Hourse property.bose

By Shankar Bose, Inspector of Income-tax, MSTU, Puri

Which property income is exempt from tax?

Income from farm house (Sec.2(1A)(c) read with sec. 10(1)). Annual value of any one palace of an ex-
ruler (Sec.10(19A)). Property income of a local authority (Sec.10(20)), university/ educational institution
(Sec.10(23C)), approved scientific research association (Sec.10(21)), political party (sec.13A). Property
used for own business or profession (Sec.22). One self occupied property (sec.23(2)). House property
held for charitable purposes (sec.11).

How is the annual value of a house property calculated?

Under the Income Tax Act what is taxed under the head „Income from House Property‟ is the inherent
capacity of the property to earn income called the Annual Value of the property. The above is taxed in the
hands of the owner of the property.

Computation Of Annual Value

(i) GROSS ANNUAL VALUE(G.A.V.) is the highest of

(a) Rent received or receivable

(b) Fair Market Value.

(c) Municipal valuation.

(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent received, whichever
is higher).

It may be noted that if the let out property was vacant for whole or any part of the previous year and
owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause(a)
above, then the amount actually received/receivable shall be taken into account while computing the
G.A.V. If any portion of the rent is unrealisable, (condition of unrealisability of rent are laid down in Rule 4
of I.T. Rules) then the same shall not be included in the actual rent received/receivable while computing
the G.A.V.

(ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes paid by the owner. Provided that the taxes
were paid during the year.

(iii) ANNUAL VALUE is the N.A.V. less the deductions available u/s 24.

Deductions U/S 24:- Are exhaustive and no other
deductions are available:-

(i) A sum equal to 30% of the annual value as computed above.

(ii) Interest on money borrowed for acquisition/construction/ repair/renovation of property is deductible on
accrual basis. Interest paid during the pre construction/acquisition period will be allowed in five
successive financial years starting with the financial year in which construction/acquisition is completed.
This deduction is also available in respect of a self occupied property and can be claimed up to maximum
of Rs.30,000/-. The Finance Act, 2001 had provided that w.e.f. A.Y. 2002-03 the amount of deduction
available under this clause would be available up to Rs.1,50,000/- in case the property is acquired or
constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is completed
before 1.4.2003. The Finance Act 2002 has further removed the requirement of acquisition/ construction
being completed before 1.4.2003 and has simply provided that the acquisition/construction of the property
must be completed within three years from the end of the financial year in which the capital was
borrowed.

Some Notable Points

In case of one self occupied property, the annual value is taken as nil. Deduction u/s 24 for interest paid
may still be claimed therefrom. The resulting loss may be set off against income under other heads but
can not be carried forward.

If more than one property is owned and all are used for self occupation purposes only, then any one can
be opted as self occupied, the others are deemed to be let out.

Annual value of one house away from workplace which is not let out can be taken as NIL provided that it
is the only house owned and it is not let out.
If a let out property is partly self occupied or is self occupied for a part of the year, then the value in
proportion to the portion of self occupied property or period of self occupation, as the case may be is to
be excluded from the annual value.

From assessment year 1999-2000 onwards, an assessee who apart from his salary income has loss
under the head “Income from house property”, may furnish the particulars of the same in the prescribed
form to his Drawing and Disbursing Officer who shall then take the above loss also into account for the
purpose of TDS from salary.

A new section 25B has been inserted with effect from assessment year 2001-2002 which provides that
where the assessee, being the owner of any property consisting of any buildings or lands appurtenant
thereto which may have been let to a tenant, receives any arrears of rent not charged to income tax for
any previous year, then such arrears shall be taxed as the income of the previous year in which the same
is received after deducting therefrom a sum equal to 30% of the amount of arrears in respect of
repairs/collection charges. It may be noted that the above provision shall apply whether or not the
assessee remains the owner of the property in the year of receipt of such arrears.

On what basis is income from House Property taxed?

The annual value of house properties owned by a person other than those which are occupied by him for
the purpose of any business or profession carried on by him is charged to Income-tax as 'Income from
House Property'. Annual value of a property is defined as 'the sum for which the property might
reasonably be expected to let from year to year'. If the property is in the occupation of the tenant, the
taxes levied by any local authority in respect of the property shall, to the extent such taxes are borne by
the owner should be deducted in determining the annual value of the property of that previous year in
which such taxes are actually paid by the owner. If the property is let and if the rent received or receivable
is in excess of the sum mentioned above, the rent so received or receivable shall be taken to be the
annual value.

Deductions allowed under 'income from house property'

The following deductions are to be made from the annual value while computing income
from house property :-

(a) 30% of the annual value, in respect of repairs and collection charges; (b) interest payable on
loan taken for acquisition, construction, repair, renewal or re-construction of the property; In
respect of a self-occupied property whose annual value is taken as Nil, no deduction is
admissible except deduction for interest payable on loan as mentioned at (b) above, subject to a
ceiling of Rs 30,000/- ( if the property is acquired or constructed with capital borrowed on or
after 1.4.1999 and if the acquisition or construction is completed before 1.4.2003, the interest
allowable as deduction will be Rs.1,50,000/- instead of Rs.30,000/-).

Why Annual Value important for income from House Property?

The determination of „Annual Value‟ is important in the context of taxation of income from House Property
because though the tax under the head „Income from house property‟ is tax on income, yet it is not in that
sense a tax on income but upon inherent capacity of such property to yield income and for this „annual
value‟ is the yardstick.

The inherent capacity has been defined as the sum for which the property might reasonably be expected
to be let from year to-year. It is not necessary, that the property should be actually let. 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 (e.g. in case where the tenancy is affected by manipulation, emergency, close
relationship or such other consideration), the latter will be 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 relevant factors for the determination of
the annual value. However, if a property is let and was vacant during any part or whole of the year and
due to such vacancy, the rent received is less than the notional rent, such lesser amount shall be the
Annual Value.

How to determine annual value of self-occupied property?

In case of one self-occupied house property which has not been actually let out at any time, the annual
value is taken as „nil‟. If, one is having more than one house property using all of them for self-occupation,
he is entitled to exercise an option in terms of which, the value of one house property as specified by him
will be taken at nil. The annual value of the other self occupied house properties will be determined on
notional basis as if these had been let out.

Annual Value of one house away from work place

A person may own a house property, say in Bangalore, which he normally uses for his residence. He is
transferred to Chennai where he does not own any house property and stays in a rental accommodation.
In such case, the house property income therefore would normally have been chargeable although he
derives no benefit from the property. To save the taxpayer from hardship in such situations, it has been
specifically provided that the annual value of such a property would be taken to be nil subject to the
following conditions:

• The assessee must be owner of only one house property.

• He is not able to occupy the house property because of his employment, business etc. being away from
place where the property is situated.

• The property should not have been actually let.

• He has to reside at the place of employment in a building not belonging to him.

• He does not derive any other benefit from the property not occupied.

Why Annual Value important for income from House Property?

The determination of „Annual Value‟ is important in the context of taxation of income from House Property
because though the tax under the head „Income from house property‟ is tax on income, yet it is not in that
sense a tax on income but upon inherent capacity of such property to yield income and for this „annual
value‟ is the yardstick.

The inherent capacity has been defined as the sum for which the property might reasonably be expected
to be let from year to-year. It is not necessary, that the property should be actually let. 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 (e.g. in case where the tenancy is affected by manipulation, emergency, close
relationship or such other consideration), the latter will be 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 relevant factors for the determination of
the annual value. However, if a property is let and was vacant during any part or whole of the year and

due to such vacancy, the rent received is less than the notional rent, such lesser amount shall be the
Annual Value.

How to determine Annual Value of let out house properties?

In respect of a let out house property, the rent received is usually taken as the annual lettable value.
When, however, the rent is not indicative of the actual earning capacity of the house, the notional annual
value will have to be found and adopted. The standard rent would be the Annual Value in the case of
properties, subject to Rent Control Legislation. However, when the actual rent received or receivable is
higher than the notional value as calculated above, the higher figure will be taken for the purpose of
Income-tax. From the annual value as determined above, municipal taxes are to be deducted if the
following conditions are fulfilled:

• The property is let out during the whole or any part of the previous year (There is no such deduction in
respect of a self-occupied house property).

• The Municipal taxes must be borne by the landlord. (If the municipal taxes or any part thereof are borne
by the tenant, the same will not be deductible).

• The municipal taxes must be paid during the year. (Where the municipal taxes have become due but
have not been actually paid, these will not be allowed. The municipal taxes may be claimed on payment
basis i.e., only in the year they were paid even if the taxes belonged to a different year). Amount left after
deduction of municipal taxes is net annual value.

Permissible deductions from Annual Value for let out house

The permissible deductions from annual value for let out properties are as follows:

(i) Deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the taxpayer.
No other allowance for repairs, maintenance etc. would be allowable.

(ii) Interest on borrowed capital

Interest on borrowed capital is allowable as deduction on accrual basis (even if account books are kept
on cash basis) if capital is borrowed for the purpose of purchase, construction, repair, renewal or
reconstruction of the house property.

What is maximum interest deductible on borrowed capital?

The maximum amount of interest permissible in cases of self-occupied property is Rs.1,50,000 (in respect
of funds borrowed on or after 01.04.1999). Interest upto Rs.1,50,000 is deductible if the following
conditions are satisfied:

- Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;

- The acquisition/construction should be completed within 3 years from the end of the financial year in
which capital was borrowed; and

- The person extending the loan certifies that such interest is payable in respect of the amount advanced
for acquisition or construction of the house or as refinance of the principal amount outstanding under an
earlier loan taken for such acquisition or construction"

In the above context the following further aspects have to be kept in view:

1. If capital is borrowed for any other purpose (e.g. if capital is borrowed for reconstruction, repairs or
renewals of a house property), then the maximum deduction on account of interest is Rs.30,000 (and not
Rs.1,50,000).

2. There is no stipulation regarding the date of commencement of construction. Consequently, the
construction of the residential unit could have commenced before April 1,1999 but, as long as its

construction/ acquisition is completed within 3 years, the higher deduction of Rs.1,50,000 would be
available. Also, there is no stipulation regarding the construction/acquisition of the residential unit being
entirely financed by the loan taken on or after April 1, 1999. It may be so in part. However, the higher
deduction upto Rs.1,50,000 can be taken for the loan which has been taken and utilized for
construction/acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry deduction of
interest upto Rs. 30,000 only (CBDT‟s circular No. 779, dated September 14, 1999). "

Rs 1,50,000 maximum deduction will not be available in the following situations:

"i. if capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or
renewals of a house property;

ii. if capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house
property; and

iii. if capital is borrowed on or after April 1, 1999 but construction is not completed within 3 years from the
end of the year in which capital was borrowed. In the above situations only deduction upto Rs 30,000 can
be claimed.

Deductions U/S 80C for investment in New Residential House

Deduction under section 80C of the Income tax Act is available for investment in house property subject
to the satisfaction of the conditions of that section in regard to qualifying amounts in the following
circumstances to the individuals/Hindu undivided families.

Payments made towards the cost of purchase/construction of new residential house property during the
previous year are eligible for deduction under section 80C.

Section 80C provides that in computing the total income of an assessee, deduction shall be provided in
respect of various payments/investments made as included in the aforesaid Section subject to a ceiling of
Rs.1 lakh on the aggregate amount of such payments/investments.

Section 80C(5) stipulates that in case an assessee transfers the house property referred to above before
the expiry of five years from the end of the financial year in which possession of such property is obtained
by him, or receives back, whether by way of refund or otherwise, any sum specified above, then no
deduction shall be allowed with reference to any of the sums referred to above and the aggregate amount
of deductions of income already allowed in respect of the previous year or years shall be deemed to be
the income of the assessee of such previous year and shall be liable to tax in the assessment year
relevant to such previous year.

Do investments in new house qualify for deductions u/s 80C?

The following payments qualify for deduction under section 80C in relation to investment in new
residential house property:

a. any instalment or part payment of the amount due under any self-financing or other scheme of
any development authority, housing board or other authority engaged in the construction and sale
of house property on ownership basis; or

b. any instalment or part payment of the amount due to any company or cooperative society of
which the assessee is a shareholder or member towards the cost of the house property allotted to
him (it is not applicable if the assessee is not a shareholder or member of the
company/cooperative society which provided house to the assessee); or

c. repayment of the amount borrowed by the assessee from

i. the Central Government or any State Government, or

ii. any bank, including a cooperative bank, or

iii. the Life Insurance Corporation of India, or

iv. the National Housing Bank, or v. any public company formed and registered in India with the
main object of carrying on the business of providing long term finance for construction or
purchase of houses in India for residential purposes which is eligible for deduction under section
36(1) (viii),

or

v. any company in which the public are substantially interest or any cooperative society, where
such company or cooperative society is engaged in the business of financing the construction of
houses, or

vii. the assessee’s employer where such employer is an authority or a board or a corporation or
any other body established or constituted under a Central or State Act, or viii. the assessee’s
employer where such employer is a public company or public sector company, or a university
established by law or a college affiliated to such university or a local authority or a cooperative
society;

d. stamp duty, registration fee and other expenses for the purpose of transfer of such house
property to the assessee.

Deductions U/S 80C for investment in New Residential House

Deduction under section 80C of the Income tax Act is available for investment in house property subject
to the satisfaction of the conditions of that section in regard to qualifying amounts in the following
circumstances to the individuals/Hindu undivided families.

Payments made towards the cost of purchase/construction of new residential house property during the
previous year are eligible for deduction under section 80C.

Section 80C provides that in computing the total income of an assessee, deduction shall be provided in
respect of various payments/investments made as included in the aforesaid Section subject to a ceiling of
Rs.1 lakh on the aggregate amount of such payments/investments.

Section 80C(5) stipulates that in case an assessee transfers the house property referred to above before
the expiry of five years from the end of the financial year in which possession of such property is obtained
by him, or receives back, whether by way of refund or otherwise, any sum specified above, then no
deduction shall be allowed with reference to any of the sums referred to above and the aggregate amount
of deductions of income already allowed in respect of the previous year or years shall be deemed to be
the income of the assessee of such previous year and shall be liable to tax in the assessment year
relevant to such previous year.

Investment in new house:Do all costs qualify for deductions

The following payments do not qualify for deduction under section 80C in relation to investment in new
residential house property:

a. the admission fee, cost of the share and initial deposit which a shareholder of a company or a member
of a shareholder or member; or

b. the cost of any addition or alteration to, or renovation or repair of, the house property which is carried
out after issue of the completion certificate in respect of the house property by the authority competent to
issue such certificate or after the house property (or any part thereof) has either been occupied by the
assessee or any other person on his behalf or been let out; or

c. any expenditure in respect of which deduction is allowable under the provisions of section 24.

Can rental income received be split between me and my spouse for jointly owned property
for which we had invested equally for construction?

Yes. The rental income received can be split between you and your spouse which will be taxed in
the individual hands.

Should I calculate the house property income separately for each individual 5 properties let
out or club all the rental receipts in one calculation?

The calculation will have to be made separately for the various properties.

Thanks

Hourse property.bose

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