Tax on Income from House Property

INTRODUCTION

Section 22 of the Income tax Act, 1961 is the charging section for head Income from House Property. As per this section, the assessee must be the owner of the property which is subject to income under the head House Property. Property can be any building or  land not necessarily residential. However, land means land connected with the building. Vacant land falls under the head Income from Other source or PGBP, on case-to-case basis. The property whose income is subject under the head income from House Property, can be used for any purpose, except for business. Even when the property is held as stock in trade, the income from it will treated as income from house property, except for the first two years, the annual value of the property which is being held as stock in trade will be treated as NIL, after the end of 2 years, it will be considered let out.

The process of computation of the income under the head House Property is basically the determination of annual value of the property. Section 23 of the Income Tax Act, 1961 talks about the calculation and determination of annual value of the property.

COMPOSITE RENT

This means that the owner of the building is receiving rent in respect to furniture, plant/machinery, security, power backup etc. In such cases, if the rent from building and other assets are separable, then the income can be treated in such a manner that the rent of the building is treated under House Property and the rent of other assets are treated under Income from Other Sources/Income from PGBP, as the case may be. However, if the rent from building and other assets are not separable, then the income can be treated under Income from PGBP/Income from other sources.

INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

In case of income from house property situated outside India, the income received for residents (ROR) is taxable whether such income is bought to India or not. But for non residents or RNOR, the income is taxable only if it is received in India.

DETERMINATION OF ANNUAL VALUE

NET ANNUAL VALUE = GROSS ANNUAL INCOME – MUNICIPAL TAX PAID BY THE OWNER DURING ANY PREVIOUS YEAR

• Where the property is let out throughout the previous Year

In those cases where the property is let out for the previous year, then the gross annual value will be the higher of :

i. Expected rent – rent of other similar properties in that area

ii. Actual rent received/to be received in that year.

In order to calculate Expected Rent, we have to see higher of Municipal Rent and Fair Value but  be restricted to standard Rent.

• Where the property is vacant for the part of the previous year

In those cases, where the property is vacant for part of the previous year, then the actual rent received will obviously be less than the expected rent, then in such cases, actual rent received is the gross annual value.

• When the property is self occupied or unoccupied

In such cases, the gross annual value is nil, provided no benefit in any other sense is derived. However, this is restricted to only two properties. However, no deduction of municipal taxes is allowed in this case.

• When the property is let out for half of the previous year and self occupied for the other half

In such cases, the Expected Rent for the whole year shall be considered as Gross Annual Value. However, the Expected Rent shall be compared with the actual rent received and whichever is higher shall be considered as Gross Annual Income. Municipal Taxes are subject to deduction in such cases.

• When the property is deemed to be let out

In case the person has more than two properties, the third property even if not let out, will be considered deemed to be let out even if it is vacant. Further the expected rent will be considered as Gross Annual Value in such cases.

• When the property is held as stock-in-trade

In such cases, the gross annual value is treated as NIL for the initial two years.

• When portion of the property is let out and portion is self occupied

In such cases, it can be bifurcated and both the portions can be treated separately.

DEDUCTIONS FROM ANNUAL VALUE

Section 24 of the Income Tax Act, 1961 talks about the deductions from Annual value. As per Section 24 (a) of the said act, a net deduction of 30% is allowed on Net Annual Value and as per Section 24(b), deduction of interest on borrowed capital is fully allowed, in case of properties which are let out or deemed to be let out.

In case of those properties, which are self occupied, the deduction of Interest on borrowed capital under Section 24(b) is treated in two different manners.

• When the loan is taken for the repair/reconstruction/renewal of the property, then the an maximum deduction of Rs 30,000 is allowed.
• When the loan is taken for construction of house property or acquisition than the deduction is allowed depending on the date on which loan was taken

i. If the loan was taken before 1^st April, 1999, then an maximum deduction of Rs 30,000 is allowed.

ii. If the loan was taken after 1^st April, 1999, then again two situations arise depending on whether the acquisition/construction was completed within 5 years from the end of the Previous Year in which the loan was taken. In case the construction/acquisition is not completed within 5 years, then then an maximum deduction of Rs 30,000 is allowed. However, if the construction is completed within 5 years then a deducted of Rs 2,00,000 is allowed.

This are applicable for one/two self-occupied property.

PRE CONSTRUCTION INTEREST: If any interest is paid for the period before the previous year in which the construction/acquisition was completed, then this interest is allowed to be deduced in 5 equal installments starting from the previous year in which acquisition/construction was completed.

INADMISSIBLE DEDUCTION

Section 25 of the Income Tax Act, 1962 talks about Inadmissible deductions. As per this section any interest which is paid outside India shall not be legible for deduction if the there is no agent in India or tax has not been deducted from such interests.

TAX ON RECOVERY OF UNREALISED INCOME

As per Section 25 A, in cases where the unrealized income has been recovered, a deducted of 30% of rent received is allowed. This will taxable in the year the income is received and the assessee will be taxable even if he was not the owner in the previous year in which the rent was received.