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Computation of income from house property


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Presentation on computation of income from house property for the benefit of students of Income tax. Useful material for undergraduate students of commerce faculty. It covers most of the important section of Income tax act applicable for computation of Income from house Property.

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Computation of income from house property

  1. 1. COMPUTATION OF INCOME FROM HOUSE PROPERTY Presentation on computation of income from house property For students of Income tax Presented by – Dr. Sanjay P Sawant Dessai Associate Professor VVM’s Shree Damodar College of Commerce and Economics Margao Goa
  2. 2. COMPUTATION OF INCOME FROM HOUSE PROPERTY • • • • • • • Sections: Definition of Annual Value u/s. 2(2). 22 Chargeability 23 Computation of annual value 24 Deductions available 25 deductions not allowed 25(AA) unrealised rent of previous year 2001-02 (or subsequent years ) is collected subsequently • 25(B) Mode of taxation of arrears of rent in the year of receipt • 26 Property owned by co-owners • 27 Deemed owner 13/12/13 2
  3. 3. Annual Value u/s. 2(2) • Annual value of house property (U/s 23) – It is the annual value of house property which is charged to tax after allowing certain deductions therefore • Annual value of property consisting of any building or land appurtenant thereto except such property which is used by assessee for the purpose of business and profession. 13/12/13 3
  4. 4. Section 22 Basis of charge Income is taxable under head “Income from house property ” if following conditions are satisfied 1.The property should consist of any building or lands appurtenant thereto. (land attached to building ) 2.The assessee should be owner of the property. 3.The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax . 13/12/13 4
  5. 5. DETERMINATION OF ANNUAL VALUE This is the inherent capacity of the property to earn income and it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out.  It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent, the latter will be the annual value. The municipal value of the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same locality, are all pointers to the determination of annual value. 13/12/13 5
  6. 6. Computation of Gross annual value sec 23 (1) • Step 1find out reasonable expected rent of the property • Step 2-find out actual rent received or receivable after deducting unrealised rent but before deducting loss due to vacancy • Step 3- find out which one is higher – among computed in step 1 and 2 • Step 4- find out loss because of vacancy • Step 5-step 3 minus step 4 is gross annual value 13/12/13 6
  7. 7. Computation of gross annual value (illustration) Municipal value 120000 Fair rent (whichever higher of the MR &FR is reasonable expected rent ) 115000 Standard rent ( Reasonable rent cannot exceed SR (wherever rent control Act applicable 125000 Step I Reasonable expected rent (Municipal value or fair rent , whichever is higher, but subject to maximum of standard rent ) Step II Rent received / receivable after deducting unrelised rent of current previous year (132000- 2000) Amount computed in step I and II , whichever is higher Less, Loss due to vacancy Gross annual value 13/12/13 120000 120000 1,30000 1,30,000 11000 119000 7
  8. 8. Calculation of gross annual value A B Gross annual value 1. Reasonable expected rent (higher of MR/FR not exceeding SR) A) Municipal valuation B) Fair rent C) Standard rent 2. Actual rent ( Annual rent) Less Unrealised rent 3. Higher of the above (1 &2) 13/12/13 Less loss due to vacancy 8
  9. 9. Reasonable expected rent • Reasonable expected rent is deemed to be the sum for which the property might reasonably be expected to be let out for year to year. • In determining reasonable rent, several factors have to be taken into consideration, such as • Location • Annual ratable value fixed by the municipalities • Rent of similar properties in neighborhood, • Rent which property likely to fetch having regard to• Demand and supply • Cost of construction of the property and • Nature and history of the property 13/12/13 Back 9
  10. 10. Reasonable expected rent • In majority cases, reasonable rent can be determined by taking into consideration the following factors • Municipal valuation of property • Fair rent of the property The higher of the above is generally taken as reasonable expected rent Note – If property is covered by rent control Act, then the amount so computed cannot exceed the standard rent. Back 13/12/13 10
  11. 11. COMPUTATION OF INCOME FROM LET OUT HOUSE PROPERTY • Income from house property is determined as under: • Gross Annual Value • Less: Municipal Taxes • • • • xxxxxxx xxxxxxx Net Annual Value Less: Deductions under Section 24 - Statutory Deduction (30% of Net Annual Value) - Interest on Borrowed Capital • Income From House Property 13/12/13 xxxxxxx xxx xxx xxxxxx 11
  12. 12. COMPUTATION OF INCOME FROM LET OUT HOUSE PROPERTY (illustration) Income from house property is determined as under: Gross Annual Value 2,00,000 Less: Municipal Taxes 25,000 Net Annual Value 1,75,000 Less: Deductions under Section 24 Statutory Deduction (30% of NAV) 52500 Interest on Borrowed Capital 30,000 82,500 Income From House Property 13/12/13 92,500 12
  13. 13. Deduction under head income from house property ( Let out and deemed to be let out ) Sec 24 1. Sum equal to 30 percent of net annual value 2. Interest on housing loan – if property is acquired, constructed, repaired with borrowed funds, the amount of interest payable on such borrowings will be allowed as deduction (Deduction is allowed on accrual basis) 3. Pre construction interest – will also be deductible in five equal installments commencing from the previous year in which such property is constructed or acquired 13/12/13 13
  14. 14. Amount not deductable (u/s 25) • Deductions in respect of interest on borrowed funds will not be allowed as deductions, if such amount are payable outside India, and no tax has been paid or deducted at source or no person is taxable as agent in India in respect of such amount of interest. 13/12/13 14
  15. 15. Recovery of unrealized rent of AY 2002-03 and subsequent years • The amount realized shall be charged to tax as the income of the previous year in which such rent is realized, whether or not the assessee is the owner of that property in the previous year. • No deductions shall be allowed for such unrealized rent received. 13/12/13 15
  16. 16. Arrears of rent received (u/s 25 B) • Any amount received by way of arrears of rent from property, which is not being charged to income tax in any previous year, then the amount so received as arrears of rent, will be charged to income tax as income of the previous year in which such rent is received under head income from house property, whether the assessee is the owner of that property in that year or not. • However a deduction is allowed in respect of 30 percent of such amount received as arrears of rent. 13/12/13 16
  17. 17. Property owned by co –owners (u/s 26) • Where house property is owned by two or more persons and there respective share are defined and ascertainable, such person shall not be assessed in respect of such property as an AOP but the share of each co-owner, in the income of house property, will be included in his total income 13/12/13 17
  18. 18. Deemed owners • Section 27 provides that following will be deemed owner of the house property for the purpose of charging tax on Annual Value. • i) Transfer to spouse or minor child • ii) Holder of impartible estate • iii) Property held by a member of Co-operative Society • iv) Person who has acquired a property under Power of attorney transaction • v) Person who has acquired the Right in Property u/s 269 UA (Property held on lease exceeding 12 years) 13/12/13 18
  19. 19. Set off and carry forward of loss • Loss from house property shall be set off against income under the same head or any other heads of income in the same year, Thereafter, if there is a loss remaining unadjusted, such unadjusted loss can be carried forward and set off in subsequent years subject to a limit of 8 assessment years against income from house property. 13/12/13 19
  20. 20. Income from self occupied house property • Where property consist of only one house or a part of house which is occupied be the owner for his own residence, the annual of such a house (or a part of house) shall be taken as nil. However, the following two conditions must be satisfied ; • The property or part thereof is not let out actually during any part of the previous year, and • No benefit is derived from such property 13/12/13 20
  21. 21. Deductions available for self occupied house property Interest on borrowed capital for self occupied property – The deduction in respect of interest on borrowed fund is Rs 1,50,000 Conditions The house property is acquired or constructed with capital borrowed on or after 1st April 1999 The acquisition or construction of the house is completed within three years from end of the financial year in which capital was borrowed Loan should be taken for acquisition or construction and not for repairs , renewals, reconstruction etc. ( for repairs, renewals and reconstruction purpose Rs. 30,000 only ) 13/12/13 21
  22. 22. Deemed to be let out house property • If person has occupied two or more houses for his residential purpose, in that case only one house according to his choice is treated as self – occupied and all other houses will be treaded as deemed to be let out house and all deductions as are applicable to let out property would be allowed. 13/12/13 22
  23. 23. Set off of loss from self occupied house property • Loss can be set off against the income of the assessee under the same head of income or any other income of the assessee for the same assessment year 13/12/13 23