Analysis of Income from House Property (Part 1)

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Income from House Property is one of the five heads of income and is applicable to taxpayers who have earned an income from any house property during the year under consideration. Now the moot question is what kind of house property income would be covered under this head.

Income from House Property is quite vast and hence I have divided the blog into series. In this series, I have covered the basic aspects of house property income.

Income chargeable to tax under the head “house property”

Rental income from a property being building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the head “Income from house property”. So, there are three conditions to be fulfilled for an income to be classifies as a House Property income. These are as follows:

  • The income should be in the form of rent, i.e. it should be let out to derive rental income therefrom.
  • The house property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him/ her
  • Rent should be attributed to a property being a building or land appurtenant thereto
  1. Buildings include residential buildings as well as factory buildings, offices, etc
  2. Land appurtenant means land connected with the building
  3. Income from letting out of vacant land is, however, taxable under the head “income from other sources”
  • The taxpayer should be the owner of the house property
  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
  6. The taxpayer must be the owner of the house property during the year under consideration. It is not material whether he is the owner in the assessment year.

Financial Year: This is the tax year during which income is earned

Assessment Year: This is the year immediately following the financial year, in which income is assessed and taxes are paid thereupon. Thus, it can be rightly said that income for a financial year is assessed in its assessment year

Rental income from sub-letting

Rental income in the hands of owner is charged to tax under the head “Income from house property”. Rental income of a person other than the owner cannot be charged to tax under the head “Income from house property”. Hence, rental income received by a tenant 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.

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Rental income from a shop

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”

What is the meaning of a deemed owner?

Rental income from property is charged to tax under the head “Income from house property in the hands of the owner of the property”. If a 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” (E.g. Rent received by tenant from sub-letting). As per Section 27 of the Income Tax Act, in the following cases a person may not be the registered owner of the property, but he 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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What is the meaning of composite rent?

When apart from recovering rent of the building, in some cases the owner gets rent of other assets (like furniture) or he charges for different services provided in the building (for instance, charges for lifts, security, air conditioning, etc.), the amount so recovered is known as “composite rent”.

Tax treatment of composite rent of building let out along with other assets

Composite rent includes rent of building and rent towards other assets or facilities. The tax treatment of composite rent is as follows:

  1. Letting out is inseparable: In a case where letting out of building and letting out of other assets are inseparable (i.e., both the lettings are composite and not separable, e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. Nothing is charged to tax under the head “Income from house property”
  2. Letting out is separable: In a case where, letting out of building and letting out of other assets are separable (i.e., both the lettings are separable, e.g., letting out of refrigerator along with residential bungalow), rent of building will be charged to tax under the head “Income from house property” and rent of other assets will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. This rule is applicable, even if the owner receives composite rent for both the lettings. In other words, in such a case, the composite rent is to be allocated for letting out of building and for letting of other assets
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Tax treatment of composite rent in a case of letting of building along with provision of services

In a case letting of building along with provision of services, composite rent includes rent of building and charges for different services (like lift, watchman, water supply, etc.):In this situation, the composite rent is to be bifurcated and the sum attributable to the use of property will be charged to tax under the head “Income from house property” and charges for various services will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources” (as the case may be).

Property held as stock-in-trade, etc

Annual value of house property would be chargeable under the head “income from house property” in the following cases as well:

  1. Where it is held by the taxpayer as stock-in-trade of a business
  2. Where the taxpayer is engaged in the business of letting out of property on rent:

Exceptions:

  1. If letting out is supplementary to the main business, the income would be treated as “income from business or profession”
  2. If letting out of building alongwith other facilities, like machinery and the two lettings are inseparable, the income would either be taxable as “income from business or profession” or “income from other sources”, as the case may be.

Income from House Property situated outside India:

  1. In case of Resident and Ordinarily Resident (Individuals and HUF) in India: Income from House Property situated outside India is taxable, whether such income is brought into India or not
  2. In case of a Non-Resident or Resident but not ordinarily Resident in India: Income from a House Property situated outside India is taxable only if it is received in India.