Analysis of Income from House Property (Part 3)

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In the previous series, we covered how to compute house property income and other related matters. In this series, we would be discussing few Frequently Asked Questions (FAQs).

Question: Is rental income from sub-letting chargeable to tax under the head “income from house property”?

Answer: We already discussed this in the previous series that in order to tax certain income under the head house property, three conditions are required to be satisfied cumulatively. One of the conditions is that the taxpayer should be the owner of the house property during the year under consideration.

  1. Owner is the person who is entitled to receive income from the property in his own right
  2. The requirement of registration of the sale deed is not warranted
  3. Ownership includes both free-hold and lease-hold rights
  4. Ownership includes deemed ownership
  5. The person who owns the building need not also be the owner of the land upon which it stands

Since the tenant is not the owner of the house property, rental income received by him/ her from sub-letting cannot be charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be. ​

Question: Whether rental income could be charged to tax in the hands of a person who is not a registered owner of the house property?

Answer: Again, if the person receiving the rent is not the owner of the property, then rental income is not charged to tax under the head "Income from house property". However, there are exceptions as to when an owner, not being a registered owner would be treated as a deemed owner. In the following cases a person will be treated as the owner (i.e., deemed owner) of the property and rental income from property will be charged to tax in his hands:

  1. If an individual transfers his or her house property to his/her spouse or to his/her minor child without adequate consideration, then the transferor (the individual) will be deemed as owner of the property.

This is not applicable if the individual transfers his or her property in connection with an agreement to live apart or if the individual transfers his or her property to his or her minor married daughter. In these cases, the spouse or the minor married daughter, as the case may be, would be the owner and the income would be taxable in their hands and not in the hands of the individual.

  1. Holder of impartible estate is deemed as the owner of the property comprised in the estate. Thus, the holder of an impartible estate will be the true owner for the purpose of income tax even though the house is legally owned by some one else. For instance, in case where a Hindu Undivided Family (HUF) jointly holds property on behalf of all its members, it will be treated as the owner though legally the property is in the name of an individual member of the family.
  2. 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.
  3. A person acquiring property 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:

    1. There must be an agreement in writing
    2. The purchase consideration is paid or the purchaser is willing to pay it.
    3. Purchaser has taken the possession of the property in pursuance of the agreement
  4. In case of lease of a property for a period not less than 12 years (whether originally fixed or provision for extension exists), the 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      
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Question: Under which head is the rental income from a shop charged to tax?

Answer: ​Rental income from a property, being building or land appurtenant thereto, of which the taxpayer is the owner is charged to tax under the head “Income from house property”. To tax the rental income under the head “Income from house property”, the rented property should be building or land appurtenant thereto. Shop being a building, rental income will be charged to tax under the head “Income from house property”

Question: Can interest paid on loans taken from friends and relatives be claimed as deduction while calculating house property income?

Answer: Yes, if the loan is taken for purchase, construction, repair, renewal or reconstruction of the house. However, if the loan is taken for personal or other purposes then the interest on such loan cannot be claimed as deduction.

Question: While computing income chargeable to tax under the head “income from house property”, in the case of a let-out property, how much interest on housing loan can be claimed as deduction?

Answer: While computing income chargeable to tax under the head "Income from house property" in case of a let-out property, the taxpayer can claim deduction under section 24(b) on account of interest on loan taken for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b​)​. This is a very important provision which a taxpayer must be aware of in order to claim the benefit of the interest liability.

Question: My spouse and I jointly own a house property in which both of us have invested equally out of independent sources. Can the rental income received be split up between us and taxed in the individual hands?

Answer: ​Yes, if the share of each co-owner is ascertainable. ​

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Question: What is self-occupied property?

Answer: ​​A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence

Question: How to compute income from self-occupied property?

Answer: A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence. Income chargeable to tax under the head "Income from house property" in case of a self-occ​upied property is computed in following manner:

ParticularsAmount (in INR)
Gross Annual ValueNIL
Less: Municipal taxes paid during the yearNIL
Net Annual Value (NAV)NIL
Less: Deduction under section 24
Deduction under section 24(a) @ 30% of NAVNIL
Deduction under section 24(b) on account of interest on borrowed capital(xxx)
Income from house property(XXX)

Question: Can a property not used for residence by the taxpayer be treated as self-occupied property?

Answer: As discussed above, a self-occupied property means a property which is occupied throughout the year by the owner for his residence. 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:

  1. The taxpayer owns a property;
  2. 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 by him;
  3. The property mentioned in (a) above (or part thereof) is not actually let out at any time during the year;
  4. No other benefit is derived from such property.

Question: What will be the tax implications if a person occupies more than one house property for his residence? Can he treat all the properties as self-occupied and claim gross annual value as NIL?

Answer: The Self-occupied property benefit (i.e., treating property as Self occupied and claiming Gross annual value as Nil) is available only in respect of one property occupied by the owner for his residence.

If a person occupies more than one property for his residence, then the self-occupied benefit will be granted only in respect of any one property as selected by him and other property/properties will be treated as "Deemed to be let-out". Income from deemed to be let-out property is computed in the same manner as in the case of a "Let-out" Property.

Question: I own two houses. One is a farmhouse that I visit on weekends and the other is in the city that I use on weekdays. Is it correct to treat both these residences as self-occupied?

Answer: No, for the purpose of Income-tax Law you can claim only one property as self-occupied property and other property will be deemed to be let-out property. ​

Question: In case of a self-occupied property, how much of interest on housing loan can be claimed as deduction?

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Answer: The provisions relating to deduction under section 24(b) on account of interest on housing loan in case of self-occupied property are same as applicable in case of let-out property. In other words, deduction available to taxpayer under section 24(b) in respect of self-occupied property will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post-construction period (if any) [provisions of section 24(b) are already discussed in Series B].

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:

  • 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.

If any of the above condition is not satisfied, then the limit of Rs. 2,00,000 will be reduced to Rs. 30,000

Question: Is loss from house property eligible for set off and carry forward?

Answer: Loss from house property can be set off with other heads of income. If the loss cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward to next year. In the subsequent years(s) such loss can be adjusted only against income chargeable to tax under the head "Income from house property".

Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred.

It is pertinent to note here that the loss can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1)​​​​.​

Question: My spouse and I jointly own a house property (self-occupied) for which both of us have taken a housing loan jointly. We have a 50: 50 share in the property. We have paid a total interest of INR 450,000 during the year under consideration. Would we be able to claim the interest deduction individually upto a maximum of INR 200,000?

Answer: Yes, both wife and husband can claim the benefit of INR 200,000 as interest in their individual tax returns. In other words, each co-owner, who is also a co-applicant in the loan, can claim a maximum deduction Rs 2,00,000 for interest on the housing loan in their Income Tax Return in the ratio of their ownership.

I hope answering the above set of general FAQs would have resolved a number of your queries.