Income from House Property under Income Tax Act, 1961

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For the purpose of computation of total income and charge of income tax, Section 14 of the IT Act has divided income into 5 heads of income namely, Salaries, Income from house property, Capital Gain, Profits & Gains of Business or Profession and Income from other sources.

In this blog we will specifically discuss the meaning, computation of Income from House Property and also other related concepts thereto.

 

Firstly, one should know the meaning and basic concept of House property. House property for calculating income under this head can be anything such as House, office, any building or warehouse etc. Here, the Income from house property is basically the income earned through rent from such house property.

In this blog we will read about which income is considered as “Income from House Property”, its conditions and related topics.

 

Meaning of Income under the head House Property: IT Act, 1961

The head ‘House Property’ is defined under Section 22 of the IT Act, 1961.

Click here to read definition of Income under the head House Property

According to the definition, we can contemplate the following essential conditions for calculating Income from House Property –

  • There shall be a house property, here House Property refers to any building including any land appurtenant attached to it,
  • Next, the assesses has to be an owner of such house property,
  • The property can be either self-occupied or let out,
  • Lastly, the property must not be used by assesses for operating or running his own business/profession.

 

Basics of House Property

  1. Concept of Self-Occupied House Property for Income tax purposes

    A). The House Property is a Self-occupied for Income Tax purposes when following two conditions are satisfied-

    • When the property is used by owner himself for residential purposes, or
    • When the house is vacant, subject to certain prescribed conditions.

        B). According to IT law, an assesses  can claim only two house properties as Self-Occupied House Properties. Thus, if an assesses owns more than two house properties then more than two house properties shall be deemed let-out properties for tax purposes.

In case of self-occupied house property there would be no income but there could be loss, which we will discuss in this blog.

      2. Concept of Let-out House Property for Income tax purposes

When any house property is given on rent either for the whole year or a part of the year then such house property shall be known as let out house property for tax purposes.

 

Calculation of Income under the head House Property as per IT Act & Rules

 

Particulars

 

Amt(In Rs.)

GAV(Gross Annual Value of House Property) XXYZ
Subtract:

Property Taxes Paid in a relevant F.Y.

 

 

XXYZ

NAV of the House Property

 

XXYZ

Less:Standard Deduction @30% of NAV as per section 24(a) of the IT Act

 

Interest on borrowed capital as per section 24(b) of the IT Act

 

XXYZ

 

 

XXYZ

Income under the head House Property

 

XXYZ

Let’s understand the above computation table and terminologies used as under–

Step 1: The first step for computing Income from house property is to calculate GAV of the house property. Thus, one should understand that GAV of self-occupied house property would always be zero, as no rent can be received from that.  However, GAV i.e Gross Annual Value of House Property would be the rent collected during the year for let out property.

Step 2: The second step is to deduct the Municipal property tax from GAV calculated in first step. Municipal property tax means the tax levied on the house property by a local authority. Section 23 of the IT Act states that the total amount of municipal property tax shall be deducted while calculating the annual value of property of the year in which such tax is actually paid by the assessee.

Step 3: Net Annual Value would arrive: When Property tax would be deducted from GAV, the resultant value would be considered as NAV.

Step 4: Lastly, deductions available on NAV under section 24 of the IT Act shall deducted to get the total Income from House Property.

As per the provisions of section 24 of the IT Act two deductions are allowed, discussed as under:

  1. Standard Deduction- section24(a) of the IT Act, 1961

A sum equals to 30 % of the Net Annual Value, is allowed as deduction in case when the property is let out during previous year. However, this deduction is not allowed in case of self-occupied house properties.

  1. Interest received on Borrowed Capital-section 24(b)of the IT Act

When an assesses has borrowed capital for acquisition, construction, repairing, renewal or reconstruction of house property then he can claim the total amount of interest payable on borrowed capital as deduction for calculating Income from House property under Section 24 of the IT Act. However, this deduction is subject to satisfaction of other conditions discussed below-

  • Tax treatment in case of let-out property,

The actual amount of interest incurred on the borrowed capital can be allowed as deduction only when such borrowed capital is used for construction, acquisition, repairing or reconstruction of house property.

  • Tax treatment in case of Self-Occupied property,

The actual  amount of interest incurred on the borrowed capital can be allowed as deduction maximum up-to Rs. 30,000/-.However, an assesses can claim interest deduction of Rs. 2 lakh when both the following conditions are satisfied:

  • The loan is taken on or after1 April 1999 and
  • The purchase or construction is completed within 5 years from the end of the FY in which loan were availed.

Step 5is the final step by which the total Income from house property would arrive:It is the resultant amount arrived after deducting standard deduction from NAV.

Note: –It is also possible that the value of the Income from House property is in negative, such as in case of self-occupied house property then in this case  the negative value or the loss can be adjusted against income from other heads.

 

How Composite Rent is taxed under IT Act?

Composite rent is the rent received by the owner of house property for letting out house property along with movable assets such as machinery; furniture etc in a single transaction and the rent of property and assets is inseparable in nature. In this case, the whole composite rent shall be treated as Income from house property for income tax purposes. Whereas, when the rent of the house can be charged separately from the rent of assets then the rent received for letting house shall be income from house property and the rent received for letting out assets must be taxed either under Income from other source or under profits and gains from business or profession, as the case may be.

 

How unrealized rent is taxed under IT Act 1961?

When the tenant has not paid the rent to the landlord in a financial year then such rent shall be called as Unrealized Rent for that particular financial year. It is basically the rent which is due but the tenant has not paid. However, the landlord/assesses can claim unrealized rent as deduction in the year in which it was to be paid.

Here the situation comes that the tenant pays the unrealized rent in the next year, then the amount so received shall be chargeable to tax under the head Income from House Property in the year in which it is received within the provisions of section 23 and 24 of the IT Act. Provided that, it was claimed as deduction in the previous year.

 

Conclusion

Consequently, any income in the form of rent earned out of a house property is chargeable to tax under the head Income from House Property. We hope all of your related to Income from House are solved. In case you are struggling with ITR filing or computations of taxable then contact your trustworthy advisors ‘Manthan Experts’ by calling at 09643969969.

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Knowledge Source:

Can a taxpayer claim both HRA and Home loan tax benefits?

HRA- House Rent Allowance – Exemption and other Key Points to Remember

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