Income from House property

Basis of charge is Sec 22Income is taxable under the head “ Income

from House property” if the following three conditions are satisfied:

a. Property should consist of any buildings or lands appurtenant thereto.

b. Assessee should be owner of the property.

c. Property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income tax

illustrations1. X owns a building and it is given on rent. Income of the property is taxable under the

head “ Income from house property” as all the three conditions are satisfied.

2. Y owns a building and it is used by him for carrying on a business or he uses the building as his office/factory/godown.

In this case, no income is taxable under the head

“ Income from house property” as third condition is not satisfied.

“Building” includes residential houses ( let out or self

occupied ) building let out for office use,

storage,factory,etc

Appurtenant lands in respect of a building may be in the form of compounds, backyards, car parking,etc

“Owner” includes a legal owner as well as

deemed owner. “Owner” may be an individual, HUF, firm, company, society or AoP

Annual value of the property is assessed to tax u/s 22 in the hands of the owner even if he is not in receipt of income.

1. Mr. X owns a house property. On April 1,2010, he transfers the property without any consideration to his wife.

Rental income is received by Mrs. X after

April 1,2010.

However, for the purpose of charging tax on rental income, Mr. X will be deemed as “owner” of the property.

Consequently, income would be taxable in the hands of Mr.X.

2. Mr.Y gifts Rs. 15 Lakhs to Mrs.Y and she purchases a house property out of the gifted money.

In this case, Mr. Y will not be deemed as “owner” of the property because he has not transferred a house property.

Consequently, income from property would be computed in the hands of Mrs.Y

2. Mr.Y gifts Rs. 15 Lakhs to Mrs.Y and she purchases a house property out of the gifted money.

In this case, Mr. Y will not be deemed as “owner” of the property because he has not transferred a house property.

Consequently, income from property would be computed in the hands of Mrs.Y

3. Rental income from a vacant plot is not chargeable to tax under the head “Income from house property” but is taxable under income from other sources.

In the following cases, rental income is not charged to tax

a. Income from farm houseb. Annual value of any one palace of an Ex-ruler Property income of c. a local authority.d. an approved scientific research association.e. an educational institution and hospital.f. a trade union. g. a charitable institution.h. a political party.i. one self occupied property.

Basis of computing income from a let out house property

Gross Annual Value - XXXXXXLess : Municipal taxes - xxxxxx

Net Annual value - xxxxxxLess : Deduction u/s 241. Standard Deduction - xxxxx2. Interest on borrowed capital - xxxxxx Income from House property -

xxxxx

Gross Annual Value : Tax under the head “Income from house property” is not a tax upon rent of a property. It is tax on inherent capacity of a building to yield income.

The standard selected as a measure of the income to be taxed is “ Gross Annual Value ”

Determination of Gross Annual Value : Step 1 : Find out reasonable expected rent of

property.

Step 2 : Find out rent actually received or receivable after excluding unrealised rent.

Step 3 : Find out higher amount in Step -1 or Step-2.

Step 4 : Find out loss because of vacancy.

Step 5 : Step 3 minus Step 4 is Gross Annual Value

Step 1 : Reasonable expected rent of property

The higher amount of Municipal valuation(MV) and Fair Rent of property (FR), subject to maximum of Standard Rent (SR) is reasonable expected rent of property.

Step 1 : Reasonable expected rent of property

( Amount in Rs. Thousands)

Particulars A B C D EMV 40 40 40 40 40FR 46 46 46 48 51SR NA 45 35 45 63

Reasonable 46 45 35 45 51Expected rent( Step 1 )

Step 2 : Find out rent actually received or receivable after excluding unrealised rent.

Rent of the previous year( or part of the previous year) for which the property is available for letting out - Rs.xxxxxx

Less : Unrealised rent if a few conditions - Rs.xxxxxx are satisfied

Rent received or receivable before - Rs.xxxxxx deducting loss due to vacancy

When unrealised rent shall be excluded : Unrealised rent( which the owner could not realise) shall be excluded only if the following conditions are satisfied.

1. The tenancy is bonafide.

2. The defaulting tenant has vacated or steps have been taken to compel him to vacate the property.

3. The defaulting tenant is not occupying any other property of the assessee.

4. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent

A, B, C, D , E separately own the following properties.

Find out Gross annual value for AY 2010 – ’11

( Amount in Rs. Thousands)

Particulars A B C D EMV 105 105 105 105 105FR 107 107 107 107 107SR NA 88 88 135 135Actual Rent 103 112 86 114 97Unrealised Rent 1 2 1 2 1(conditions are satisfied)

Computation of Gross annual value.( Amount in Rs.

Thousands)

Particulars A B C D EStep 1 107 88 88 107 107Step 2 102 110 85 112 96Step 3 107 110 88 112 107Step 4 NIL NIL NIL NIL NILStep 5 ( G.A.V) 107 110 88 112 107

X,Y,Z separately own the following properties.Find out Gross annual value for AY 2010 – ’11

( Amount in Rs. Thousands)

Particulars X Y ZMV 95 60 60FR 96 54 55SR 94 78 79Actual Rent 93 106 78Unrealised Rent nil nil nil

Find out Gross annual value for AY 2011 – ’12( Amount in Rs.)

Particulars X YMV 61,000 61,000FR 1,08,000 30,000SR 60,000 60,000Rent receivedFrom Tenant 1(1.4.10 to 30.6.10 ) 5000 P.M 2000 P.M.From Tenant 2(1.7.10 to 31.12.10) 9000 P.M. 2500 P.M,Period when the propertyRemains unoccupied 1.1.11 to 31.3.11 1.1.11 to 31.3.11 Actual rent receivable 96,000 28,500Loss due to vacancy 27,000 7,500

Deduct Municipal taxes 1. From the Gross Annual Value computed, deduct

municipal taxes(incl. Service taxes) levied by any local authority in respect of the house property.

2. Municipal taxes are deductible only if a) these taxes are borne by the owner and b) these are actually paid by the owner during

the previous year

Deduction u/s 24 1. Standard Deduction 30 % of net annual value is deductible

irrespective of any expenditure incurred by the tax payer.

2. Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

3. Interest on borrowed capital is deductible fully without any maximum ceiling( in the case of a let out property)

Find out Income from property chargeable to tax for AY 2011 – ’12 in the following cases.

( Amount in Rs.)Particulars House A House BMV 1,20,000 1,20,000 FR 1,30,000 1,30,000SR 1,10,000 1,10,000Actual Rent 1,26,000 1,26,000Unrealised Rent 10,500 NILLoss due to vacancy 10,500 NILMunicipal taxesPaid by owner (FY 2010-11) 18000 NILPaid by owner (FY 2011-12) NIL 7000Paid by tenants (FY 2010-11) NIL 9000Interest on borrowed capital 25000 15000

How to compute taxable income from self occupied property

Gross Annual Value NilLess : Municipal Taxes Nil Net Annual Value NilLess: Deduction u/s 241. Standard deduction Nil2. Interest on borrowed capital

xxxxx3. Income from one self occupied property xxxxx

Interest on borrowed capital( self occupied property)

1. If the capital is borrowed on or after April 1,1999 for acquiring or constructing a property, interest on borrowed capital is deductible upto Rs. 1.5 Lakhs

2. If the capital is borrowed on or before April 1,1999, interest on borrowed capital is deductible upto Rs.30,000.

3. If the capital is borrowed on or after April 1, 1999 for reconstruction, repairs , interest on borrowed capital is deductible upto Rs.30,000

Mr. X owns a house property and it is used by him throughout the previous year 2010 – 11 for his residence.M.V = Rs.1,66,000 , F.R= Rs.1,76,000S.R = Rs.1,50,000Expenses : Repairs = Rs.20,000, M.Tax = Rs.16,000 Insurance = Rs.2000 Interest on borrowed capital to construct property = Rs.1,36,000( Capital borrowed on 25.7.2005)Income of Mr.X from business is Rs.7,10,000

Find out net income of Mr.X for AY 2011 – 12.

Computation of taxable income of Mr.X

Gross Annual Value NilLess : Municipal Taxes Nil Net Annual Value NilLess: Deduction u/s 241. Standard deduction Nil2. Interest on borrowed capital

(1,36,000)

3. Income from one self occupied property (1,36,000)

4. Income from Business 7,10,000

5. Total Net Income 5,74,000

WHEN A PROPERTY IS SELF OCCUPIED AND A PART IS LET OUT

Mr. X owns a house property. It has two equal residential units – Unit 1 and Unit 2 Unit 1 is self occupied by Mr.X for residential purpose, Unit-2 is let out( Rent = Rs.6000 per month, rent of 2 months could not be recovered)

M.V = Rs.1,30,000 , F.R= Rs.1,40,000S.R = Rs.1,25,000Municipal tax is imposed @ 12% which is paid by Mr.X.

Other expenses for the previous year 2010 – 11 : Repairs = Rs.2500, Insurance = Rs.6000, Int. on borrowed capital for constructing the property = Rs.63000 ( borrowed during the year 1998)

Income from other sources of Mr.X = Rs.500000Find the income of Mr.X for AY 2011 - 12