from which is chargeable under the head “Income from business or profession”.

b. Person liable to be taxed for Income from House Property?

Income from house property is taxable in the hands of owner of the property. Owner is a person who is entitled to receive income from property in his own right. Income is chargeable in the hands of person even if he is not a registered owner. Following are the pointers to chargeability –

• Rental income from sub-letting the property except where the person is in business of letting out the property

• The deemed owner of the property shall also be liable to be taxed. Such deeming fiction is only for the purposes of sections 22 to 26. Therefore, persons as defined under Section 27 as “Owner of the House Property” will be regarded as owners for the purposes of charging income under this head though they may, in general law, not be the owners of the property.

INCOME FROM PROPERTIES UNDER THE PURVIEW OF THE HEAD “INCOME FROM HOUSE PROPERTY”

1. Predominantly, only income from letting of buildings or lands appurtenant thereto is taxable under the head “Income from house property”.
• If the letting out is only of the vacant land, the rent received from such letting of land is not taxable under the head “Income from house property”. It may be taxable under the head “Income from business or profession” if the business of the assessee is to let out land or may be taxable as “Income from other sources” if letting of land is not the business of the assessee.
• Further if rent is received for property as well as services and amenities (if such services/ amenities are not incidental / subservient to letting of property) and the rent of the property and of services and amenities is separable then, the annual value of such property is assessable under section 22 and profits arising from services and amenities is chargeable to tax under section 28; i.e., business income or under section 56; i.e., income from other sources.
2. Rent derived from letting of residential and, or commercial buildings is covered under this head of income, However, where business of assessee is to let out properties, income is chargeable under the head Rs. Profits and Gains of Business & Profession’. Further if letting is subservient to the main business, the annual value will not be chargeable u/s. 22 rather it will be chargeable under Profits and Gains of Business & Profession.
3. If letting is subservient to the main business, the annual value will not be chargeable u/s. 22 rather it will be chargeable under Profits and Gains of Business & Profession.
4. Where an assessee lets machinery, plant or furniture and also buildings, and the letting out of buildings is inseparable from the letting of the machinery, plant or furniture, the income from such letting, if it is not chargeable to tax under the head “Income from business or profession” would be taxable under the head “Income from other sources”. However, where provision of services are incidental to the predominant object of letting out of the property and the income arising there from is inseparable the income shall be charged under this head.
5. Where, even if, the property is held as stock-intradeand is not let out during the whole or part of the year, the notional rent is taxable under this head if such property in stock is held for more than two years [two years is applicable w.e.f. A.Y. 2020-21; for A.Y. 2018-19 and 2019-20 it was one year] from the date of receipt of completion certificate of construction from the competent authority. 

However in case where the property held as stock in trade is held for less than two years [two years is applicable w.e.f. A.Y. 2020-21; for A.Y. 2018-19 and 2019-20 it was one year] from the date of completion certificate so received the annual value shall be treated as Nil. 

• Refer section 56(2)(iii) and decision of the Hon’ble Supreme Court in the case of Shambhu Investments (P.) Ltd. vs. CIT (2003) 263 ITR 143 (SC) as also decision in case of Chennai Properties (Supreme Court in CIVIL APPEAL NO. 4494 of 2004 April 9, 2015)

PROPERTY OWNED BY CO-OWNERS UNDER SECTION 26

Where property consisting of buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not be assessed as an Association of Persons (AOP) but the share of each person in the income from the property as computed under sections 22 to 25 (i.e., income from house property) shall be included in their individual income respectively.

Owner includes deemed owner u/s. 27 as under:

• A person, who transfers without adequate consideration any house property to his/her spouse otherwise than in connection with an agreement to live apart, or to a minor child not being a married daughter
• Holder of an impartible estate shall be deemed to be owner of all the properties comprised in the estate
• A member of a co-operative society, company or other association to whom a building is allotted or leased under a house building scheme of such society, company or other association as a case may be
• A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act,1882 (4 of 1882)
• A person who acquires any lease rights of not less than twelve years (excluding any rights by way of a lease from month to month or for a period not exceeding one year) Official assignee can be treated as owner for the purpose of section 22 except when the receiver is appointed bycourt.

DETERMINATION OF ANNUAL VALUE UNDER SECTION 23

For determining the annual value, one has to first determine the Gross Annual Value (GAV). The pointers to GAV are hereunder

• GAV of Self-occupied property is NIL
• GAV of Let-out property is rent collected

GAV which is the higher of:

• The sum for which the property might reasonably be expected to let from year to year. In cases of properties where Standard rent has been fixed, such sum cannot exceed the standard rent fixed [Refer Sheila Kaushish vs. CIT [1981] 7 Taxman 1 (SC) & Amolak Ram Khosla vs. CIT [1981] 7 Taxman 51 (SC)]. However where property is let and was vacant during the whole or part of the previous year and rent actually received or receivable owing to such vacancy is less than expected rent, then rent actually received or receivable is taken as GAV.
• Where property is actually let out and the rent received or receivable is more than the amount determined in (a) above, the annual value would be the amount of actual rent received or receivable.

A. ANNUAL VALUE TO BE TAKEN AS ‘NIL’ IN CERTAIN CASES

• The annual value of a property which is in occupation of the owner for the purposes of his residence would be considered to be nil if he does not derive any other benefit from the said residential house. If the owner has more than two houses for the purpose of his residence, the annual value of any two of such houses, at his option, would be considered to be nil and notional income of other residential houses would be charged to tax. In such a case the owner may choose to consider the annual value nil (for computation purposes) in respect of any two properties at his option.
• Similarly, if the assessee owns only two residential houses which he is unable to occupy on account of his employment, business or profession being carried on at any other place and on account of which he has to reside at that other place in a building not owned by him, the annual value of such houses shall be nil.
• The annual value of the property held as stock in trade and not let out for whole or part of the year, shall be taken as Nil for the period up to twoyears from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

B. DETERMINATION OF NET ANNUAL VALUE (NAV)

The following amounts are required to be reduced while determining the net annual value:

• Any taxes levied by any local authority, which are liable to be paid by the owner, only on actual payment thereof during the previous year in which such payment is made irrespective of method of accounting followed; and
• The unrealisable rent subject to satisfaction of following conditions where the amount of unrealised rent shall be equal to the amount of rent payable but not paid by a tenant of the assessee and is proved to be lost and irrecoverable where,�
  • the tenancy is bona fide
  • the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property
  • the defaulting tenant is not in occupation of any other property of the assessee
  • the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

C. UNREALISED RENT REALISED SUBSEQUENTLY - SECTIONS 25A/25AA (UP TO A.Y. 2016-17)

• The entire amount of unrealised rent received in any of the PY, which was not subjected to tax in earlier year as per section 24(1)(x), (effective up to A.Y. 2002-03) shall be chargeable to tax in the year in which such amount is actually received. (Deduction u/s. 23/24 shall not be allowed if the unrealised rent pertains to period up to A.Y. 2001-02 & deduction u/s. 24(1)(x) in respect thereof was allowed in earlier years.)
• Unrealised rent received subsequently is chargeable to tax even if the house property is not owned by the assessee in the year of such recovery.

D. ARREARS OF RENT RECEIVED — SECTION 25B (UP TO A.Y. 2016-17)

Where any arrears of rent is received which was not taxed earlier, such rent shall be assessed under the head “Income from house property” in the year in which such arrears are received. The arrears would be taxable under this head irrespective of the fact whether the assessee is the owner of the buildings in the year in which such arrears are received. However, a deduction of 30% on account of repairs on the arrears of rent received would be allowed in the year in which such arrears are taxable.

E. SPECIAL PROVISION FOR ARREARS OF RENT AND UNREALISED RENT RECEIVED SUBSEQUENTLY

Section 25A : (substituted for sections 25A, 25AA and 25B w.e.f. A.Y. 2017-18)

• The arrears of rent or unrealised rent received from a tenant subsequently shall be deemed to be the Rs. Income from House Property’in respect of the financial year in which such rent is received or realised and shall be chargeable to tax under the head Rs. Income from House Property’, irrespective of the fact that the assessee is the owner of such property in that financial year or not.
• From the above income,a sum equal to 30% of such income shall be allowed as deduction while computing such income from arrears of rent or unrealised rent so received and included in total income.

F. DEDUCTIONS ALLOWED WHILE COMPUTING INCOME UNDER THIS HEAD

The following deductions shall be allowed from the annual value u/s. 24:

1. 30% of the annual value as computed.
2. Interest payable on capital borrowed for the purpose of acquisition, construction, repairs, renewals or reconstruction of house property (subject however in case of self occupied property it is subject to conditions and limits as mentioned hereinafter).

(Interest to the extent it is not claimed/allowed under any of the provisions of the Act, for the period prior to acquisition or construction of the premises would be deductible in five equal installments starting from the year in which property is acquired or constructed.)

However In case of self occupied House Property or the property not occupied due to employment etc. interest allowable is subject to following conditions:

Sr. No.	Particulars	Limit of Deduction (in Rs. )
1.	Property acquired/constructed after 1st April, 1999 with borrowed capital (deduction is allowed only where such acquisition or construction is completed within 3 years (5 years w.e.f. F.Y. 2016-17) from the end of the financial year in which capital was borrowed)	2,00,000/- w.e.f. 2015-16
2.	In case of property acquired/ constructed before 1st April, 1999	30,000/-

Notes:

1. Interest on new loan taken to repay original loan is considered as loan taken for such acquisition, construction, etc. (Refer CBDT Circular No. 28 dated 20-8-1969).
2. Where interest is claimed as a deduction, a certificate from the lender certifying the amount of interest payable should be furnished by the assessee.
3. The list of deductions specified u/s. 24 are exhaustive, no other deduction can be claimed other than those specified therein.
4. Interest on borrowed money which is payable outside India shall not be allowed as deduction u/s. 24(b) unless the tax on the same has been paid or deducted at source and in respect of which, there is a person in India, who may be treated as an agent of the recipient for such purpose.
5. Brokerage or commission paid to arrange a loan for house construction will not be allowed.
6. A new section 80EE has been introduced by Finance Act, 2013 to allow a deduction of upto Rs. 1,00,000 w.e.f. 1st April, 2014 (i.e. A.Y. 2014-15) towards interest payable on loan taken by an individual,from a financial institution, for acquiring a residential property where such loan is sanctioned after 1-4-2013 but before 31-3-2014 and subject to satisfaction of other conditions mentioned in section 80EE.
   The said section 80EE has been amended by Finance Act, 2016, w.e.f. 1st April, 2017 (i.e. A.Y. 2017-18) to provide for a deduction of interest payable up to Rs. 50,000/- for loans sanctioned on after 1-4-2016 but before 31-3-2017) subject to satisfaction of conditions mentioned therein.
7. The said section 80EE has been amended by Finance Act, 2016, w.e.f. 1st April, 2017 (i.e. A.Y. 2017-18) to provide for a deduction of interest payable up to INR 50,000/- for loans sanctioned on after 1-4-2016 but before 31-3-2017) subject to satisfaction of conditions mentioned therein.
8. Section 80EEA has been introduced by the Finance Act, 2019, with effect from 1st April, 2020 (i.e. A.Y. 2020- 21 and subsequent Assessment Years) to provide for a deduction up to INR 1,50,000 in respect of interest payable on loan taken from a financial institution for acquisition of residential property subject to satisfaction of conditions prescribed therein. The deduction is in respect of interest payable, on loans sanctioned, by a financial institution to an individual, during the period beginning from 1-4-2019 and ending on 31-3-2020. Section 80EEA has been amended by the Finance Act, 2020 whereby the time limit prescribed for sanction of loan has been extended from 31-3-2020 to 31-3-2021. Accordingly, if the loan is sanctioned between 1-4-2019 to 31-3-2021, the assessee would be entitled to claim a deduction in respect of interest payable on such loan. If deduction is claimed and allowed under section 80EEA, then no deduction in respect of such interest shall be allowed in respect of such interest under any other provision of the Act for the same or any other AY.

[The benefits are not available to property under construction.]

EXAMPLE OF COMPUTATION OF INCOME FROM HOUSE PROPERTY IN NUTSHELL

(Amonut in INR)

Particulars		Types of Property
		Let-out Property u/s. 23(1)		Self-occupied House Property u/s. 23(2)		Deemed to be Let-out Property u/s. 23(4)
		Amt. Rs.	Amt. Rs.	Amt. Rs.	Amt. Rs.	Amt. Rs.	Amt. Rs.
(i)	Reasonably Expected Rent		XXX		NIL		XXX
(ii)	Actual rent received or receivable		XXX		NIL		NIL
Gross Annual Value (GAV)			XXX
1.	(i) or,
2.	(ii)>(i), then (ii) or,
3.	(ii)<(i) due to vacancy then (ii)				NIL		XXX
Less : Municipal Taxes paid during the previous year by the owner to local authority			(XXX)		NIL		(XXX)
1.	Net Annual Value (NAV)		XXX		NIL		XXX
Less: Deduction u/s. 24
(a)	30% of NAV	XXX		NIL		XXX
(b)	Interest on loans as allowed	XXX		XXX		XXX
2.	Total Deductions (a) + (b)		(XXX)		(XXX)		(XXX)
A.	Income from House Property (1 - 2)		XXX		(XXX)		XXX
B.	Add Unrealised Rent Received subject to conditions of deduction u/ss. 23/24		XXX		NIL		NIL
C.	Add arrears of Rent Received	XXX		NIL		NIL
Less: 30% of arrears of Rent		(XXX)	XXX	NIL	NIL	NIL	NIL
Total Income from House Property (A + B + C)			XXX		XXX		XXX

Note: The amount of rent may be charged under the head business income or income from other sources where the assessee carries out an organized activity of letting out of the properties and/or the predominant object of receiving such rent is the commercial exploitation of such property.

Section 23(5) as inserted by the Finance Act, 2017 w.e.f. 1-4-2018 and amended by the Finance Act, 2019 w.e.f. 1-4-2020

Where the property consists of any building or land appurtenant thereto or any part thereof which is held as stock in trade and such property is not let out during the whole or any part of the previous year, then for a period of 1 year from the end of the financial year in which certificate of completion of property is obtained from the competent authority, the annual value of such property shall be taken as NIL. Conversely, w.e.f. A.Y. 2018-19, the property held as stock-in-trade and not let out shall also be subjected to tax to be determined as above.

The Finance Act, 2019 has amended section 23(5) and the period of one year has been substituted by “two years” w.e.f. 1-4-2020 i.e. Assessment Year : 2020-21

Section 71(3A): Income being loss under the head House property shall not be allowed to be set off against income under any other head in excess of Rs. 2,00,000/- Ref Section 71(3A) w.e.f 1-4-2018.