The provisions relating to Income from House Property are contained in Chapter IV A of the Income Tax Act, 1961 (in sections 22 till 27). Income received from house property is chargeable to tax as per Sec. 22 of the said Act. The computation of the annual value of the property is detailed in section 23 and the deductions permitted from the Income from House Property are detailed in section 24 of the Act.
- What constitutes Income from House Property (Sec 22)
- Annual Value of the property (Sec 23)
- Computation of annual value in respect of residential properties of the owner [Sec 23(2)]
- Ownership of the property
Deductions from income from house property (Sec. 24)
What constitutes Income from House Property (Sec 22)
The Income Tax Act creates a legal fiction by which income from house property means the 'annual value' of any 'building or lands appurtenant thereto' owned by the assessee. The charge is not on the rent received but on the inherent potential of the property to generate incomes. It may be noted that it is only the 'owner' of a property who is assessed under this head. Thus ,if a tenant, or lessee or a licensee lets out the property any income received by him will not be taxable under this head but under the head 'Profits or Gains from Business' or , as the case may be, 'Income from Other Sources'. The section however excludes those portions of the property which are used by the assessee for the purposes of his business and whose profits are chargeable to tax. The section does not apply to income received from vacant plots which is taxable under the residuary head - Income from other sources. Similarly, where an assessee lets out on hire machinery , plant or furniture along with buildings and the letting out of the buildings is inseparable from the letting out of such plant , machinery or furniture the income is taxable either under the head Profits from Business or Profession or Income from Other Sources depending on the facts of the case. The term 'House Property' refers not only to a building but also to a part thereof . Even if the assessee only owns superstructure built on a leased land the income from the property is taxable under the head 'Income from House Property'.
Annual Value of the property (Sec 23)
The annual value of the property is deemed to be the higher of the two sums below:-
- The sum for which the property might reasonably be let from year to year ; or
- The 'annual rent' received or receivable by the owner where the property is let. However if owner has to bear the taxes levied by any local authority in respect of such property, the taxes if actually paid are allowed as a deduction from the computation of the annual value in the year of payment irrespective of the previous year in which the liability to pay such taxes was incurred by the owner. The taxes also include service tax wherever levied by the local authority.
Computation of annual value in respect of residential properties of the owner [Sec 23(2)]
- The annual value of one house or any part thereof is to be taken as nil if the same or its part is in the occupation of the owner for his residence for the whole year and if no other benefit is derived by the owner from the house property. In such case no deductions as allowable under section 24 can be claimed except for interest on borrowed capital subject to a maximum of Rs. 15,000/-.
- If the owner lets out the house or a part thereof for any period of time during the previous year the annual value of the property or part has to be calculated for the whole year and the proportionate annual value of the period for which the house or any part thereof was in the occupation of the owner for his own residence shall be deducted from the gross annual value. The assessee in such cases cannot claim deduction under section 24 in excess of the annual value so determined.
- If the assessee occupies more than one house for his residence the above exemption is applicable only to one such house at the option of the assessee. The annual value of the other house or houses shall be computed as if the house or houses are let.
- In case where the assessee has only one residential house but it cannot be occupied by the owner by reason of that owing to his employment, business or profession carried out on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house shall be taken to be nil if the house is not actually let and no other benefit is derived by the owner from such house. The assessee cannot claim any deduction in such case as allowable under section 24 of the Act except for interest on borrowed capital subject to a maximum of Rs. 15,000/-.
Ownership of the property
An owner of the property is one who can exercise the rights of the owner. This is not synonymous with the term interest in a property. The word owner refers to the owner of the property and not to the owner of its annual value. The definition of the term owner of house property has been extended beyond mere legal ownership to also cover the cases of deemed ownership as under :
- where an individual transfers any house property to his or her spouse or a minor child for otherwise than for adequate consideration, he shall be deemed to be the owner of the house property so transferred. This does not however applies to cases where the transfer is to a married daughter or to a spouse in connection with an agreement to live apart.
- the holder of an impartible estate is deemed to be the individual owner of all the properties comprised in the estate.
- where a Cooperative, Society, Company or other association of persons allots or leases a building or part thereof to a member under any house building scheme the member is deemed to be the owner of that building or part thereof.
- a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, shall be deemed to be the owner of that building or part thereof.
- a person who acquires any rights in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Act shall be deemed to be the owner of that building or part thereof. This does not include any rights by way of a lease from month to month or for a period not exceeding one year.
Where any House Property is owned by two or more persons and their respective shares are definite and ascertainable, in such a case, the share of each such person in the income from the property shall be separately included in his total income.
Deductions from income from house property (Sec. 24)
The following deductions are permissible from the annual value of the house property under the Income Tax Act :-
- One fifth of the annual value is automatically allowed as a deduction as allowance for repairs of and collection of rent from the property.
- Insurance premium paid to insure the property against risk of damage or destruction.
- The value of an annual charge on the property not being a capital charge or a charge voluntarily created by the assessee. The annual charge means a charge to secure an annual liability and the capital charge means a charge to secure the discharge of a liability of a capital nature. The annual charge which is payable outside India is allowable as a deduction only when tax has been deducted therefrom as under chapter XVII-B of the Act or where there is a person in India who may be treated as an agent of the recipient under section 163 of the Act.
- Amount of ground rent if applicable.
- Interest paid on borrowed capital if the same has been used to acquire, construct, repair, renew, or reconstruct the property. The interest which is payable outside India is allowable as a deduction only when tax has been deducted therefrom as under chapter XVII-B of the Act or where there is a person in India who may be treated as an agent of the recipient under section 163 of the Act.
- Land revenue or any other tax levied by the State Government in respect of such property on actual payment basis.
- Vacancy allowance is also available as a deduction which is calculated on proportionate basis for the period or periods when the property was vacant during the previous year
- Unrealised rent can be allowed as a deduction if the following conditions are fulfilled :-
- The tenancy must be bona fide.
- The defaulting tenant should have vacated, or steps should have been taken by the assessee to compel him to vacate the property.
- The defaulting tenant should not be in possession of any other property of the assessee.
- The assessee must either have taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent, or satisfy the assessing officer that legal proceedings would be useless.
- The deduction allowed should in no case exceed the income under the head 'Income from House Property', as computed without making this deduction.
- If , after deduction has been allowed in one year, the assessee realises the unpaid rent in a subsequent year, the amount so realised will be brought to tax under the head 'Income from House Property' in the year of receipt, irrespective of whether the assessee continues to be the owner of that property in that year or not. No deductions under section 23 or 24 are however allowable in such case in the year of receipt of the unrealised rent.
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