Is rental income from sub-letting chargeable to tax under the head “Income from house property”?

Rental income in the hands of owner is charged to tax under the head “Income from house property”. Rental income of a person other than the owner cannot be charged to tax under the head “Income from house property”. Hence, rental income received by a tenant from sub-letting cannot be charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be.

Whether rental income could be charged to tax in the hands of a person who is not a registered owner of the property?

Rental income from property is charged to tax under the head “Income from house property in the hands of the owner of the property”. If a person receiving the rent is not the owner of the property, then rental income is not charged to tax under the head “Income from house property” (E.g. Rent received by tenant from sub-letting). In the following cases a person may not be the registered owner of the property, but he will be treated as the owner (i.e., deemed owner) of the property and rental income from property will be charged to tax in his hands:

(1) If an individual transfers his or her house property to his/her spouse (not being a transfer in connection with an agreement to live apart) or to his/her minor child (not being married daughter) without adequate consideration, then the transferor will be deemed as owner of the property.

(2) Holder of impartible estate is deemed as the owner of the property comprised in the estate

(3) A member of co-operative society, company or other association of persons to whom a building (or part of it) is allotted or leased under house building scheme of the society, company or association, as the case may be, is treated as deemed owner of the property.

(4) A person acquiring property by satisfying the conditions of section 53A of the Transfer of Property Act, will be treated as deemed owner (although he may not be the registered owner). Section 53A of said Act prescribes following conditions:

    (a)  There must be an agreement in writing.

    (b)  The purchase consideration is paid or the purchaser is willing to pay it.

    (c)  Purchaser has taken the possession of the property in pursuance of the agreement.

(5) In case of lease of a property for a period exceeding 12 years (whether originally fixed or provision for extension exists), lessee is deemed to be the owner of the property. However, any right by way of lease from month-to-month or for a period not exceeding one year is not covered by this provision.

Under which head is the rental income from a property held as stock-in-trade chargeable to tax?

Rental income from a property, being building or land appurtenant thereto, of which the taxpayer is the owner is charged to tax under the head “Income from house property”.

It will not make any difference whether the property is held by the owner as stock-in-trade or otherwise. Thus, in respect of property held as stock-in-trade or in case of a person engaged in the business of letting out of property, rental income from property will be charged to tax under the head “Income from house property”.

However, if letting out of property is incidental to the main objective of business, then rental income will be charged to tax under the head “Profits and gains of business and profession” E.g: Rent collected by the employer from the employees in respect of residential quarters allotted to them.

Under which head is the rental income from a shop charged to tax?

Rental income from a property, being building or land appurtenant thereto, of which the taxpayer is the owner is charged to tax under the head “Income from house property”. To tax the rental income under the head “Income from house property”, the rented property should be building or land appurtenant thereto. Shop being a building, rental income will be charged to tax under the head “Income from house property”.

What is the meaning of the term ‘deemed owner’ and Whether rental income could be charged to tax in the hands of a person who is not a registered owner of the property?

Rental income from property is charged to tax under the head “Income from house property in the hands of the owner of the property”. If a person receiving the rent is not the owner of the property, then rental income is not charged to tax under the head “Income from house property” (E.g. Rent received by tenant from sub-letting). In the following cases a person may not be the registered owner of the property, but he will be treated as the owner (i.e., deemed owner) of the property and rental income from property will be charged to tax in his hands:

(1) If an individual transfers his or her house property to his/her spouse (not being a transfer in connection to an agreement to live apart) or to his/her minor child (not being married daughter) without adequate monetary consideration, then the transferor will be deemed as owner of the property.

(2) Holder of impartible estate is deemed as the owner of the property comprised in the estate

(3) A member of co-operative society, company or other association of persons to whom a building (or part of it) is allotted or leased under house building scheme of the society, company or association, is treated as deemed owner of the property.

(4) A person acquiring property by “power of attorney transaction” by satisfying the conditions of section 53A of the Transfer of Property Act, will be treated as deemed owner (although he may not be the registered owner). Section 53A of said Act prescribes following conditions:

(a) There must be an agreement in writing.

(b) The purchase consideration is paid or the purchaser is willing to pay it.

(c) Purchaser has taken the possession of the property in pursuance of the agreement.

(5) In case of lease of a property for a period exceeding 12 years (whether originally fixed or provision for extension exists), lessee is deemed to be the owner of the property. However, any right by way of lease from month-to-month or for a period not exceeding one year is not covered by this provision.

What is composite rent?

A person may let-out property along with other assets like building-cum-furniture, a well equipped cinema hall, a factory building with machinery. In such a case the owner will receive rent for letting out building as well as rent for other assets. This rent is called as ‘composite rent’.

Further, a person may let-out property and also provide additional services like supply of water, security service, etc. In such a case the owner will receive rent for building as well as charges for providing various services.

What is the tax treatment of composite rent when the composite rent pertains to letting of building along with assets?

In such a case, composite rent includes rent of building and rent towards other assets. This situation can be classified as follows:

(a) In a case where letting out of building and letting out of other assets are inseparable (i.e., both the lettings are composite and not separable, e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”. Nothing is charged to tax under the head “Income from house property” (as the case may be). This rule is applicable even if rent of building and rent of other assets is fixed separately.

(b) In a case where, letting out of building and letting out of other assets are separable (i.e., both the lettings are separable, e.g., letting out of refrigerator along with residential bungalow), rent of building will be charged to tax under the head “Income from house property” and rent of other assets will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources” (as the case may be). This rule is applicable, even if the owner receives composite rent for both the lettings. In other words, in such a case, the composite rent is to be allocated for letting out of building and for letting of other assets.

What is the tax treatment of composite rent when the composite rent pertains to letting out of building along with charges for provision of services?

In such a case, composite rent includes rent of building and charges for different services (like lift, watchman, water supply, etc.):  In this situation, the composite rent is to be bifurcated and the sum attributable to the use of property will be charged to tax under the head “Income from house property” and charges for various services will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources” (as the case may be).

How to compute income from a property which is let out throughout the year?

Income chargeable to tax under the head “Income from house property” in the case of a let-out property is computed in the following manner:

ParticularsAmount
Gross annual valueXXXX
Less:- Municipal taxes paid during the yearXXXX
Net Annual Value (NAV)XXXX
Less:- Deduction under section 24
➣Deduction under section 24(a) @ 30% of NAV➣Deduction under section 24(b) on account of interest on borrowed capital(XXXX)(XXXX)
Income from house propertyXXXX

How to compute gross annual value of a property which is let-out throughout the year?

Gross annual value of a property which is let-out throughout the year is determined in the following manner :

Step 1: Compute reasonable expected rent of the property (for details refer to FAQ on computation of reasonable expected rent).

Step 2: Compute actual rent of the property (for details refer to FAQ on computation of actual rent).

Step 3: Compute gross annual value (Gross annual value will be higher of amount computed at step 1 or step 2).

While computing gross annual value of a property which is let-out throughout the year, how to compute reasonable expected rent?

Reasonable expected rent will be higher of the following:

➣  Municipal value of the property (Note 1); or

➣  Fair rent of the property (Note 2).

If a property is covered under Rent Control Act, then the reasonable expected rent cannot exceed standard rent (Note 3).

Note 1: Meaning of Municipal Value

For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property.

Note 2: Meaning of Fair Rent

It is the reasonable expected rent which the property can fetch. It can be determined on the basis of rent fetched by a similar property in the same or similar locality.

Note 3: Meaning of Standard Rent

It is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.

Illustration for better understanding

From the following information compute the reasonable expected rent of each property:

ParticularsProperty A (Rs.)Property B (Rs.)Property C (Rs.)
Municipal Value8,48,4848,48,4848,48,484
Fair Rent2,52,2522,52,2522,52,252
Standard RentNot Applicable84,2529,84,000

**

Reasonable expected rent will be higher of the following :

➣  Municipal value of the property; or

➣  Fair rent of the property.

In case of a property covered under the Rent Control Act, reasonable expected rent will be higher of municipal value or fair rent subject to standard rent of the property. The computation in case of each property will be as follows :

Property A (Rs.)Property B (Rs.)Property C (Rs.)
Reasonable expected rent will be Rs. 8,48,484 (being higher of municipal value and fair rent).Reasonable expected rent will be Rs. 84,252 (being higher of municipal value and fair rent, but restricted to standard rent).Reasonable expected rent will be Rs. 8,48,484 being higher of municipal value and fair rent, but restricted to standard rent (standard rent is higher and hence restriction of standard rent will not apply in this case).

While computing gross annual value of a property which is let-out throughout the year, how to compute actual rent?

Actual rent means the rent for which the property is let out during the year. While computing actual rent, rent pertaining to vacancy period is not to be deducted. However, unrealised rent (*) is to be deducted from actual rent if conditions specified in this regard are satisfied.

(*) Unrealised rent is the rent of the property which the owner of the property could not recover from the tenant, i.e., rent not paid by the tenant. If following conditions are satisfied, then unrealised rent is to be deducted from actual rent of the year:

➣ The tenancy is bona fide.

➣ The defaulting tenant has vacated the property, 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 taxpayer.

➣ The taxpayer has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless.

Illustration for better understanding

Mr. Raj owns a bungalow. Throughout the year 2015-16 the bungalow is rented to Mr. Kumar at a monthly rent of Rs. 84,000. Due to internal dispute, Mr. Kumar did not pay rent for the month of March, 2016. What will the amount of actual rent to be used to compute gross annual value of the property?

**

Rent for the month of March, 2016 is not received and, hence, unrealised rent will come to Rs. 84,000.

While computing gross annual value of the property, unrealised rent of Rs. 84,000 will be deducted from actual rent. Thus, actual rent to be considered while computing gross annual value will come to Rs. 9,24,000 (Rs. 10,08,000 – Rs. 84,000 unrealised rent). Unrealised rent of Rs. 84,000 will be deducted from actual rent if all the conditions discussed in this regard are satisfied.

If any of the conditions specified in this regard is not satisfied, then while computing gross annual value, actual rent will be taken as Rs. 10,08,000 (i.e., rent for entire year without deducting unrealised rent of Rs. 84,000).

 How to compute gross annual value of a property which is let-out throughout the year?

The steps involved in computation of gross annual value of a property which is let-out throughout the year are already discussed earlier, hence, we will take an illustration for better understanding.

Illustration

From the following information provided by Mr. Raja in respect of 3 properties rented out by him compute the gross annual value of all the properties.

ParticularsProperty A (Rs.)Property B (Rs.)Property C (Rs.)
Municipal Value8,48,4848,48,4842,52,252
Fair Rent2,52,2522,52,2528,48,484
Standard RentNot Applicable84,2529,84,000
Actual rent for the entire year9,60,00060,0009,60,000
Unrealised rent (*)1,60,000NIL80,000

(*) All the conditions specified for deduction of unrealised rent are satisfied.

**

Gross annual value will be computed as follows:

Step 1: Compute reasonable expected rent of the property.

Step 2: Compute actual rent of the property.

Step 3: Compute gross annual value.

Based on these steps the computation will be as follows

ParticularsProperty A (Rs.)Property B (Rs.)Property C (Rs.)
Amount at Step 1 (Note 1)8,48,48484,2528,48,484
Amount at Step 2 (Note 2)8,00,00060,0008,80,000
Amount at Step 3, i.e., Gross annual value (Note 3)8,48,48484,2528,80,000

Note 1: Amount at Step 1 (,i.e., Reasonable expected rent) is higher of municipal value or fair rent (subject to standard rent).

Note 2: Amount at Step 2 is actual rent after deducting unrealised rent., i.e., Rs. 8,00,000 (9,60,000 – Rs. 1,60,000) in case of property A, Rs. 60,000 in case of property B and Rs. 8,80,000 (Rs. 9,60,000 – Rs. 80,000) in case of property C.

Note 3: Gross annual value will be higher of amount at Step 1 or Step 2.

How to compute the gross annual value in the case of a property which is vacant for some time during the year?

A property may remain vacant for some time during the year, i.e., due to non availability of tenant. In such a case, the taxpayer can claim deduction on account of vacancy allowance. In other words, the gross annual value of a property which remained vacant for some time during the year (and was not used for any purpose during the vacancy period) will be computed as follows  :

Step 1 Ascertain higher of municipal value or fair rent (subject to standard rent) (we will term it as reasonable expected rent).

Step 2 Ascertain actual rent after deducting unrealised rent and loss on account of vacancy (i.e., rent pertaining to vacancy period)

Step 3 Computation of gross annual value will be as follows:

(a) Gross annual value will be amount at step 2, if the actual rent is less than reasonable expected rent and such reduction is only due to vacancy.

(b) Gross annual value will be reasonable expected rent (i.e., amount at step 1) less loss due to vacancy, if the actual rent is less than reasonable expected rent and such reduction is partly due to vacancy and partly due to other factors.

While computing income chargeable to tax under the head “Income from house property” in the case of a let-out property, what are the expenses to be deducted from gross annual value?

While computing income chargeable to tax under the head “Income from house property” in the case of a let-out property, only following items can be claimed as deductions from gross annual value. It other words, deduction cannot be claimed for any expenditure incurred by the taxpayer other than following:

  • Deduction on account of municipal taxes paid by the taxpayer during the year (*).
  • Deduction under section 24(a) @ 30% of Net Annual Value.
  • Deduction under section 24(b) on account of interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

(*) Only taxes paid by the owner during the year can be deduced, hence, taxes due but not paid during the year cannot be deducted or taxes borne by the tenant cannot be deducted.

Can interest paid on loans taken from friends and relatives be claimed as deduction while calculating house property income?

Yes, if the loan is taken for purchase, construction, repair, renewal or reconstruction of the house. If the loan is taken for personal or other purposes then the interest on such loan cannot be claimed as deduction.

While computing income chargeable to tax under the head “Income from house property” in the case of a let-out property, how much interest on housing loan can be claimed as deduction?

While computing income chargeable to tax under the head “Income from house property” in case of a let-out property, the taxpayer can claim deduction under section 24(b) on account of interest on loan taken for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b). However, in case of a self occupied property, limit is Rs. 1,50,000 (Rs. 2 Lakh from A.Y. 2015-16) or Rs. 30,000 (discussed in later FAQ).

What is pre-construction period?

While computing income chargeable to tax under the head “Income from house property” in case of a let-out property, the taxpayer can claim deduction under section 24(b) on account of interest on loan taken for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

Deduction on account of interest is classified in two forms, viz., interest pertaining to pre-construction period and interest pertaining to post-construction period.

Post-construction period interest is the interest pertaining to the relevant year (i.e., the year for which income is being computed).

Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following:

➣ Date of repayment of loan; or

➣ 31st March immediately prior to the date of completion of the construction/acquisition of the property.

Interest pertaining to pre-construction period is allowed as deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed.

Thus, total deduction available to the taxpayer under section 24(b) on account of interest will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post construction period (if any).

My spouse and I jointly own a house in which both of us have invested equally out of independent sources. Can the rental income received be split up between us and taxed in the individual hands?

Yes, if the share of each co-owner is ascertainable.

What is self-occupied property?

A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence.

How to compute income from self occupied property?

A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence. Income chargeable to tax under the head “Income from house property” in case of a self-occupied property is computed in following manner :

ParticularsAmount
Gross annual valueNil
Less:- Municipal taxes paid during the yearNil
Net Annual Value (NAV)Nil
Less:- Deduction under section 24
➣Deduction under section 24(a) @ 30% of NAV➣Deduction under section 24(b) on account of interest on borrowed capitalNil(XXXX)
Income from house propertyXXXX

From the above computation it can be observed that “Income from house property” in the case of a self occupied property will be either Nil (if there is no interest on housing loan) or negative (i.e., loss) to the extent of interest on housing loan. Deduction in respect of interest on housing loan in case of a self-occupied property cannot exceed Rs. 1,50,000 (Rs. 2 Lakh from A.Y. 2015-16) or Rs. 30,000, as the case may be (discussed later).

Can a property not used for residence by the taxpayer be treated as self occupied property?

A self-occupied property means a property which is occupied throughout the year by the owner for his residence. Thus, a property not occupied by the owner for his residence cannot be treated as a self occupied property. However, there is one exception to this rule. If the following conditions are satisfied, then the property can be treated as self-occupied and the annual value of a property will be “Nil”, even though the property is not occupied by the owner throughout the year for his residence :

(a) The taxpayer owns a property;

(b) Such property cannot actually be occupied by the him by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not owned to him;

(c) The property mentioned in (a) above (or part thereof) is not actually let out at any time during the year;

(d) No other benefit is derived from such property.

What income is charged to tax under the head “Income from house property”?

Rental income from a property being building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the head “Income from house property”.

What will be the tax implications if a person occupies more than one property for his residence? Can he treat all the properties as self occupied (SOP) and claim gross annual value (GAV) as Nil?

The SOP benefit (i.e., treating property as SOP and claiming GAV as Nil) is available only in respect of one property occupied by the owner for his residence.

If a person occupies more than one property for his residence, then the SOP benefit will be granted only in respect of any one property as selected by him and other property/properties will be treated as “Deemed to be let-out”. Income from deemed to be let-out property is computed in the same manner as discussed in the case of “Let-out” Property.

I own two houses. One is a farmhouse that I visit on weekends and the other is in the city that I use on weekdays. Is it correct to treat both these residences as self occupied?

No, for the purpose of Income-tax Law you can claim only one property as self occupied property and other property will be deemed to be let-out property.

However, incomes from buildings situated in or near agricultural farms are considered exempt, provided they are used as dwellings or as a store house or other out-building of the farm owner/cultivator.

I own two houses both of which are occupied by me and my family. Is there any tax implication?

Yes. As already mentioned in the earlier FAQ, income from house property is a notional income and only in respect of one residential unit, if self occupied, it will be considered as nil. In case of the other residential unit, marketable rental value, i.e., fair rent will have to be treated as your income and will be taxed accordingly.

In case of a self-occupied property, how much of interest on housing loan can be claimed as deduction?

The provisions relating to deduction under section 24(b) on account of interest on housing loan in case of self-occupied property are same as applicable in case of let-out property. In other words, deduction available to taxpayer under section 24(b) in respect of self-occupied property will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post-construction period (if any) [provisions of section 24(b) are already discussed in earlier FAQ].

However, in the case of self-occupied property, deduction under section 24(b) cannot exceed Rs. 1,50,000 (Rs. 2 Lakh from A.Y. 2015-16) or Rs. 30,000 (as the case may be). If all the following conditions are satisfied, then the limit in respect of interest on borrowed capital will be Rs.1,50,000 (Rs. 2 Lakh from A.Y. 2015-16):

➣ Capital is borrowed on or after 1-4-1999. However, the construction can start even before 1-4-1999.

➣ Capital is borrowed for the purpose of acquisition or construction (i.e., not for repair, renewal, reconstruction).

➣ Acquisition or construction is completed within 3 years from the end of the financial year in which the capital was borrowed.

➣ 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 re-finance of the principal amount outstanding under an earlier loan taken for acquisition or construction of the property.

If any of the above condition is not satisfied, then the limit of Rs. 1,50,000 (Rs. 2 Lakh from A.Y. 2015-16) will be reduced to Rs. 30,000.

How to compute income from a property which is self-occupied for part of the year and let out for part of the year?

At times a property may be let-out for some time during the year and is self-occupied for the remaining period (i.e., let-out as well as self occupied during the year). For the purpose of computation of income chargeable to tax under the head “Income from house property”, such a property will be treated as let-out throughout the year and income will be computed accordingly.

However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period.

How to compute income from a property, when part of the property is self-occupied and part is let-out?

A house property may consist of two or more independent units, one of which is self-occupied and the remaining are/are used for any other purpose (i.e., let-out or used for own business). Income from such property will be computed in the following manner:

– Part/unit which is occupied by the taxpayer for his residence throughout the year will be treated as an independent property and income from such a part/unit will be computed in the manner as discussed in case of a self-occupied property.

– Part/unit which is let out will be treated as an independent property and income from such a part/unit will be computed in the manner as discussed in case of let out property.

What is the tax of treatment of unrealised rent which is subsequently realised?

As discussed in earlier FAQ, while computing gross annual value in the case of let-out property, the taxpayer is allowed to claim deduction of unrealised rent (i.e., rent not paid by the tenant). Many times, after claiming deduction on account of unrealised rent, the owner may realise the same in a subsequent year. This is called as unrealised rent subsequently realised. The tax treatment of unrealised rent subsequently realised will be as follows:

  • When unrealised rent pertaining to year 2000-01 or any earlier years which was allowed as deduction is subsequently realised, then the amount so realised will be taxed (in the year in which it is received) under the head “Income from house property”. It will be charged to tax without allowing any deduction and will be taxed, even if the property is not owned by the taxpayer in the year of recovery/receipt.
  • In respect of unrealised rent pertaining to year 2001-02 or any subsequent years which is subsequently realised, amount to the extent it has not been included in the annual value earlier, shall be deemed to be the income chargeable to tax under the head “Income from house property”. It will be charged to tax in the year in which it is received. It will be charged to tax whether or not the taxpayer owns the property in the year of receipt.

I have 5 separate let out properties. Should I calculate the house property income separately for each individual property or by clubbing all the rental receipts in one calculation?

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

What is the tax treatment of arrears of rent?

The amount received on account of arrears of rent (not charged to tax earlier) will be charged to tax after deducting a sum equal to 30% of such arrears. It is charged to tax in the year in which it is received. Such amount is charged to tax whether or not the taxpayer owns the property in the year of receipt.

(Source- incometaxindia.gov.in, Republished with amendment)

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  • Vimal

    Can HRA exemption be allowed under Rule 10 (13a) for a person who is also availing exemption under income from house property. If so what is the limit?

  • PANKAJ KUMAR

    dear sir i taken home loan 150000 but land is my wife name but i am paying mothhly installment of home loan my wife is house wife so she has no any income can i find deduction us 80 c ad for interest.

  • Twinkle

    Dear sir.
    My FMV, S.R. and rent actually received is same but i have not realised rent for 2 months . In that way my actual rent received is less than the FMV & S.R.
    But i Have to pay tax on whichever is higher i.e FMV & S.R.
    Ultimately I am giving tax on the amount which i never realised. Is this the intention of law? Kindly share if any there is any solution. so that, i can save myself from additional tax.