To determine the tax liability of a person under income tax, first of all his Gross Total Income (GTI) is to be computed as under consisting of income from the five heads of income:
(1) Income from Salary
(2) Income from House Property
(3) Income from Business and Profession
(4) Income from Capital Gain
(5) Income from Other Sources
Income from House Property covers the rent earned from the House property which is chargeable to tax. Sometimes, the owner may have to pay tax on ‘deemed rent’ in case the property is not let out or vacant. The income from house property would be taxable if it satisfies the following three essential conditions:
It is legal owner who is chargeable to tax in respect of property income. Transfer of house property by the individual without adequate consideration to his or her spouse or to his minor child is considered as “deemed owner”of the house property.
(1) Computation of Gross Annual Value
(2) Computation of Net annual Value
(3) Computation of Deduction available U/s 24
Income from House property is computed as under :
|Gross Annual value||**********|
|Less : Municipal Taxes
(It is deductible when it is born by the owner and actually paid by him during the year. )
|Net Annual value||**********|
|Less : Deduction U/s 24|
|(i)Standard Deduction @ 30% (Section 24(a))||(*********)|
|(ii)Interest on borrowed Capital (Section 24(b))||(*********)|
|Income from House Property||**********|
Gross Annual Value (GAV)
Why ‘Gross Annual Value’ is calculated to compute income from house property?
The answer to this is that tax on house property is not on actual rent but on inherent capacity of building to generate income. In other words, how much rent the property can fetch. Through Gross Annual Value, taxable income from house property is calculated.
Fair Rent (FR): Fair rent is the rent, which similar properties in the same locality might reasonably fetch.
Municipal Valuation (MV): For collecting municipal taxes, local authorities surveys and value buildings. This valuation is taken as evidence in determining the earning potential of the building.
Standard Rent (SR): Standard rent is derived from rent prescribed under Rent Control Act.
Expected Rent: The reasonable expected rent is the sum for which a property might reasonably expect to be let out from year to year. It is derived as higher of Municipal Valuation (MV) and Fair Rent (FR) but subject to Standard Rent (SR).
Unrealized Rent : Rent which cannot be realized by the owner is unrealized rent.
Loss due to vacancy: It is s a notional loss of rent incurred by owner due to vacancy of the property.
Actual Rent received or receivable: It is the actual amount of rent received by the owner from the tenants.
Gross Annual Value
Gross Annual Value is determined as under:
|Step I||Find out reasonable expected rent of the property|
|Step II||Find out Actual rent received or receivable ( Note 1 )|
|Step III||Higher of the I or II above|
|Step IV||Find out Loss due to vacancy|
|Step V||Step III minus step IV is the Gross Annual Value|
Note 1: Unrealized rent if any has to be deducted from rent received or receivable
If certain conditions are fulfilled.
Net Annual Value
Gross Annual Value minus Municipal taxes like property tax, paid by the owner.
Following two types of deductions from annual value are available u/s 24 of the Income Tax Act to arrive at the taxable income from HP.
1. Standard deduction @ 30% of Net Annual value (Note 2)
2. Deduction of Interest on borrowed capital
Note 2: No other deduction towards expenditure such as insurance, repairs, electricity, water supply etc. is allowed.
Mr. Z owns a residential property in Mumbai. He earned ₹ 12,00,000 as a rent from it in Financial Year 2019-20. The Municipal Valuation (MV) is ₹ 9,60,000, Fair rent (FR) is ₹ 900000 and Standard Rent (SR) under Rent Control Act is ₹ 8,40,000. However, out of ₹ 12,00,000, unrealized rent is ₹ 1,00,000. Further, He has paid interest of ₹ 4,60,000 in the current year and in pre construction period Rs. 20,00,000 on loan taken on this property and municipal tax of ₹ 60,000. What is the Income from House Property of Mr. Z for or Assessment Year 2020-21 (FY 2019-20).
First we have to calculate Gross Annual Value (GAV):
Computation of Gross Annual Value
|Step I : Reasonable Expected Rent (Higher of MV or FR subject to SR)||8,40,000|
|Step II : Rent actually received or receivable after reducing unrealised rent ( 1200000-100000)||11,00,000|
|Step III : Higher of step I or Step II||11,00,000|
|Step IV : Loss due to vacancy||Nil|
|Step V : Gross annual value ( Step III- Step IV )||11,00,000|
Now we will compute Income from House property as under:
Computation of Income From House Property
|Gros Annual Value as above||11,00,000|
|Less : Municipal Taxes||60,000|
|Net Annual Value||10,40,000|
|Less : Deduction u/s 24||Nil|
Standard Deduction 30% (10,40,000*30%)
Interest On borrowed capital ( 1/5 of 2000000+ 460000)
|Income From House Property ( loss ) Note 3||(1,32,000)|
Note 3: Law in respect of setting of losses from house property has been changed from the FY 2017-18. How the same is to be adjusted with other source of income or to be carried forward in subsequent years has been explained in the illustration no 5.
1. A self occupied property is one which is owned and used by the owner for his own residential purposes.
2. This is to be occupied by the owner throughout the year. Thus, a property or a house not occupied by the owner for his/her residence cannot be treated as a self-occupied property
3. No other benefit is derived from such property
Exception to self-occupied house property
There is an exception to the above rule. If the following conditions are satisfied even though the property can be treated as self-occupied:
1. If the tax payer owns a property
2. If the property mentioned above is not let-out at any time during the year. (The property should not be letout in the whole year or any part of the year )
3. If such property could not be occupied by the owner, by reason of the fact that owing to his employment, business or profession carried on at any other place
4. No other benefit is derived from such property.
The annual value of the self occupied property will always be Nil. No other deduction will be allowed from it except interest to the extent of Rs 2,00,000 .The interest will be considered as loss under the head income from house property and adjustable with other source of income under the same head or in another head. Only one house can be declared as self-occupied property.
In case the property is let out, owner will receive rent from your tenant(s). This rent income will be taxed as your income from house property. In short, rental income received by the owner from letting out the house property will be taxed under income from house property. Some times second house property (owned by the owner) is vacant (not let out), in those cases rent will not be received but same would be considered as deemed let-out.
1. Interest on borrowed capital is allowed on accrual basis.
2. Interest on unpaid interest (penalty) is not allowable .
3. Pre-construction interest for borrowed capital is available for deduction meaning thereby that the interest for the period commencing on the date of borrowing and ended on 31st March prior to the date of completion of construction/ acquisition of property will be considered interest of pre- construction period .The deduction is available in 5 equal installments, commencing from the previous year in which house is acquired or constructed.
4. The income from house property, which is occupied by the owner for the purpose of his own residence or could not be occupied by the owner for his residential purpose due to his employment at other place is taken as nil. However, he is allowed as deduction of interest paid on borrowed capital (including the accumulated interest of the pre-construction period) up to Rs 2.00 Lacs only.
5. When the assessee has more than one house then, he/she can exercise an option to treat anyone of the house to be self-occupied. The other house(s) shall be deemed to let out.
Mr. X has taken loan for construction of the house on 1st Oct 2009 and construction of house is completed/ possession taken over on 15 Dec 2017.It means interest from 01.10.2009 to FY 2016-17 will be considered as interest of pre- construction period and allowed to be claimed in 5 equal installment commencing from the FY 2017-18. Say Total interest up to FY 2016-17 is Rs. 10,00,000 then it will be allowed to be claimed Rs 200000 per year from the FY 2017-18 plus actual interest accrued for FY 2017-18.
Maximum ceiling of interest is Rs 2,00,000
Interest on borrowed capital is allowed up to Rs. 200000 (inclusive of pre construction interest), on fulfillment of the following conditions:
1. Loan is taken after 1/4/1999 for purchase or construction of property.
2. Purchase or construction should be completed within 5 years (3 years up to FY 2015-16) from the end of financial year when loan is taken. Suppose loan is taken 1/1/2010. Construction should be completed up to 31/03/15.
3. There is certificate from lender that interest is payable in respect of amount given for purchase or construction of property.
Maximum ceiling in any other case is Rs 30,000
If all the above three conditions are not satisfied then deduction is allowed up to Rs 30000 only. In other words in the following cases interest on borrowed capital is allowed up to Rs 30,000:
1. If capital is borrowed before 1/4/1999 for purchase, construction, reconstruction, repairs of a property or
2. If capital is borrowed after 1/4/1999 for repair, reconstruction or renewal of property.
If the home loan is taken on joint names then the deduction is allowed to each co-borrower in proportion to his share in the loan. For taking such deduction, it is necessary that such co-borrower must also be co-owner of that property. If the assessee is a co-owner but is repaying the full loan himself, then he can claim deduction of full interest paid by him.
The limit of deduction in case of Self occupied property applies individually to each co-borrower. In other words, each co-borrower can claim deduction up to Rs. 2 Lacs. Meaning thereby the Co-owner may claim interest up to Rs 400000 (i.e. Rs 200000 each). No limit is applicable to let out property.
Situation : MR X owns a HP consisting of two units (Unit 1 and unit 2 ). Unit 1 is self occupied and unit 2 is rented out. Rent of unit 2 is Rs. 6000 pm, and rent of 2 months could not be recovered. Municipal valuation of property is Rs 130000, Fair Rent is Rs. 140000 and Standard rent is Rs 125000. Municipal tax is imposed @ 12% and paid by Mr. x .Interest on construction of house property is Rs 63000 (borrowed prior to 01.04.1999). Calculate Income from HP of Mr. X for FY 2017-18.
|Unit 1 : Self occupied|
|Gross Annual Value||Nil|
|Less :Municipal Tax||Nil|
|Net Annual Value||Nil|
|Less : Interest on borrowed Capital||30000|
|Income From Unit I||(30000)|
|Unit 2 : Let Out|
|Municipal Valuation ( 50% of 130000)||65000|
|Fair Rent ( 50% of 140000)||70000|
|Standard Rent ( 50% of 125000)||62500|
|Rent Receivable ( 6000*12)||72000|
|Calculation of Gross annual Value|
|Step I:Reasonable expected Rent ( MV or FR subject to Max of SR)||62500|
|Step II Rent received minus unrealized rent||60000|
|Step III : Higher of Step I and Step II||62500|
|Step IV : Loss due to vacancy||0|
|Step V : Step III minus Step IV||62500|
|Gross Annual Value||62500|
|Less MT ( 50% of 12% of Rs 130000)||7800|
|Net Annual Value||54700|
|Less :Standard Deduction U/s 24 ( 30% of 54700)||16410|
|Interest on borrowed Capital ( 50% of 63000)||31500|
|Income Of unit II||6790|
|Total Income Under House Property ( Unit I + Unit II ) (Loss)||(23210)|
Situation : MR X owns a HP . Municipal Valuation of property is Rs 164000, and Fair rent is Rs 216000, Standard rent is 180000. Property is let out up to 31.01.2019 on monthly rent of Rs 14000 pm and self-occupied from 01.02.2019. Municipal tax is Rs 6000 paid by Mr. X .Interest on construction of house property is Rs 212000 . Calculate Income from HP of Mr. X for FY 2019-20.
Solution: In this situation the computation will be made as let out property and benefit of self occupied property will not be available
|Calculation of Gross annual Value|
|Step I:Reasonable expected Rent ( MV or FR subject to Max of SR)||180000|
|Step II Rent received less unrealized rent but before adjusting loss due to vacancy||140000|
|Step III : Higher of Step I and Step II||180000|
|Step IV : Loss due to vacancy||0|
|Step V : Step III minus Step IV||180000|
|Gross Annual Value||180000|
|Net Annual Value||174000|
|Less (i) Standard Deduction U/s 24 ( 30% of 174000)||52200|
(ii) Interest on borrowed Capital
|Income Under the Head Income from House Property (Loss)||(90200)|
Major Changes Applicable from the Financial Year 2017-18
Until FY 2016-17, Loss under the head Income from House Property could be set off against other heads of income without any limit. However, from FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs only.
This amendment would not effect on self-occupied house property, however this will have an impact on let-out properties. Though there is no bar on the amount of interest that can be claimed as a deduction under Section 24 for a rented house property, but the losses which arises on account of such interest repayment can be set off with other heads of income) only to the extent of Rs 200000 lacs .
Mr. X is residing in Delhi has a salary income of Rs 10 lakhs for FY 2016-17 and FY 2017-18 and Interest income from FD of Rs 4 lakhs. He owns three residential house properties as under:
|Self-occupied for which Interest on housing loan paid Rs 280000|
( Bombay )
|This properly could not be occupied because of employment in Delhi. So it is considered as deemed let out .Annual value is considered as Rs 300000 .Interest on housing loan is Rs 240000|
( Delhi )
|Let out for residential purpose , the annual value is Rs 5,20,000 and Municipal taxes Rs 20,000 .Interest on borrowed capital is Rs 600000|
Computation of total income and tax liability
|Description||FY 2016-17||FY 2017-18|
|Income from HP ( see working below )||*(390000)||*(200000)|
|Gross total income||1010000||1200000|
|Tax including cess||99910||131325|
|Additional tax out go due to amendment||31415|
*Working on computation of Income from House property
|FY 2016-17||FY 2017-18|
|Property A (Self-occupied)|
|Less :Interest on loan limited to Rs 200000||200000||200000|
|Loss from House Property A||(200000)||(200000)|
|Property B ( Deemed Let- out )|
|Less : Interest on housing loan||240000||240000|
|Net Income from House Property B||60000||60000|
|Property C ( Let- Out )|
|Gross Annual Value||520000||520000|
|Less :Municipal Taxes||20000||20000|
|Net annual Value||500000||500000|
|Less :Standard Deduction 30%||150000||150000|
|Less : Interest (pre Construction+ Current)||600000||600000|
|Loss from House Property C||(250000)||(250000)|
|Total Income (Loss ) from House Property ( A+ B +C )||(390000)||(390000)|
|Adjustment of loss and carry forward in subsequent year||The loss of Rs 390000 is fully adjusted with the other income say with the salary. If unadjusted in the same year then to carry forward in next 8 AY to be adjusted with house property Income only. Here all the losses can be adjusted with salary||Out of above loss only 200000 will be adjusted with other Income (say with salary).
Balance loss of 190,000 will be carried forward in next 8 AY and to be adjusted with house property Income Only.
This amendment has been introduced by Financed Act, 2019. Earlier only one property will be treated as a ‘self-occupied property’ and the other property will be taken as ‘deemed to be let out’ property. Now, from AY 2020-21 onwards two house properties can be taken as ‘Self-occupied properties’
a) Here please note that, the assesse do not have an option, either to shown it as ‘deemed to be let out’ or as ‘self-occupied property’ – But it is mandatory that if assesse have two house property he has to consider both as self-occupied.
b) The main key effect of this amendment is that, earlier if assesse is showing second property as deemed to be let out, and then in that case he is eligible to take deduction u/s 24(b) for interest on housing loan without any monetary limit.
But now henceforth, if he has to consider the second house as self-occupied property only and therefore now he is eligible for total deduction of maximum Rs. 2,00,000/- only towards interest on housing loan of both the properties.
Illustration 6: Explaining the above concept and impact
Mr. X owns two house properties. These properties are used for own residential purpose throughout the previous year i.e. not let out at all. Relevant details pertaining to these properties are given below:
|Particulars||House 1||House 2|
|Municipal Tax (paid by Mr. X during previous year)||50,000||1,00,000|
|Interest on Housing Loan||17,00,000||12,00,000|
Compute Income from House Property for AY 2019-20 and AY 2020-21.
Computation of Income From House Property:
(Deemed to be let out)
|Gross Annual Value
(Municipal Value or fair rent, whichever is higher but subject to maximum standard rent)
|Less :Municipal Taxes||50,000||Nil|
|Net annual Value||11,50,000||Nil|
|Less :Standard Deduction 30%||3,45,000||Nil|
|Less : Interest on Housing Loan||17,00,000||2,00,000|
|Loss from House Property||(8,95,000)||(2,00,000)|
(Both the houses are considered as self-occupied)
|Gross Annual Value
(Municipal Value or fair rent, whichever is higher but subject to maximum standard rent)
|Less :Municipal Taxes||Nil|
|Net annual Value||Nil|
|Less :Standard Deduction 30%||Nil|
|Less : Interest on Housing Loan||2,00,000|
|Loss from House Property (House 1 and House 2 together)||(2,00,000)|
Section 80C provides for deductions from gross total income in respect life insurance, provident fund, National Saving Certificate, tuition fees, equity oriented mutual funds, fixed deposits scheme, Senior Citizens Saving Scheme etc. In addition to this, 80C also offers deduction in respect of repayment of housing loan take for purchase or construction of residential property. Maximum amount qualified for deduction under section is Rs. 1,50,000. The deduction in respect of repayment of housing loan also falls under this limit. In other words, if taxpayer had made repayment of Rs.3,00,000 towards principal, he can claim deduction only up to Rs. 1,50,000 under this section .The taxpayer can also claim deduction stamp duty, registration charges and other expenses incurred for transfer of house property in his name subject to maximum limit of Rs.1,50,000. However, if the taxpayer transfers the house property before 5 years, then all the deduction already taken in previous years will be deemed as income in which the house property is transferred.
From the FY 2019-20 and subsequent year an additional deduction of interest up to Rs 1,50,000 can be claimed to first time buyer of residential house property. The condition in this regard is as under:
♦ Conditions :
1. The assessee is an individual, whether resident or non -resident.
2. He is not eligible to claim ny deduction under section 80EE
3. Loan should be for acquision of residential house property.
4. Loan should be from bank or banking institution or housing financing company.
5. Loan should be sanctioned during 01.04.2019 to 31.03.2020
6. The stamp duty value of the residential house property should not be more than Rs 45 Lacs
7. Home buyer should not have any other existing residential house in his name at the time of sanction of loan.
♦ Amount of Deduction: If the above conditions are satisfied, assessee can claim the deduction under section 80EEA. Deduction is available of Rs 1,50,000 or interest payable, whichever is lower. The deduction is available for the financial year 2019-20 and subsequent year.
♦ Double deduction not allowed: If the deduction is claimed under section 80EEA, no deduction will be allowed in respect of this amount under any other provisions of the act (say under section 24) for the same year or any other financial year.
(Different situation of Tax benefit of HRA and Interest )
|Situation 1||Mr. X, is residing in his house in Delhi, which was purchased with the housing loan from the bank|
|Answer||He is residing in his own house, he may get HRA but exemption benefit is not available, since the rent receipt is not provided for own house. However, tax benefits on both, the principal repayment and interest is available.|
|Situation 2||Mr.X is residing in Delhi in a rented house but had bought an apartment in Chennai taking a home loan.|
|Answer||He will be entitled for exemption benefit of HRA and tax benefits on both, the principal repayment and interest on the home loan|
|Situation 3||Mr. X has bought a house in Mumbai, which is under construction taking a home loan and currently living in Mumbai in a rented apartment because the house is under construction.|
|Answer||In such a case, Mr. X is eligible to claim HRA tax benefit and tax benefit on the home loan for the principal repayment and may claim tax benefits on the interest also.|
|Situation 4||Mr. X has bought a house in Delhi taking a home loan but residing in a rented apartment in Delhi for genuine reasons e.g. the house is for away from the office.|
|Answer||The individual can claim HRA tax benefit and home loan benefits, which includes both principal repayment and interest accrued. If no genuine reason, ITO may dispute the tax benefit|
Q.1 Is rental income from sub-letting chargeable to tax under the head “Income from house property”?
Ans: Rental income in the hands of owner is charged to tax under the hea d “Income from house property”. Rental income of a person other than the owner can not be charged to tax under the head “Income from house property”. Hence, rental income received by a tenant from sub-letting can not 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.
Q.2 Under which head is the rental income from a shop charged to tax?
Ans : 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”.
Q.3 What is the tax treatment of composite rent when the composite rent pertains to letting of building along with other assets?
Ans: Composite rent includes rent of building and rent towards other assets or facilities. The tax treatment of composite rent is 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”, as the case may be. Nothing is charged to tax under the head “Income from house property”.
(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 other facilities.
Q.4 Can interest paid on loans taken from friends and relatives be claimed as deduction while calculating house property income?
Ans: 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.
Q.5 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?
Ans: Yes, if the share of each co-owner is ascertainable
Q.6 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?
Ans: 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”.
Q.7 Mr x owns two houses. One is a farmhouse that he visit on weekends and the other is in the city that he uses on weekdays. Is it correct to treat both these residences as self occupied?
Ans: 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
Q.8 What is the tax treatment of arrears of rent?
Ans: 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.
Disclaimer : Author does not make any claim that the information provided in this article is correct and up-to-date. The contents of this article cannot be treated or interpreted as a statement of law. The reader may visit Income Tax Web site for resolving their doubts/clarifications.
(Republished with Amendments)