CONCEPT 1: Charging Section of Income from House Property (Section 22) What is taxable under Income from House Property? The Net annual value (NAV) of a property consisting of any buildings or lands appurtenant thereto of which assessee is the owner shall be chargeable to tax under the head Income from house property. Such Net Annual Value shall be reduced by standard deduction and interest paid or payable on any loan for acquisition or construction or renovation or repair of such property, in order to calculate Income from House Property. We must keep in mind the following points:- 1) What is taxed is not the annual rent but the annual value. The annual value of a House Property is the Rent earning capacity of that house property in a year. The annual value of the property may or may not be equal to the annual rent. The concept of Annual Value is explained in Concept 2. 2) Following are some examples of lands appurtenant thereto:- i. Garden given as rent along with the house. ii. Parking area in the vicinity of the house given in rent along with house. iii. Backyard of a House Note: - Any income from a plot (i.e.) a piece of land shall not be taxable under the head of Income from house property. Such an income shall be taxable under the head Income from Business or Profession or Income from Other Sources. 3) The annual value of a house property shall be taxable in the hands of owner or deemed owner of such house property only. Therefore, rent received by tenant from sub- letting of the house property shall be taxable under the head Income from Other Sources. The Concept of deemed owner is explained later in this chapter. Mobile- +91 9873730234 Page 1
4) The Annual Value of a property shall not be chargeable to tax under the head Income from House property if that house property is used by the owner for the purpose of carrying out his business or profession, the income from which is chargeable under the head Income from Business and profession. CONCEPT 2:- How to calculate Net Annual Value and Income under the head Income from House Property? Situation1:- When the house property is let out for whole or any part of the year. Step (a) Calculate Gross Annual Value (GAV) Municipal Value of the House Property Fair Rent of the House Property Higher of the two Standard Rent of the House Property Lower of the two (Will be called as Expected Rent or Reasonable Rent) Actual rent (After deducting Unrealised rent but before deducting loss due to vacancy) Higher of the two less loss due to = vacancy GROSS ANNUAL VALUE (GAV) Mobile- +91 9873730234 Page 2
Step (b) Calculate Net Annual Value (NAV) Particulars Amount Gross Annual Value (from (a)) *** Less:- Municipal Taxes *** NET ANNUAL VALUE Step (c) Calculate Income from house property Particulars Amount Net Annual Value (NAV) (from (b)) *** Less:- Standard deduction @ 30% of NAV *** Less:- Interest on Capital Borrowed for acquisition or *** construction or renovation or repair of House Property Income from House Property (IHP) *** Concepts explained in brief:- i. Municipal Value of the House Property: - It is the value determined by municipal authorities for the purpose of charging municipal taxes on house properties. Such value is calculated by municipal corporations after taking into consideration the annual letting value of such property, its location and other considerations which it considers necessary. ii. iii. Fair Rent of the House Property: - It is rent which a similar property can fetch from the same or similar locality, if let out for whole year. Standard Rent of the House Property:- Standard rent for a property is fixed for a property under the Rent Control Act. An owner of a house property is not supposed to charge a rent more than the standard rent fixed for such property. Note 1:- Higher among the Municipal Value and the Fair Rent shall be the Expected Rent (reasonable rent) of the property, however subject to a maximum of Standard Rent. Mobile- +91 9873730234 Page 3
iv. Actual rent received or receivable: - It is the actual rent which the owner of the House Property has received from the tenant for letting out his property to him. Note 2:- Higher between the Expected Rent and Actual Rent shall be reduced by loss due to vacancy in order to calculate Gross Annual Value (GAV) of the Property. Actual Rent shall be the rent had the property been let out for whole year as reduced by unrealized rent but before reducing loss due to vacancy. Note 3- Loss due to Vacancy: - A property might remain vacant for any period of time during the year. It is obvious that the owner of the house property shall not receive any rent during such period. Such a loss arising to the owner of the house property is called loss due to vacancy. Note 4- Unrealised Rent: - It is the amount of rent which the landlord couldn t realize from the tenant due to any reason. Note 5:- From the analysis of the meaning of Standard rent, it seems that the actual rent of a property shall always be less than the Standard Rent because an owner of a house property is not supposed to charge a rent more than the standard rent fixed for such property. So, it seems that the Expected rent of a property will always be its Gross Annual Value. However this is not true. This is because the Rent control Act doesn t apply on all properties and thus there can be house properties where actual rent of the property can be much more than the standard rent. Moreover, even if the owner of the house property in contravention of Rent control Act charges a higher rent, such rent shall be taken as Gross Annual Value. v. Municipal Taxes: - From the Gross Annual Value, the Municipal Taxes levied by Municipal Authorities shall be deducted to calculate Net Annual Value. For this the following two conditions must be satisfied:- Mobile- +91 9873730234 Page 4
Municipal Taxes must be borne by the owner of such house property. Municipal Taxes must be paid by him during the previous year. Note 6:- If Municipal Taxes are paid by the tenant and then reimbursed by the owner, then also such deduction is available. vi. vii. Standard deduction: - It is a deduction given at a flat rate of 30% of Net Annual Value. After this deduction, the owner will not separately get any benefit of any repair or maintenance or administrative cost incurred by him. It is this flat 30% which is presumed to be the deduction for such costs which may be incurred by the him. It is to be noted that even if the owner doesn t incur any such expense, he shall still be given standard deduction at 30% of Net Annual Value. Interest on Borrowed Capital: - In case the property is acquired, constructed, repaired, renewed or reconstructed with borrowed capital then any amount of interest payable during the year on such loan shall also be deducted from Net Annual Value (NAV). When the property is let out then Interest on Borrowed capital is allowed as deduction without any limit. Other points to be noted:- 1) In case the assessee takes a fresh loan to repay the original loan taken for acquisition, construction, repair, renovation or reconstruction of property, then interest payable on such new loan to repay the old loan shall also be allowed as deduction on account of Interest on borrowed capital. 2) Interest on unpaid interest is not allowed as deduction. 3) Interest on borrowed capital is allowed on Accrual basis. So, such interest will be allowed as deduction even when it is due but not paid. 4) Interest on capital borrowed is allowed as deduction irrespective of the fact that such interest or the principal is a charge on the property. In simple words, it is Mobile- +91 9873730234 Page 5
immaterial whether the assessee has obtained the loan by mortgaging the property or not. 5) No deduction shall be allowed for any brokerage or commission charges paid or payable for arranging the loan. Example 1:- Calculate Income under the head Income from House property of Mr. A who is owner of the house property, in following different scenarios:- (Amount in Rs.) Particulars Scenario# 1 Scenario# 2 Scenario# 3 Scenario# 4 Scenario# 5 Municipal Value (MV) 120 105 135 120 115 Fair Rent (FR) 110 115 140 120 120 Standard Rent (SR) 130 95 160 110 118 Actual Rent (AR) 125 120 135 110 116 Municipal Taxes paid Nil 10 15 8 18 Maintenance Cost Nil 5 10 12 40 borne by Mr. A Interest on Loan for 5 8 10 9 11 purchasing the property Solution:- Particulars Scenario# 1 Scenario# 2 Scenario# 3 Scenario# 4 Scenario# 5 Expected Rent (ER)- 120 95 140 110 118 (Higher between MV & FR, subject to maximum of SR) Actual Rent (AR) 125 120 135 110 116 Gross Annual Value (GAV) 125 120 140 110 118 (Higher of ER & AR) Less:- Municipal Taxes Nil 10 15 8 18 Net Annual Value (NAV) 125 110 125 102 100 Less:- Standard Deduction 37.50 33 37.50 30.60 30 @ 30% of NAV Less:- Interest on Loan to purchase the House 5 8 10 9 11 Income under the head 82.50 69 77.50 62.40 59 Income from House property Mobile- +91 9873730234 Page 6
Note: - Maintenance Cost borne by Mr. A shall be ignored and no deduction for the same shall be allowed irrespective of the amount. Mr. A has been allowed a standard deduction at 30% of Net Annual Value. Even in Scenario # 5, there is no option as such in hands of Mr. A to pick 30% of NAV or actual expense incurred by him, whichever is higher. Example 2:- Calculate Income under the head Income from House property of Mr. B who is owner of the house property, in following different scenarios:- (Amount in Rs.) Particulars Scenario# 1 Scenario# 2 Scenario# 3 Scenario# 4 Municipal Value (MV) 120 105 135 105 Fair Rent (FR) 110 115 140 115 Standard Rent (SR) 130 95 160 95 Actual Rent (AR) (if let out whole year) 144 120 132 120 No. of Months Vacant Nil 1 2 3 Municipal Taxes paid Nil 7 10 7 Interest on Loan for purchasing the property 8 9 15 9 Solution:- Particulars Scenario# 1 Scenario# 2 Scenario# 3 Scenario# 4 (a) Expected Rent (ER)- (Higher between 120 95 140 95 MV & FR, subject to maximum of SR) (b) Actual Rent (before loss due to 144 120 132 120 vacancy) Higher of (a) or (b) 144 120 140 120 Less:- Loss due to vacancy Nil 10* 22 30 Gross Annual Value (GAV) 144 110 118 90 Less:- Municipal Taxes Nil 7 10 7 Net Annual Value (NAV) 144 103 108 83 Less:- Standard Deduction @ 30% of 43.20 30.90 32.40 24.90 NAV Less:- Interest on Loan to purchase the House 8 9 15 9 Income under the head Income from 92.80 63.10 60.60 49.10 House property * Actual Rent, if let out whole year= Rs. 120 Monthly rent= 120/12= Rs.10 Mobile- +91 9873730234 Page 7
No. of months vacant= 1 Loss due to vacancy= 1*10= Rs. 10/- Example 3:- Calculate Income under the head Income from House property of Mr. C who is owner of the house property, in following different scenarios:- (Amount in Rs.) Particulars Scenario# 1 Scenario# 2 Scenario# 3 Scenario# 4 Municipal Value (MV) 120 105 135 105 Fair Rent (FR) 110 115 140 115 Standard Rent (SR) 130 95 160 95 Actual Rent (AR) (if let out whole year) 144 120 132 120 Unrealised Rent Nil 30 12 5 No. of Months Vacant Nil 1 2 3 Municipal Taxes paid Nil 7 10 7 Interest on Loan for purchasing the property 8 9 15 9 Solution:- Particulars Scenario# 1 Scenario# 2 Scenario# 3 Scenario# 4 (a) Expected Rent (ER)- (Higher between 120 95 140 95 MV & FR, subject to maximum of SR) (b) Actual Rent (after unrealised rent but 144 90 120 115 before loss due to vacancy) Higher of (a) or (b) 144 95 140 115 Less:- Loss due to vacancy Nil 10 22 30 Gross Annual Value (GAV) 144 85 118 85 Less:- Municipal Taxes Nil 7 10 7 Net Annual Value (NAV) 144 78 108 78 Less:- Standard Deduction @ 30% of 43.20 23.40 32.40 23.40 NAV Less:- Interest on Loan to purchase the House 8 9 15 9 Income under the head Income from 92.80 45.60 60.60 45.60 House property Mobile- +91 9873730234 Page 8
Situation 2:- When the house property is used by the owner for his residence throughout the year. When a house property is used by the owner for his residence throughout the year, then Income from House property shall be calculated as follows:- Particulars Amount Gross Annual Value Nil Less:- Municipal Taxes Nil Net Annual Value Nil Less:- Standard Deduction Nil Less:- Interest on Capital Borrowed for acquisition or construction Calculated as per or renovation or repair of House Property (Interest on Self occupied below para Property) Income or (Loss) from House Property (*****) Since the assessee is using the property for his own residence and is making no direct monetary benefit out of it, nothing will be taxed under the head Income from House Property. Since nothing is taxed, the assessee will also not get the tax benefit of Municipal tax paid or Standard Deduction. However in order to encourage the citizens of the country to purchase their own house, and to boost the banking system, the government has given the benefit of Interest on Self Occupied Property even when the property is used by the owner for his residence throughout the year. Interest on Self Occupied Property Interest on Capital Borrowed for acquisition or construction or renovation or repair of House Property shall be reduced from Net Annual value even when the property is used by the assessee for his residence throughout the year. Since the property is self occupied, the net annual value shall be Zero and the owner of the house property in such a case will have loss under the head Income from House Property. However such a loss or deduction shall not exceed Rs. 30,000. Mobile- +91 9873730234 Page 9
The above limit of Rs. 30,000 shall be increased to Rs. 2,00,000 (w.e.f AY 2015-16) if all the below three conditions are fulfilled:- 1) Capital is borrowed on or after 1 st April, 1999 for acquiring or construction of house property. 2) The acquisition or construction of house property is completed within 3 years from the end of the financial year in which such loan was taken. For example, if loan is taken on 05 th April, 2012, acquisition or construction should be over by 31 st March, 2016 (3 years form 31 st March 2013). 3) The assessee (i.e. the owner of the house property) should furnish a certificate, from the person to whom such interest is payable on the capital borrowed, specifying the amount of such interest payable by the assessee for the purpose of acquisition or construction of the property or conversion of the whole or part of the capital borrowed which remains to be repaid as a new loan. This is a procedural condition and it shall be presumed that the assessee has furnished such a certificate even if the question is silent. Example 4 (a):- Mr. A, owns a residential house which has been used by him for his self occupancy. Following are the details of the house:- Particulars Amount (Rs.) Municipal Value 3,50,000 Fair Rent 3,90,000 Standard Rent 3,60,000 Municipal tax paid 5,000 Interest paid during the FY 2015-16 on loan taken on 15 th April, 2011 1,20,000 for purchase of property. Property was purchased on 20 th Sept, 2011 Calculate the income or loss under the head Income from House Property of Mr A, for the FY 2015-16 (AY 2016-17). b) What if the interest paid during the FY 2015-16 was 2,10,000? c) In (a), if the house was purchased on 20 th Sept 2015, will it make any difference? Mobile- +91 9873730234 Page 10
Solution:- Income from House Property of Mr. A, for the FY 2015-16, shall be calculated as follows:- Particulars Amount (Rs.) Expected Rent Nil Actual Rent Nil Gross Annual Value Nil Less:- Municipal tax paid Nil Net Annual Value Nil Less:- Standard Deduction Nil Less:- Interest on Self occupied property 1,20,000 LOSS UNDER THE HEAD INCOME FROM HOUSE PROPERTY 1,20,000 b) If the interest paid during the FY 2015-16 was 2,10,000:- The deduction of Interest on Self occupied property is limited to Rs. 2,00,000 and hence loss under the head Income under House property shall be equal to Rs. 2,00,000/- The deduction of Interest on Self occupied property is allowed upto Rs. 2,00,000 because all the below three conditions are satisfied:- 1) Loan was taken after 1 st April, 1999 (i.e. on 15 th April, 2011) 2) House was purchased within 3 years from the end of the FY in which loan was taken (i.e. within 31 st March, 2015) (Purchased on 20 th September, 2011). 3) Loan certificate has been furnished by the assessee (presumed) c) If the house was purchased on 20 th Sept 2015:- The assessee has failed to acquire the house within 3 years from the end of the financial year in which loan was taken. The assessee has failed to fulfill 2 nd condition that would have allowed him the maximum benefit of Rs. 2,00,000 as interest on borrowed capital. So the maximum deduction that will be allowed to him is Rs. 30,000/-. So even though the Interest paid by him in FY 2015-16 was Rs. 1,20,000, the Loss under the head Income from house property will be Rs. 30,000/- Situation 3:- When the house property could not be occupied by the owner owing to his business or profession at any other place. Mobile- +91 9873730234 Page 11
Income from house property shall be calculated as per Situation-2, if all the below conditions are satisfied:- 1) The Assessee is the owner of the house property. 2) The assessee couldn t occupy the property as his business or profession is at any other place. 3) It is not feasible for the assessee to commute between the place where his house is and the place where his office is. 4) The house is vacant throughout the year. 5) No other benefit is derived from such property. In simple words, if the above conditions are satisfied then it is presumed that the house has been self- occupied and nothing shall be chargeable to tax under the head Income from House Property and the assessee will get only the benefit of Interest on Self occupied property (Rs. 30,000 or Rs. 2,00,000) Situation 4:- When the assessee owns more than one house property and claims all of them to be Self- Occupied. (Concept of Deemed to be let out) Where an assessee has occupied more than one house property for his own residential purpose, then only one house (according to his own choice) shall be considered as Selfoccupied and all other units will be considered as deemed to be let out. In case of property that is opted as Self- Occupied, the taxable amount shall be computed as per Situation-2 (i.e. considering the house property as self occupied for whole of the year) In case of the property that is Deemed to be let out, the taxable amount shall be computed as per Situation-1 (i.e. considering the house property as let out throughout the year) While making choice of which house to be considered as self occupied, the option that is most beneficial to the assessee shall be taken. Mobile- +91 9873730234 Page 12
Example 5:- Mr. A, owns 4 houses, the details of which are given below:- Particulars House 1 House 2 House 3 House 4 Location Delhi Chennai Mumbai Kolkata Stay of Mr. A 3 Months 3 Months 3 Months 3 Months Status when Mr. A doesn t stay Vacant Vacant Vacant Vacant Municipal Value (MV) 1,20,000 5,90,000 2,30,000 3,25,000 Fair Rent (FR) 1,30,000 5,10,000 2,30,000 3,35,000 Standard Rent (SR) 1,25,000 6,10,000 2,25,000 3,30,000 Actual Rent (AR) Nil Nil Nil Nil Municipal Taxes paid 5,000 15,000 7,500 8,500 Interest on Loan payable for FY 2015-15,000 75,000 12,500 32,500 16 for purchasing the property. Loan Taken on 10 th May 05 15 th Nov 08 18 th Mar 09 12 th Jun 10 Property Purchased on 11 th Mar 11 18 th Oct 10 15 th Mar 10 31 st Dec 14 Calculate the Income under the hear Income from House Property for the FY 2015-16 (AY 2016-17) Solution: - Since none of the four houses are let out and all are used by the owner for his own residence for some part of year, it is clear that this is the case of more than one house claimed as Self- occupied. So, as per option of the assessee one house will be considered as Self-Occupied and rest as deemed to be let out. For making this choice, we shall 1 st presume that all the houses are deemed to be let out. If we consider so then following will be the situation:- Mobile- +91 9873730234 Page 13
Particulars House 1 House 2 House 3 House 4 Interest on Loan payable for FY 2015-15,000 75,000 10,000 12,500 16 for purchasing the property. Expected Rent (ER)- (Higher between 1,25,000 5,90,000 2,25,000 3,30,000 MV & FR, subject to maximum of SR) Actual Rent (AR) Nil Nil Nil Nil Gross Annual Value (GAV) (Higher 1,25,000 5,90,000 2,25,000 3,30,000 of ER & AR) Less:- Municipal Taxes 5,000 15,000 7,500 8,500 Net Annual Value (NAV) 1,20,000 5,75,000 2,17,500 3,21,500 Less:- Standard Deduction @ 30% of 36,000 1,72,500 65,250 96,450 NAV Less:- Interest on Loan to purchase the House (no limit will apply) 15,000 75,000 12,500 32,500 Income under the head Income 69,000 3,27,500 1,39,750 1,92,550 from House property Now Mr. A has four options as follows:- Option 1- House 1 is self occupied and House 2, 3, 4 Deemed to be let out Option 2- House 2 is self occupied and House 1, 3, 4 Deemed to be let out Option 3- House 3 is self occupied and House 1, 2, 4 Deemed to be let out Option 4- House 4 is self occupied and House 1, 2, 3 Deemed to be let out Following shall be the Income under Income from House Property under different situations:- Particulars Option 1 Option 2 Option 3 Option 4 House 1 (15,000) 69,000 69,000 69,000 House 2 3,27,500 (75,000) 3,27,500 3,27,500 House 3 1,39,750 1,39,750 (12,500) 1,39,750 House 4 1,92,550 1,92,550 1,92,550 (30,000) Total Income from House property 6,44,800 3,26,300 5,76,550 5,06,250 Mobile- +91 9873730234 Page 14
Since the Income chargeable to tax is least in option # 3, House Number 3 shall be considered as self occupied and House number 1, 2 & 4 shall be deemed to be let out and Income chargeable under the head shall be Rs. 3,26,300 Situation 5:- When the property is let out for part of a year and self- occupied for part of a year. This situation is same as Situation 1 and income shall be computed as if the property is let out and no other extra benefit is available. This can be explained with the help of below example:- Example 6:- Calculate Income under the head Income from House property of Mr. A who is owner of the house property, which is let out for 6 month and used by Mr. A for his residence for 6 months. Particulars Amount Municipal Value (MV) 2,50,000 Fair Rent (FR) 2,60,000 Standard Rent (SR) 2,40,000 Actual Rent (AR) (For 6 months) 1,50,000 Municipal Taxes paid (For whole year) 10,000 Interest on Loan for purchasing the property (Throughout the year) 42,000 Date of taking the loan 01/04/1998 Solution:- Since the assessee has let out the property for part of a year (i.e) 6 months and occupied the same for rest part of the year, the rental income from house property shall be calculated as follows:- Particulars Amount Expected Rent (ER)- (Higher between MV & FR, subject to maximum of 2,40,000 SR) Actual Rent (AR) 1,50,000 Gross Annual Value (GAV) (Higher of ER & AR) 2,40,000 Less:- Municipal Taxes 5,000 Net Annual Value (NAV) 2,35,000 Less:- Standard Deduction @ 30% of NAV 70,500 Less:- Interest on Loan to purchase the House 42,000 Income under the head Income from House property 1,22,500 Mobile- +91 9873730234 Page 15
Note: - Since the property is considered as let out, it is immaterial that loan was taken on 01/04/1998 and Interest on borrowed capital shall be allowed without any limit. Situation 6:- When part of the property is let out and part of the property is selfoccupied. A house property may consist of independent parts or units, Example: - A two storeyed house has three independent parts or units (i.e.) ground floor, 1 st Floor and 2 nd Floor. In such a case there might be a situation in which ground floor is occupied by the owner for his residence and 1 st & 2 nd Floor are let out to tenants. In such a scenario, income from these independent parts or units shall be computed separately. In the above example income from ground floor shall be calculated as per situation 2 (i.e. Income from self occupied property) and income from 1 st & 2 nd floor shall be calculated as per situation 1 (i.e. Income from property let out for any part of the year) Example 7:- Mr. X owns a residential house which has two equal sized independent units: - Unit- I & Unit- II. Unit-I is occupied by Mr. X for his residence and Unit-II is let out. The following are other details of the said house property:- Municipal Value (MV) 4,50,000 Fair Rent (FR) 4,60,000 Standard Rent (SR) 4,40,000 Actual Rent (Of Unit-II) 19,000 per month Loss due to vacancy 1 month Unrealized rent 10,000 Municipal Taxes paid 12,000 Interest on Loan payable during FY 2015-16 for purchasing the 70,000 property Date of taking the loan 01/07/1998 Mobile- +91 9873730234 Page 16
Calculate the income under the hear Income from House property of Mr. X for the FY 2015-16 (AY 2016-17) Solution: - Income of Mr. X from Unit-I shall be calculated considering the same as selfoccupied and income from Unit-II shall calculated considering the same as let out, as follows:- Particulars Unit-I Unit-II Status of the Property Self Occupied Let Out (a) Expected Rent (ER)- (Higher between MV & FR, subject Nil 2,20,000 to maximum of SR) (See Note- 1) (b) Actual Rent (after unrealised rent but before loss due to Nil 2,18,000 vacancy) Higher of (a) or (b) Nil 2,20,000 Less:- Loss due to vacancy Nil 19,000 Gross Annual Value (GAV) Nil 2,01,000 Less:- Municipal Taxes Nil 6,000 Net Annual Value (NAV) Nil 1,95,000 Less:- Standard Deduction @ 30% of NAV Nil 58,500 Less:- Interest on Loan to purchase the House 30,000 35,000 Income/ (Loss) under the head Income from House (30,000) 1,01,500 property Total Income under the head income from House property:- 1,01,500-30,000= Rs. 71,500/- Note 1:- Particulars For Whole For Unit-II (50%) residential house Municipal Value (MV) 4,50,000 2,25,000 Fair Rent (FR) 4,60,000 2,30,000 Standard Rent (SR) 4,40,000 2,20,000 Municipal Taxes 12,000 6,000 Interest on Loan to purchase the House 70,000 35,000 Mobile- +91 9873730234 Page 17
Note 2:- In case of Unit-I, the deduction of Interest on Borrowed capital shall not exceed Rs. 30,000 as the loan was taken before 01 st April, 1999. However in case of Unit-II, no such limit shall apply as Unit II is let out. CONCEPT 3:- Joint Owners of a House Property As discussed in Concept 1, the Net annual value (NAV) of a property consisting of any buildings or lands appurtenant thereto of which assessee is the owner shall be chargeable to tax under the head Income from house property. A situation of Joint ownership occurs when the house property is owned by two or more persons. All the owners will be individually called as Co- owners. Now the question arises, on which owner s hands will the Income from House Property be taxed and how? The answer will lie on the fact that whether the Shares of Joint owners is definite and ascertainable? Where the Shares of Joint owners is definite and ascertainable: - The Income from such property will be assessed in the hands of each co- owners separately and not as an Association of Persons (AOP). For this purpose the Income from house property shall be calculated in the proportion of his share in the property. Example 8: - Mr. A & Mr. B jointly hold a property in Delhi (Equal owners, i.e. 50% to A and 50% to B). The municipal value of the same is Rs. 2,00,000, Fair rent is Rs. 1,80,000, Standard Rent I Rs. 2,05,000 and actual rent is Rs. 2,10,000, Municipal taxes paid= Rs. 10,000 & Interest paid on borrowed capital= Rs. 40,000. Calculate the income from house property of Mr. A and Mr. B Solution:- Particulars For he A s Share B s Share property (50%) (50%) Municipal Value (MV) 2,00,000 1,00,000 1,00,000 Fair Rent (FR) 1,80,000 90,000 90,000 Standard Rent (SR) 2,05,000 1,02,500 1,02,500 Actual Rent (AR) 2,10,000 1,05,000 1,05,000 Mobile- +91 9873730234 Page 18
Expected rent (ER) (Higher of MV & 2,00,000 1,00,000 1,00,000 FR, Subject to maximum of SR) GAV (Higher of AR & ER) 2,10,000 1,05,000 1,05,000 Less:- Municipal taxes 10,000 5,000 5,000 NAV 2,00,000 1,00,000 1,00,000 Less:- Standard Deduction @ 30% 60,000 30,000 30,000 Less:- Interest on Capital borrowed 40,000 20,000 20,000 Income from House Property 1,00,000 50,000 50,000 Income from House property of Mr. A= 50,000/- Income from House property of Mr. B= 50,000/- Where the Shares of Joint owners is not definite: - The Income from such property will not be assessed in the hands of each co- owners separately but as an Association of Persons (AOP). In the above example if the share of A & B is no ascertainable, then the total income from house property of Rs. 1,00,000 will be charged to tax considering A & B together and forming a new AOP. Concept 4:- Composite Rent When the owner of the building, along with the rent of the building gets rent of other assets which have been provided to the tenant along with the building (like furniture, etc), or charges for some services provided to the tenant (like Security charges, maintenance, air- condition charges, etc), then the total amount so received is called as composite rent. The tax treatment of composite rent is as follows:- a) When composite rent consist of rent of building and rent of other assets like furniture, etc, and the two rents are inseparable, then the amount so received shall be taxable under the head Income from business or profession or Income from other source. b) When composite rent consist of rent of building and rent of other assets like furniture, etc, and the two rents are separable, then the amount received towards rent of building shall be taxable under the head Income from house property, and Mobile- +91 9873730234 Page 19
the amount received towards rent of other assets shall be taxable under the head Income from other source. c) When composite rent consist of rent of building and service charges like security, maintenance, etc, then the composite rent shall be split up and the amount which relates to rent of building shall be taxable under the head Income from house property, and the amount that relates to service charges shall be taxable under the head Income from business or profession or Income from other source. Note 1:- Renting of building and renting of other assets like furniture, etc, shall be considered as inseparable, when the landlord is not willing to give one thing in rent without the other and he charges from the tenant one all inclusive amount for renting of both the building and other assets. Note 2:- The decision of taxability under the head Income from business or profession or Income from other source depends upon the repetitiveness of the transaction. For example, if renting of building and renting of other assets like furniture, etc, is the main business of the landlord and the two rents are inseparable, then the amount so received shall be taxable under the head Income from business or profession. Concept 5:- Some special cases 1) Interest on borrowed capital payable outside India:- When the assessee pays interest on borrowed capital to any person outside India on which TDS was deductible and the assessee doesn t deduct such TDS or after deducting doesn t deposit the same, then such Interest shall not be deducted while computing Income from House Property. 2) Rental Income received by any person from house property situated in India:- Where any person, whether resident or not, receives rent from a property situated in India, then such income shall be deemed to accrue in India and shall be taxable in the hands of such person, irrespective of the location of that person. 3) Rental Income received by a person assessable in India, from a house property located outside India:- Where an assessee who is assessable in India for the rent Mobile- +91 9873730234 Page 20
received in foreign currency, the rate of exchange for such foreign currency into Indian Rupees shall be the Telegraphic Transfer Buying rate (TT buying rate) of such currency as on the specified date. The specified date shall be last day of the previous year (31 st March). Concept 6:- Recovery of Unrealised Rent Where the assessee cannot realize rent from a property let to a tenant and, subsequently the assessee has realised any amount in respect of such rent, the amount so realised shall deemed to be income chargeable under the head Income from House Property in the previous year in which such amount has realised, whether or not the assessee is the owner of that house property in that year. Example 9:- Mr. X owns a residential house in Delhi the details of which for the financial year 2015-16 are as follows:- Particulars FY 2015-16 FY 2016-17 Municipal Value (MV) 3,60,000 3,60,000 Fair Rent (FR) 3,75,000 3,75,000 Standard Rent (SR) 3,50,000 3,50,000 Actual Rent (Of Unit-II) 30,000 p.m 30,000 p.m Loss due to vacancy 2 months 1 month Unrealized rent 12,000 5,000 Municipal Taxes paid 8,000 8,000 Interest on Loan capital borrowed 72,000 67,000 Date of taking the loan 01/10/2008 01/10/2008 Out of the rent which couldn t be realised in FY 2015-16, Rs. 8,000 was realised in December 2016. Calculate the Income under the head Income from other House Property for FY 2015-16 & 2016-17. Solution:- Particulars FY 2015-16 FY 2016-17 Expected Rent (ER) (Higher of MV and FR, subject to 3,50,000 3,50,000 max of SR) Actual Rent (AR) (After unrealised rent, before loss due 3,48,000 3,55,000 to vacancy) Higher of ER & AR 3,50,000 3,55,000 Mobile- +91 9873730234 Page 21
Less:- Loss due to vacancy 60,000 30,000 GAV 2,90,000 3,25,000 Less:- Municipal Taxes paid 8,000 8,000 NAV 2,82,000 3,17,000 Less:- Standard Deduction @ 30% 84,600 95,100 Less:- Interest on Loan capital borrowed 72,000 67,000 Add:- Recovery of Unrealised rent Nil 8,000 INCOME FROM HOUSE PROPERTY 1,25,400 1,62,900 Concept 7:- Arrear Rent of Earlier years Rent of a house property might increase retrospectively from a past date due to which the owner of the house property receives the arrears of rent of past period. Example: - In a disputed case the court on 1 st April 2015 fixes the rent of a property at Rs. 1,000 per month with effect from April 2005. The actual rent charged from April 2005 till March 2015 was Rs. 800 per month. So, on 1 st April, 2015, the owner of the property is entitled to receive arrear rent of Rs. 24,000/- (200*12*10) Taxability of Arrear Rent: - Any arrear rent received on or after 1 st April, 2000 shall be chargeable to tax under the hear Income from House Property in the year of receipt if the same is not charged to tax in earlier years, whether or not the assessee is the owner of that house property in that year. However deduction from annual value to the extent of 30% w.e.f. AY 2002-03 shall be available from such rent. Concept 8:- Deemed Owner As per Income tax Act, the owner of house property means not just the person who is legal owner of the house but the person who is entitled to receive the Income from House property in his own right. Example: - Mr. A is the legal owner of House property in Delhi. Mr. A enters into an agreement with Mr. B that all the income from the property shall belong to Mr. B. Now the effective owner of the property is not Mr. A but Mr. B. Mr. B is deemed owner. Similarly, the following persons shall be deemed to be owners of the house property (Deemed owners):- Mobile- +91 9873730234 Page 22
1) The person who has transferred the property without adequate consideration to his or her spouse or to his or her minor child. Exception:- a) When house property is transferred by a person to his or her spouse in connection to agreement to live apart. b) When house property is transferred by a person to his or her married minor daughter. 2) A member of a co- operative society, company or AOP to whom a building or part of a building is allotted or leased under a house building scheme. 3) A person in possession of property in part performance of a contract. Example: - A person who has paid the consideration and taken possession of the property as per agreement for sale will become owner even though the transfer is not yet registered in his favour. 4) A person having lease right in the property under a lease for period exceeding 12 years in aggregate including the term for which the lease may be extended. 5) The holder of impartible estate shall be deemed to be individual owner of all the properties comprised in that estate. Concept 9:- Interest of Pre Construction period As we know the income from house property shall be chargeable to Income tax in the hands of an assessee, under the head Income from House Property, only when the assessee is the owner of such property. However there may be an instance in which the assessee has started paying interest on capital borrowed for purchase or construction of house property but such acquisition or construction is not complete. In such an instance the assessee is not owner however he is paying interest which is entitled to be deducted under the head Income from House Property. Now the question arises on how will such interest be treated which computing Income from House Property. Mobile- +91 9873730234 Page 23
Example: - Assessee took a loan of Rs. 1,00,000/- on 1 st April, 2014 and started paying interest on loan from the same date. The rate of Interest is 10% p.a. The construction of house is complete on 1 st April, 2015. Now the interest paid from 1 st April, 2014 to 31 st March, 2015 (i.e. 1,00,000 @ 10%= Rs. 10,000/-) shall be considered as interest of pre construction period. In other words, pre- construction period is the period commencing from the date of taking loan and ending on:- (a) 31 st March immediately preceding the date of completion of construction or date of purchase. Or (b) Date of repayment of Loan, whichever is earlier. Tax treatment of Interest of Pre Construction period Interest of Pre Construction period will be allowed as deduction in 5 equal annual installments, commencing from the previous year in which construction or acquisition of house property is complete. Note: - In case of Self occupied property (Situation-2, Concept-2) or property which couldn t be self occupied owing to employment in any other place (Situation-3, Concept- 2), the limit of Rs. 30,000 or Rs. 2,00,000, as the case may be, shall be considered after taking into account the 1/5 th amount of Interest of Pre Construction period. Example 10:- Mr. A takes a loan of Rs. 1,00,000 for construction of house. The loan was taken on 1 st April, 2008. Construction was complete on 1 st September 2015. Calculate interest of Pre Construction period and explain how it will be treated in calculating taxable income under the head Income from House Property, when the loan is repaid on:- a) 31 st March, 2012 b) 31 st May, 2015 c) 30 th September, 2016 d) 30 th September, 2008 (Note: - The house was let out as soon as construction was complete) Mobile- +91 9873730234 Page 24
Solution (a):- Step-1:- Find out Pre- Construction Period: - It Shall be from: - 1 st April 2008 to 31 st March 2015 or 31 st March 2012, whichever is earlier (i.e.) from 1 st April 2008 to 31 st March 2012= 4 years Step 2:- Find out the Interest paid in Pre- Construction Period:- = Rs. 1,00,000* 10%* 4 years= Rs. 40,000/- Step 3:- Determine taxability of Interest paid in Pre- Construction Period:- Total interest on pre construction period of Rs. 40,000/- shall be allowed in 5 equal annual installments beginning from financial year 2015-2016 (i.e.) 40,000/5= Rs. 8,000 shall be deducted in FY 2015-16, 2016-17, 2017-18, 2018-19 & 2019-20. Step 4:- Determine the amount of Deduction in current FY In FY 2015-16, interest paid is Rs. Nil (Loan has been already repaid on 31 st March, 2012). So the interest deduction in FY 2015-16 is Rs. 8,000 (8,000+Nil). Pre- Const Period 1 st Apr 2008 31 st Mar 2012 31 st March 2015 1 st Sept, 2015 31 st Mar 2016 (Date of Loan) (Date of repay) (Preceding 31 st March) (Construction End of Current FY Complete) Solution (b):- Step-1:- Find out Pre- Construction Period: - It Shall be from: - 1 st April 2008 to 31 st March 2015 or 31 st May 2015, whichever is earlier (i.e.) from 1 st April 2008 to 31 st March 2015= 7 years Step 2:- Find out the Interest paid in Pre- Construction Period:- = Rs. 1,00,000* 10%* 7 years= Rs. 70,000/- Mobile- +91 9873730234 Page 25
Step 3:- Determine taxability of Interest paid in Pre- Construction Period:- Total interest on pre construction period of Rs. 70,000/- shall be allowed in 5 equal annual installments beginning from financial year 2015-2016 (i.e.) 70,000/5= Rs. 14,000 shall be deducted in FY 2015-16, 2016-17, 2017-18, 2018-19 & 2019-20 Step 4:- Determine the amount of Deduction in current FY In FY 2015-16, interest paid is Rs. 1667 (Rs. 1,00,000* 10%*2/12) (For the month of April & May 2015). So the interest deduction in FY 2015-16 is Rs. 15,667 (14,000+1,667). Pre- Const Period Current year Interest 1 st Apr 2008 31 st March 2015 31 st May 2015 30 th Sep 2015 31 st Mar 16 (Date of Loan) (Preceding 31 st March) (Loan Repay) (Const Complete) (End of Current FY) Solution (c):- Step-1:- Find out Pre- Construction Period: - It Shall be from: - 1 st April 2008 to 31 st March 2015 or 30 th September 2016, whichever is earlier (i.e.) from 1 st April 2008 to 31 st March 2015= 7 years. Step 2:- Find out the Interest paid in Pre- Construction Period:- = Rs. 1,00,000* 10%* 7 years= Rs. 70,000/- Step 3:- Determine taxability of Interest paid in Pre- Construction Period:- Total interest on pre construction period of Rs. 70,000/- shall be allowed in 5 equal annual installments beginning from financial year 2015-2016 (i.e.) 70,000/5= Rs. 14,000 shall be deducted in FY 2015-16, 2016-17, 2017-18, 2018-19 & 2019-20 Step 4:- Determine the amount of Deduction in current FY In FY 2015-16, interest paid is Rs. 10,000 (Rs. 1,00,000* 10%). So the interest deduction in FY 2015-16 is Rs. 24,000 (14,000+10,000). Mobile- +91 9873730234 Page 26
Pre- Const Period Current year Interest 1 st Apr 2008 31 st March 2015 30 th Sep 2015 31 st Mar 16 30 th Sep 16 (Date of Loan) (Preceding 31 st March) (Const Complete) (End of Current (Loan repay) FY) Solution (d):- Step-1:- Find out Pre- Construction Period: - It Shall be from: - 1 st April 2008 to 31 st March 2015 or 30 th September 2008, whichever is earlier (i.e.) from 1 st April 2008 to 30 th September 2008= 6 months Step 2:- Find out the Interest paid in Pre- Construction Period:- = Rs. 1,00,000* 10%* 6/12 years= Rs. 5,000/- Step 3:- Determine taxability of Interest paid in Pre- Construction Period:- Total interest on pre construction period of Rs. 5,000/- shall be allowed in 5 equal annual installments beginning from financial year 2015-2016 (i.e.) 5,000/5= Rs. 1,000 shall be deducted in FY 2015-16, 2016-17, 2017-18, 2018-19 & 2019-20. Step 4:- Determine the amount of Deduction in current FY In FY 2015-16, interest paid is Rs. Nil (Loan has been already repaid on 30 th September, 2008). So the interest deduction in FY 2015-16 is Rs. 1,000 (1,000+Nil). Pre- Const Period 1 st Apr 2008 30 th Sep 2008 31 st March 2015 1 st Sept, 2015 31 st Mar 2016 (Date of Loan) (Date of repay) (Preceding 31 st March) (Construction End of Current FY Complete) Mobile- +91 9873730234 Page 27
Example 11: Calculate the deduction of Interest on Capital Borrowed in following cases:- Case Loan Interest Date on Date on Date on Status of home Amount Rate which loan which which loan is after construction taken construction is over repaid 1 10,00,000 10% 01 st Mar 12 01 st Jan 15 31 st Jan 16 Self- Occupied 2 10,00,000 10% 01 st Mar 12 05 th Jul 15 31 st Jan 16 Self- Occupied 3 12,00,000 8% 01 st June 13 01 st Oct 13 31 st Oct 16 Self- Occupied 4 19,00,000 10% 01 st June 12 01 st Oct 13 31 st Oct 16 Self- Occupied 5 15,00,000 10% 01 st Aug 05 10 th Oct 09 31 st Mar 16 Self- Occupied 6 15,00,000 10% 01 st Aug 05 10 th Oct 09 31 st Mar 16 Let- out 7 20,00,000 10% 01 st Apr 14 30 th Sep 15 31 st Mar 16 Let- out 8 10,00,000 10% 01 st Apr 12 31 st Jan 16 31 st Mar 14 Self- Occupied 9 10,00,000 10% 01 st Jan 12 31 st Jan 16 31 st Mar 14 Self- Occupied 10 10,00,000 10% 01 st Jan 12 31 st Jan 16 31 st Mar 14 Let- out 11 14,00,000 10% 01 st Sep 12 01 st Sep 15 31 st Mar 16 Self- Occupied Solution: - Case Preconstruction period From Preconstruction period To Pre- Const Period (Months) Interest on Pre Const. Period 1/5th of Pre- Const period allowed in FY 2015-16 Actual interest paid in FY 15-16 Total Deduction actually allowed respect Interest Capital borrowed 1 1-Mar-12 31-Mar-14 25 2,08,333 41,667 83,333 1,25,000 1,25,000 2 1-Mar-12 31-Mar-15 37 3,08,333 61,667 83,333 1,45,000 30,000 3 1-Jun-13 31-Mar-13 - - - 1,52,000 1,52,000 1,52,000 4 1-Jun-12 31-Mar-13 10 1,58,333 31,667 3,00,833 3,32,500 2,00,000 5 1-Aug-05 31-Mar-09 44 5,50,000-1,50,000 1,50,000 30,000 6 1-Aug-05 31-Mar-09 44 5,50,000-1,50,000 1,50,000 1,50,000 7 1-Apr-14 31-Mar-15 12 2,00,000 40,000 2,00,000 2,40,000 2,40,000 8 1-Apr-12 31-Mar-14 24 2,00,000 40,000-40,000 40,000 9 1-Jan-12 31-Mar-14 27 2,25,000 45,000-45,000 30,000 10 1-Jan-12 31-Mar-14 27 2,25,000 45,000-45,000 45,000 11 1-Sep-12 31-Mar-15 31 3,61,667 72,333 1,40,000 2,12,333 2,00,000 in of on Mobile- +91 9873730234 Page 28