Understanding Income from House Property under Income Tax Act, 1961

Summary: The Income Tax Act of India classifies income into five categories, one of which is “Income from House Property.” This category applies to rental income generated by property ownership, regardless of whether the property is occupied or rented out. Several sections govern this type of income. Section 22 specifies that only the “annual value” of a property counts as taxable income from house property if it meets specific conditions, such as ownership and non-use for personal business. Section 23 outlines how to calculate this annual value, differentiating between let-out and self-occupied properties. For let-out properties, the Net Annual Value (NAV) is derived after comparing municipal value, fair rent, and standard rent, then subtracting taxes paid by the owner. Self-occupied properties, however, generally have a NAV of zero.

Deductions under Section 24 include a 30% standard deduction on NAV and interest on loans taken for property acquisition or construction, with certain limitations on interest claims. Pre-construction interest can be deducted over five years once construction completes. Section 25 restricts some interest deductions, and Section 25A addresses unrealized or arrears of rent, allowing a 30% deduction on such receipts. Provisions for co-owned properties (Section 26) and “deemed ownership” (Section 27) ensure accurate income allocation for joint and specific ownership structures, impacting how taxes apply across varying ownership scenarios.

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1. Introduction

Hello readers as we know there are 5 heads falling under Income tax Act as below,

1. Income from salary

2. Income from House property

3. Profit & gains from Business & Professions

4. Capital gains

5. Income from other Sources

An Assesse has to bifurcate his earnings into these heads while computing his tax liability

2. Section Highlights

let’s dive in to one of the heads of Income tax i.e. Income From House property. In this article you will know about all Provisions & deductions fall under the said Head let’s Start,

As we know when any Assesse is earning any rent income from the property the same will be taxable under the said Head So how such things are going ?

First of all let’s Check out with Section Highlights.

• Section: 22 (Charging Section)
• Section: 23 (Computation of Annual Value)
• Section: 24 (Deductions)
• Section: 25 (Deductions not allowed)
• Section: 25A (Recovery of unrealised rent & Arrears of rent)
• Section: 26 (Co-owners)
• Section: 27 (Deemed Owner)

3. Chargeability (SECTION: 22)

An Income being Annual Value of property will chargeable as income from House property only if,

• Assesse is Owner property
• Property is either Self Occupied ( own residence ) or Let out ( for any purpose )
• Property has not used for his own Business & profession

Here the Annual Value of Property* will be taxable.

*Property includes buildings or lands appurtenant thereto of which the assesse is the owner

HOW NAV IS DETERMINED ( SECTION 23)

For the purpose of NAV under section 22 following steps can be followed,

For Let out Property

Step: 1 

Compare Municipal value (Annual renting value as per municipal records ) of Property with Fair Rent ( Rent of similar properties in nearby area or same locality ) & take whichever is HIGHER

Step: 2

Compare value as per Step 1 with Standard rent ( Rent as per Rent control Act ) take whichever is LOWER i.e. Reasonable Expected Rent

Step: 3

Compare Reasonable Expected Rent ( Step 2 ) with Actual Rent ( Received or Receivable ) & take Whichever is HIGHER & you will get GROSS ANNUAL VALUE

After Deducting Municipal Tax & local Tax PAID BY OWNER you will get NET ANNUAL VALUE ( NAV )

For Self Occupied Property

When an Assesse has occupied the property for his residence & not occupied the property due to employment at other place then the property said to be Self Occupied & NAV for the said Property will be NIL

AVAILABLE DEDUCTIONS ( SECTION 24 )

After computing NAV let’s check is there is any Deductions allowed under the said Head??

Yes under section 24 Deductions allowed as follows,

Section 24 subsection-

(a) Provides a sum equal to thirty percent of the annual value

(b) Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital

For the subsection (b) certain conditions need to be followed as under,

• When loan has taken for the said purpose under sub sec (b) then interest will allow on due basis
• Only original interest will be allowed ( interest on interest or any penalty won’t )
• If Assesse had taken Subsequent loan to repay the previous loan then interest or subsequent loan will be allowed provided that it also taken for the same purpose
• To avail the Interest as deduction interest certificate need to be furnished.

6. Pre & Post Construction Interest

When an Assesse has taken loan for the purpose of construction of his property then such interest can’t be taken as deduction till the the completion of construction

Hence such PRE-CONSTRUTION interest will be accumulated & claimed as deduction in five equal installments from the year of completion of construction

Interest payable for the year of completion of construction ( irrespective of date of completion) will be claimed as Post interest in the same PY it self

Calculation of Pre-construction interest :

For the said purpose interest form

DATE OF LOAN

To

(i) Date of final Repayment of loan

(ii) Immediate 31^st March of preceding PY of completion of construction

Or (ii) whichever is earlier

Let’s take an Example to understand the same

Date of loan : 01/09/18

Date of repayment of loan : 01/01/23

Date of completion of construction: 01/10/21

Amount of loan Rs. 20 lakhs @ 12%pa ( loan for construction purpose)

Calculate interest allowed us 24(b)

Solution

Let’s first calculate Pre- construction period i.e.

Date of loan : 01/09/2018

To

(i) Date of final Repayment of loan : 01/01/2023

(ii) Immediate 31^st March from the completion of construction : 31/03/2021

We less……. i.e. 31/03/2021

Hence pre period will bee : 01/09/18 to 31/03/21 i.e 31 Months

Interest for pre period: (20,00,000 @12% for 31Months)

I.e. 20,00,000*12%*31/12 will give Rs. 6,20,000

Hence pre period interest to be claimed in Five installments as follows

6,20,000/5 = 1,24,000 pa from PY :21.22

Deduction of interest in every PY will be as follows

Maximum allowable Interest

• In case of let out house (including Deemed letout) full interest can be claimed as deduction
• In case of Self Occupied Property Amount of Deduction will be restricted as below

(i) If Loan has been taken before 01/04/1999 then maximum allowable interest for the interest payable for Construction purpose will be 30,000

(ii) If Loan has taken after 01/04/1999 then maximum allowable interest is Rs. 2,00,000

Note:

(i) if loan has taken for the purpose of repair & maintenance then maximum allowable interest will be Rs.30,000 irrespective of date of loan

(ii) If an Assesse has taken loan after 01/04/1999 for construction of the property then the amount of deduction will be restricted to 30,000 if construction has not been completed with in 5 years from the end of PY in which loan has taken

7. Deduction not allowed (section 25)

1. Notwithstanding anything contained in section 24, any interest chargeable under this Act which is payable outside India shall not be deducted in computing the income chargeable under the head “Income from house property”.

8. Arrears of rent & unrealised rent (Section 25A)

Such section contains special provisions regarding arrears of rent ( rent which remains unpaid after the date on which it becomes due and payable) & unrealised rent (the portion of the rent that the property owner could not recover from the tenant) as below:

• The amount of arrears of rent received from a tenant or the unrealised rent realised subsequently from a tenant, as the case may be, by an assessee shall be deemed to be the income from house property in respect of the financial year in which such rent is received or realised, and shall be included in the total income of the assessee under the head “Income from house property
• 30% of standard deduction will be allowed for the purpose of section 25A

9. Co-owners (Section:26)

• Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but it will be assessed as their individual income from the property as per section 22 to 25

10. Deemed owner ( Section : 27)

Under such section I tried to cover following circumstances in which Assesse will be considered as Deemed Owner,

• An individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred
• The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate
• A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building
• A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract shall be deemed to be the owner of that building