Tax Implications on House Property Income

Income Chargeable under the head house property

Rental Income from a property whose owner is the tax payer is charged under the head Income from House Property.

Rental Income from Subletting

In the hand of the owner rental income received by him is charged under the head “Income from House Property” but if a tenant is sublet their house and received rent from them than that income is not charged under “House property” that income is considered as other source and similarly charged under the head “Income From Other Sources”.

Deemed Owner

In some of the cases a person may not be the owner of the property but he will be treated as the owner of the property (i.e, Deemed Owner) of the property & Rental Income from is charged in his hand under the head “House Property”

• If an individual transfer his or her house property to his/her spouse (not being in connection with an agreement of live apart) or his/her minor child(not being married daughter) without adequate consideration, then transferor shall be the deemed owner of the property.
• Holder of impartible estate is deemed as the owner of the property comprised in the estate
• 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.
• A person acquiring property by 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.

 In case of lease of a property for a period not less than 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

Composite Rent

When the owner of the property gives furnished house on rent with facilities like lift, security, Air conditioning etc. Then, the Rental Income include all the income of renting furniture,  facility, air conditioning etc. This is called Composite Rent.

Tax Treatment of Composite Rent

Composite rent includes Rental Income of Building and rent towards the assets or facilities. The tax treatment of Composite Rent is as follows:

• If Rental Income received for building & for assets of facilities is inseparable then income is chargeable under the head “Income under the head business or profession” (Profit & Gains of Business Profession ) or “Income under the head other sources” as the case may be. Nothing is charged under the head “Income from House Property”
• If rental income received for building & for assets or facilities is separable then income received from renting of building is charged under the head “Income from House Property” and the Rental Income Received from renting of assets or facilities is chargeable under the head “Income from business profession” or “Income from Other Sources” as the case may be. This case can be applicable only when allocation of Composite rent is possible.

Computation of Income from a Let out Property

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:

Computation of gross annual value of a let out property

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 (manner of computation is discussed in later part)

Step 2:Compute actual rent of the property (manner of computation is discussed in later part).

Step 3:Compute gross annual value (manner of computation is discussed in later part).

Computation of reasonable expected rent of a let out property (i.e. step 1).

Reasonable expected rent will be higher of the following:

• Municipal value of the property (*); or
• Fair rent of the property (Note 1).

If a property is covered under Rent Control Act, then the reasonable expected rent cannot exceed standard rent (Note 2).

(*) 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 1: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 2: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.

Computation of Gross Annual Value in case of vacant of a property for some time:

When the property is let out and was vacant during the whole year or any part of the previous year & owing to such vacancy the actual rent received or receivable is less than the reasonable expected rent then the actual rent so received or receivable( as reduced by the vacant of house) shall be considered to be the GAV (Gross Annual Value) of the property.

Expenses allowed to be deducted from GAV of let out property

 The following expenses are allowed to be deducted while computing Income from House Property :

• Deduction of Municipal Tax paid on property by the tax payer. The deduction is allowed only when the taxes are paid it should not be allowed when they are due but not paid & this deduction is also not allowed when municipal tax is borne by the tenant.
• Deduction u/s 24(a) @ 30% of Net Annual Value (NAV).
• Deduction u/s 24(b) on account of interest on capital borrowed for the purchase, construction, repair, renewal or reconstruction of property.

In case of let out property, there is no limit for the deduction of interest u/s 24(b).but in case of a self-occupied property deduction allowed is maximum Rs. 200000 or 30000, as the case may be regarding pre & post construction period interest.

Pre construction period

Deduction on account of interest u/s 24(b) is classified in 2 forms i.e., Pre construction period interest & post construction period interest.

Post Construction period Interest : It is the interest pertaining to the relevant year (i.e., the year for which income is being computed)

Pre Construction period Interest: It is the period commencing from the borrowing of the 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 5 annual equal instalments, commencing from the year in which house property is acquired or constructed.

Thus, the total deduction allowed u/s 24(b) is 1/5^th of Interest of pre-construction period (if any) + post construction period interest (if any)

Self -Occupied Property

 A self -occupied property means a property which is self-occupied throughout the year by the owner for their residence & is actually not let out during the whole or part of the year. 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 him owing to his employment, business or profession carried on at any other place and 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.

Computation of Income from self -Occupied Property

 Income chargeable under the head “ Income under the head House Property” in case of self- occupied is as under:

In case of a Self- Occupied property Income from house property is NIL except if the owner had taken a loan on the property and deduction for the interest on capital borrowed is 30000 or 200000 as the case may be. In this case, Income of House Property is negative but maximum up to 30000 or 200000 as the case may be.

If an Individual has more than 1 house property for residential purpose:

In this case, only one property is treated as a self- occupied property & other property is treated as rented property and income is calculated according to it. A benefit is given to the Individual that he/she can calculated the income by taking any of the house as rented and other house as self-occupied & compare & choose one method in which tax is less.

Deduction in respect of interest on housing loan in case of self-occupied property

 In case of self-occupied house property provision regarding u/s 24(b) interest on borrowed capital is same as in case of let-out of house property.

However, in the case of self-occupied property, deduction under section 24(b) cannot exceed Rs.2,00,000 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.2,00,000:

1. Capital is borrowed on or after 1-4-1999.
2. Capital is borrowed for the purpose of acquisition or construction (i.e., not for repair, renewal, reconstruction).
3. Acquisition or construction is completed within 5 years from the end of the financial year in which the capital was borrowed.
4. 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. 2,00,000 will be reduced to Rs. 30,000.

Arrear of Rent

The amount of arrear received will be charged under the head “house Property” after deducted a sum of 30% of the arrear received & It is charged in the year in which the arrear received irrespective that the owners had the property in the year in which arrear is received.

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