Tax on House Property Income: Self-Occupied, Let-Out & Inherited Properties

Income from house property

House property can be defined as the building of which the individual earns through ownership of a property(mainly rent)

A house property may include a home, office, shop or any land attached to the building to generate revenue out of it eg. A parking lot.

1. Self-occupied property

Here the property may be used for the beneficial enjoyment of the taxpayer’s family which may include parents or/and spouse, children.

If there is more than one self occupied property being owned by the taxpayer only one of them will be considered as house property and the remaining others are assumed to be let out.

However,

After 2019-2020 FY (Financial Year) onwards the benefit has been given to the taxpayer of considering 2 houses as self occupied and the remaining house as let out for income tax purposes.

2. Let out house property

This is the type of property you own but do not live in, such property that is let out for a whole year or a part of the year here the let out property is not exempted from tax. This applies both to residential and commercial property for the purpose of tax calculation  of let-out property.

3. Inherited property

An inherited property refers to a property received from parents, grandparents.

The property may be self occupied also. Once a person inherits the property he/she becomes the owner and can choose to sell it

At present India has no tax on inheritance of property.

This act is mainly governed by section 22 to section 27 of the Income Tax Act, 1961.

Section 22 (Income from house property) 

The Income Tax Act applies to all types of immovable properties including residential properties, commercial properties and properties that are let out or self-occupied.

It also deals with the computation of the annual value of immovable property consisting of land, buildings and apartments.

Self-occupied properties

In the case of self-occupied property if the property is not let out but rather is self-occupied the annual value of such property would be deemed to be zero.

However, if the taxpayer owns more than one property in his name only one of the properties can be considered self-occupied and others will be deemed to be let out of the purpose of taxation

Co-Ownership Property

In the case of Co-Ownership property the property is co-owned the annual value of such property will be divided among the co-owners according to their shares in the property and each co-owner will be taxed individually on their share of the annual value.

FAQ’S

What properties does section 22 apply to?

S22 applies to all immovable properties consisting of buildings, land, and apartments whether they are being used for residential or commercial purposes.

Is it mandatory to pay tax on income from house property even if the property is not let out?

Yes, it is mandatory to pay tax on income from house property even if it is not let out as tax is to be payable on the property’s annual value..

Section 23 (Annual Value How determined)

Section 23 covers income from the below mentioned sources that are:

1. Salary:: This includes allowances, bonuses, perquisites received by an individual during the course of his employment.
2. Capital Gains: This includes income from sales of assets such as property, mutual funds and shares.
3. Business and profession: This includes the income that one earns through his business or profession.
4. House Property: This includes the income received from letting out house property or a self occupied property.
5. Other sources: The income from other sources could include income from rental income of machinery, furniture, plant or interest income etc.

Deductions allowed under section 23

The deductions that can be claimed under section 23 or as follows:

1. Standard Deduction: A standard deduction that is upto 50,000 is allowed to salaried individuals
2. Deduction under 80C: This includes deductions under investments made in Public Provident Fund, Life insurance premiums,Equity linking savings schemes.
3. Interest under home loan: A deduction upto the amount of 2 lakhs can be claimed for interest paid on home loan.
4. Deduction under 80D : This includes the deduction for payment of the healthcare premiums/ health insurance premium.
5. Deduction under 80 E: This includes deductions for the payment of interest on the educational loans. 

FAQ’S 

Is it Mandatory to file a income tax return return under section 23 even if there is no taxable income?

Yes, it is mandatory to file a income Tax return under section 23 if the total income exceeds basic exemption limit.

What is the penalty for not filing income tax returns under section23 if income tax Act?

If taxpayers do not file their income tax returns on time they may have to pay an amount up to 10,000  depending on the delay.

Section 24 (Deductions from Income from house property)

Section 24 if income tax act act authorises the homeowners to claimant a deduction upto 2 lakhs (Rs 1,50,000 if returns are being filed for last financial year) on their homes loan interest if the owner and the family are a resident in the house property. The entire interest is waived off as deduction when the house is on rent. However Here, 

1. Standard Deduction: A  rate of 30% is applicable on net annual value of property

2. Interest On loan : One can also take advantage on tax exempting on interest paid on renewing, reconstruction, repairing property if a loan is availed for such activity then the interest on loan is exempted and can be claimed under section 24 of income tax act. 

Section 25 (Amounts not deductible from income from House property) 

S25 of income tax act deals with tax treatment of income earned by a firm or a association of persons  (AOP) in such cases the income will be taxed as income of firm and not of individuals partners or members of such firm.

Computation of income of firm or AOP : The income is computed in the same way to the firms or AOP as it is to the individuals subject to certain deductions that would not be available but are available to individuals.

Taxation of partners or members: Partners or members are not taxed on income earned by firm or AOP but are taxed on their individual share or profits or income from firm.

Liability of partners or members: The partners or members of AOP or a firm are jointly or severally liable for the tax payable by the firm or AOP if AOP or firm is unable to pay tax due to some reason the liability is on it’s partners and members to pay tax on it’s behalf.

How is income from a firm or AOP taxed under Section 25?

As per section 25 income from Firm or AOP will not be considered as An income taxed by a person or individual rather would be considered as taxed by a firm or an AOP.

How is the Income from firm or AOP computed?

The Income from AOP or firm is computed in the same Manner as Income on an Individual is computed subject to some adjustments specified in ITA.

Section 25A (Special Provisions for arrears of Rent and unrealised rent received subsequently) 

S25A of income tax act deals with manner in which taxes are to be paid by individuals who earn from multiple sources m.

This provision allows such individuals to claim relief from excess taxes that may have been deducted during their working period by employers.

Who is eligible to claim relief under section 25A?

Individuals who are employed by more than one employer are eligible to claim relief under this section this applies to both salaried and non salaried individuals.

Conditions for claiming relief under section 25A

1. The Individual should have more than one work source though which he earns
2. The Individual should have paid taxes to both employers.
3. The Individual should have filed tax returns that are in question
4. The individual should submit form 10E to income tax department before the end of financial year end of following year in which excess taxes were deducted

What is form 10E?

Form 10 E is a form that needs to be submitted to the income tax department to claim relief under section 25A.

Section 26 (Property owned by Co-owners)

1. Where property is owned by two or more persons ans shares of both are definite than income from such property cannot be taxed as income from an AOP.
2. share of income that each owner should be determined in accordance to section 22 to section 25 and on basis on his individual assessment.
3. Where the house property owned by co – owners is self occupied by each co owner annualproperty of each of the co-owners will be nil and each of them would be entitled to a deduction of 30,000-2,00,000 under section 24(b) on account of interest on the borrowed capital.
4. Where house property owned by co-owners is let out the income out of such property shall be computed as if property is owned by one owner and thereafter income shall be apportioned amongst each co-owners as per their specific share.

Section 27 “owner of house property” ,  “annual charge” etc defined.

As per s 27 following persons though not legal owners of a property are deemed to be owners for the purposes of section 22 to section 26. 

Transfer to a spouse/child

If a person transfers the house to his child or spouse the person making such transfer would be persumed as the owner of the residence transferred.

However, if the couple decides to live apart from each other and the property is transferred with connection to that in such case the transferor will not be considered as property’s owner.

In case of transfer of house property to a minor child otherwise for an adequate consideration the transferor would be considered as the owner of such property

Exception: In case of a minor married daughter if transfer is made to her tranferor is not deemed to be the owner.

Holder of an Impartible state :

Impartible state is a property that is not legally divisible the holder of Impartible estate shall be deemed to be individual owner of all the properties that are comprised in the estate.

Member of co-operative society

A member of co-operative society , AOP, company to whom a building or part thereof is alloted or leased under under a House building scheme or a society /association/company. Shall be deemed to be the owner of that part allotted accordingly although the co-operative society / association / company is the legal owner of the building.

Person in possession of property

A persumed owner is permitted to take possession of the building or keep possession of the same in partial fulfilment of a contract described in section 53A of Transfer of Property act.

A person having right in property for a period not less than 12 years

This section 27(iiib) of incomr tax act address the taxations of individuals who possess the rights in property not less than 12 years according to this section if you have been holding a property for at least 12 years any income coming out of it will be subject to taxation it may include rent, lease and other earnings associated with property rights

This section ensures that individuals with long term property rights fulfil their tax obligations by including income for those rights in their taxable income.

Conclusion

The government generally imposes income tax, and income tax that is taxable under income generated from house property is:

1. Rental income from rented property
2. For income tax purpose yearly value of the property is deemed to be rented out.
3. The annual value of a self occupied property is zero.

Under this act there is no differentiation made between residential and non residential commercial properties all are taxed Under it only.