Analysis of Income from House Property (Part 2)

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In the previous series, we covered the basic aspects of house property income entailing chargeability, concept of deemed ownership, taxability of composite rent and other similar aspects. In this series, my main thrust would be on computation of house property income.

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:

ParticularsAmount
Gross Annual Value (“GAV”)Xxxx
Less: Municipal taxes paid during the yearXxxx
Net Annual Value (“NAV”)Xxxx
Less: Deduction under section 24
Deduction under section 24(a) @ 30% of NAV (Standard deduction)Xxxx
Deduction under section 24(b) on account of interest on borrowed capitalXxxx
Income from House PropertyXxxx

Computation of Annual Value of a let-out house property

This involves three steps:

Step 1: Determination of Gross Annual Value (GAV)

Step 2: From the Gross Annual Value computed in step 1, municipal taxes paid by the owner during the previous year are deducted

Step 3: The balance amount will be the Net Annual Value (NAV)

Determination of annual value for different types of house properties

  1. Where the property is let out throughout the previous year

Where the property is let out for the whole year, then the gross annual value would be the higher of the following:

  1. Expected Rent
  2. Actual Rent received or receivable during the year

Expected Rent

The expected rent is the higher of fair rent and municipal value, but restricted to standard rent. Also, expected rent cannot exceed standard rent but it can be lower than standard rent, in a case where standard rent is more than the higher of municipal value and fair rent.

Municipal Value

Municipal value is the value determined by the municipal authorities for levying municipal taxes on house property.

Fair Rent

Fair Rent means rent which similar property in the same locality would fetch

Standard Rent

The Standard Rent is fixed by the Rent Control Act.

Illustration:

ParticularsHouse IHouse IIHouse IIIHouse IVHouse V
Municipal Value8000055000650002400075000
Fair Rent9000060000650002500080000
Standard RentN.A.7500058000N.A.78000
Actual Rent received/ receivable7200072000600003000072000
Gross Annual Value9000072000600003000078000
  1. Where the let-out property is vacant for part of the year

Where the let-out property is vacant for part of the year and owing to vacancy, the actual rent is lower than the expected rent, then the actual rent received or receivable would be the gross annual value of the house property.

  1. In case of self-occupied property or unoccupied property:

    1. Where the property is self-occupied for own residence or unoccupied throughout the previous year, its annual value would be NIL, provided no other benefit is derived by the owner from such property.
    2. The benefit of exemption of one self-occupied house is available only to an individual/ HUF
    3. The expression “unoccupied property” refers to a property which cannot be occupied by the owner by reason of his employment, business or profession at a different place and he resides at such other place in a building not belonging to him.
    4. No deduction for municipal taxes is allowed in respect of such property
       
  2. Where a house property is let out for part of the year and self-occupied for part of the year
  3. If a single unit of a property is self-occupied for part of the year and let out for the remaining part of the year, then the expected rent for the whole year shall be taken into account for determining the gross annual value.
  4. The expected rent for the whole year shall be compared with the actual rent for the let out period and whichever is higher shall be adopted as the gross annual value
  5. However, property taxes for the whole year is allowed as a deduction provided it is paid by the owner during the previous year
  1. In case of deemed to be let out property
  1. Where the taxpayer owns more than one house property for self-occupation, then the income from any one such property, at the option of the taxpayer, shall be computed under the self-occupied property category and its annual value would be NIL. The other self-occupied/ unoccupied properties shall be treated as “deemed let out properties”
  2. This option can be changed year after year in a manner beneficial to the taxpayer
  3. In case of deemed let out property, the expected rent shall be taken as the gross annual value
  4. The question of considering actual rent received/ receivable does not arise. Consequently, no adjustment is required on account of property remaining vacant or unrealized rent.
  5. Municipal taxes actually paid by the owner during the previous year can be claimed as deduction
  1. In case of a house property, a portion let out and a portion self-occupied
  1. Income from any portion or part of a property which is let out shall be computed separately under the let-out property category and the other portion or part which is self-occupied shall be computed under the “self-occupied property” category.
  2. There is no need to treat the whole property as a single unit for computation of income from house property
  3. Municipal valuation/ fair rent/ standard rent, if not given separately, shall be apportioned between the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such other reasonable basis.
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Deductions from Annual Value:

There are two deductions from annual value. These are:

  1. 30% of net annual value; and
  2. Interest on borrowed capital

30% of net annual value:

This is a flat deduction and is allowed irrespective of the actual expenditure. However, in case of a self-occupied property where the annual value is NIL, the taxpayer will not be entitled to deduction of 30% as the annual value is itself NIL.

Interest on borrowed capital:

  • Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction
  • Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction
  • Interest relating to the year of completion of construction can be fully claimed in that year irrespective of the date of completion
  • Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed, can be claimed as deduction over a period of five years in equal instalments commencing from the year of acquisition or completion of construction

In case of let-out property:

There is no limit on the quantum of interest which can be claimed as deduction

In case of self-occupied property:

There is a limit on the quantum of interest which can be claimed as deduction. The limits are as follows:

  • INR 200,000: If all the following conditions are satisfied:
  • Capital is borrowed on or after 1-4-1999
  • Capital is borrowed for the purpose of acquisition or construction (i.e., not for repair, renewal, reconstruction)
  • Acquisition or construction is completed within 5 years from the end of the financial year in which the capital was borrowed.
  • 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
  • INR 30,000: If any of the above conditions are not satisfied, then the interest deduction is restricted to INR 30,000
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Interest can be classified as pre-construction or post-construction period interest.

Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following:

  • Date of repayment of loan; or
  • 31st March immediately preceding the date of completion of the construction or acquisition of the property.

Interest pertaining to pre-construction period is allowed as deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed

Post-construction period interest is the interest pertaining to the relevant year (i.e., the year for which income is being computed).

Thus, total deduction available to the taxpayer under section 24(b) on account of interest will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post construction period (if any).

Treatment of unrealized rent

Unrealized rent is the rent of the property which the owner of the property could not recover from the tenant, i.e., rent not paid by the tenant. If following conditions are satisfied, then unrealized rent is to be deducted from actual rent of the year:

  1. The tenancy is bona fide.
  2. The defaulting tenant has vacated the property, or steps have been taken to compel him to vacate the property
  3. The defaulting tenant is not in occupation of any other property of the taxpayer
  4. The taxpayer has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless.

However, there may be situations that the unrealized rent is subsequently realized. In such cases, any subsequently recovery of unrealized rent shall be deemed to be the income of taxpayer under the head “Income from house property” in the year in which such rent is realized (whether or not the assessee is the owner of that property in that year). The amount received is charged to tax after deducting a sum equal to 30% of such unrealized rent.

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Tax treatment of arrears of rent

The amount received on account of arrears of rent (not charged to tax earlier) will be charged to tax after deducting a sum equal to 30% of such arrears. It is charged to tax in the year in which it is received. Such amount is charged to tax whether or not the taxpayer owns the property in the year of receipt.

Treatment of municipal taxes

Municipal taxes or property taxes are allowable as deduction from the gross annual value subject to the following two conditions:

  1. It should have been borne by the owner (taxpayer); and
  2. It should have been actually paid during the previous year, i.e. if the property taxes for a particular previous year is not paid during that year, no deduction shall be allowed in the computation of house property income.

However, if in any subsequent year, the arrears are paid, then the amount so paid is allowed as a deduction in computation of income from house property.

In case of property situated outside India, taxes levied by local authority of the country in which the property is situated is deductible as and when the payment is made.

Illustration:

Prerna owns a house property in Punjabi Bagh, New Delhi. The municipal value of the property is INR 500,000, fair rent is INR 420,000 and standard rent is INR 480,000. The property was let out for INR 50,000 per month upto December 2015. Thereafter, the tenant, Mr. Sharma vacated the property and Prerna used the house for self-occupation. Rents for the month of November and December 2015 could not be realized inspite of the owner’s efforts. She paid municipal taxes of INR 50,000 during the year. She also paid interest of INR 25,000 during the year for amount borrowed for repairs for the house property. Her income from house property would be computed in the following manner:

ParticularsAmount (INR) 
Computation of GAV
Step 1Compute expected rent for the whole year

Expected rent = Higher of municipal value or fair rent, but restricted to standard rent
480,000

Step 2Compute actual rent received/ receivable

Actual rent received/ receivable for the period let out less unrealized rent = (50,000 * 9) – (50,000 * 2)
350,000
Step 3Compare step 1 with step 2; GAV is the higher of the two480,000
Gross annual value (GAV)480,000
Less:Municipal taxes paid during the year50,000
Net annual value (NAV)430,000

Less:Deduction under section 24(a): 30% of NAV129,000
Deduction under section 24(b)25,000
Income from house property276,000