Session-7, Income from house property by B.Pani M.Com,LLB,FCA,FICWA,ACS,DISA,MBA [email protected]@yahoo.co.in 9731397829.

Session-7, Income from house property

byB.Pani

M.Com,LLB,FCA,FICWA,ACS,DISA,[email protected] 9731397829

Owner• Legal Owner• Deemed Owneri) Who transfers house property otherwise than for

adequate consideration to his or her spouse(not being in connection with an agreement to live apart) or to his minor child(not being a married daughter)

ii)Holder of an impartible estateiii)A member of a co operative society to whom a

building or part thereof is allotted under house building scheme

Property owned by Co-owners

• Where the shares are ascertainable such persons will not be assessed as AOP. The share of each person in the income from the property will be included in his income.

Chargeability

• The annual value of any property comprising of building or land appurtenant thereto of which the assessee is the owner, is chargeable to tax under the head Income from house property.

• The annual value of any building or portion of a building occupied by the assessee for the purpose of business or profession carried on by him is not taxable.

Gross Annual Value• Reasonable expected rent• Rent received or receivableWhichever is higherReasonable Expected Rent is normally higher of the

followingi) Municipal valuation of the propertyii)Fair rent of the propertyIf however ,a property is covered by Rent Control Act

than the amount so computed cannot exceed the standard rent determinable under the Rent Control Act

Annual value• The sum for which the property might reasonably expected

to let from year to year or• Where the property or any part thereof is let out and the

actual rent received or receivable by the owner is in excess of the sum as above, the amount so received or receivable or

• Where any property or any part thereof is let and was vacant during the whole or any part of the previous year and owing to such vacancy the rent received or receivable is less, the amount so received or receivable.

• The tax levied by local authority shall be deducted in determining the annual value of the property of that previous year in which such taxes are actually paid by him

Overview of Income-tax Act,1961

INCOME FROM HOUSE PROPERTY

Gross Annual Value

Self occupied propertyVacant propertyRented out property

Higher of:• Actual rent received/

receivable• Reasonable

Expected Rent

Gross Annual value of Rented property

( - )

Rent for the period of vacancy

Nil

Co ownership – Each owner taxable on a proportionate basis

Net Annual Value (NAV) = Gross Annual Value minus municipal taxesIncome from house property = NAV – standard deduction and interest on borrowed capital

DETERMINATION OF ANNUAL VALUE

Reasonable Expected RentA B C D E

Municipal Value

40 40 40 40 40

Fair Rent 46 46 46 48 51

Standard Rent

NA 45 35 45 63

Reasonable expected Rent

46 45 35 45 51

Situations Gross Annual Value

If rent received /receivable is lower than reasonable expected rent only because of vacancy

Rent received /receivable is taken as Gross Annual Value

If rent received /receivable above is lower partly because of vacancy and partly because of other factors (like letting out of property at lower rent, unrealised rent etc)

Reasonable expected rent minus loss due to vacancy is taken as gross annual value.

If rent received /receivable is lower because of factors other than vacancy

Reasonable expected rent becomes gross annual value.

Illustration

• X owns a house property municipal valuation Rs 145000/-,fair rent Rs 136000/-, standard rent Rs 124000/-.It is let out throughout the previous year rent being Rs 8000/- per month upto Nov 15 2008 and Rs 14000/- per month thereafter. The property is transferred by X to Y on January 31st 2009.Findout the Gross Annual value of the property in the hands of X for the assessment year 2009-10.

Answer

• Municipal value 145000/12*10= Rs120833/-• Fair rent 136000/12*10= Rs 113333/-• Standard rent 124000/12*10= Rs 103333/-• Actual rent 8000*7.5+14000*2.5= Rs 95000/-Gross Annual Value Rs 103333/-

Exemption on the basis of ownership

• Farm house outside the specified area-Sec10 (1)

• Building owned by a charitable or educational institution.-Sec 10 (23C)

• Building owned by a trade union-Sec 10(24)• Building owned by a political party-Sec 13A

Nil Annual value for one house

• If in the occupation of the owner for his residence.

• Can not be occupied owing to his employment, business or profession carried out at other places and he has to reside in other place in a building not belonging to him.

• The house is not actually let out in whole or in part

• No other benefit is derived by the owner.

Deduction from Income from House Property

• A sum equal to 30% of annual value.• Interest on borrowed capital to the extent of

Rs 150000/-

Example

• Ramani owns a flat which is assessed by the local authority with annual value of Rs 90000.The property was let out for Rs 7500 pm. However, the tenant vacated the property on 30/09/08.The flat was vacant from Oct 2008 to Jan 2009. In Feb 2009, a new tenant occupied the house at rent of Rs 10000 pm.

Answer

• Fair rent Rs 90000/-• Actual Rent Rs 65000/-• As per sec 23(1)(c)when the actual rent is less

than the fair rent on account of vacancy, then actual rent has to be taken as Annual Value.

• Therefore Annual value is Rs 65000/-

Example• Radhika owns a flat whose annual value assessed by

municipal corporation is Rs 60000/-.The property was let out for Rs 10000 pm in April 2005 and interest free rental advance equal to three months rent was collected.There is stipulation in the agreement that 25% increase shall be made in the rent on completion of 3 years tenancy period.From April 2008 the company paid Rs 12500 pm as per the terms of the agreement.The company ran into financial crisis in June 2008 and no rent was paid thereafter.Rental advance has been adjusted for rent due for June,July and partly for August.The balance amount is not realisable and the company vacated in March 2009

Answer• Fair rent Rs 60000/-• Rent received 25000+30000=Rs 55000/-Since the balance amount of rent is unrealisable the same

should not be considered for determination of actual rent.In a situation where actual rent is less than the fair rent on

account of property remaining vacant, rent should be considered as Annual Value

In this case the property was occupied throughout the year and was never vacant.

Therefore the fair rent i.e.Rs 60000/- would be treated as gross annual value

When unrealised rent shall be excluded

• The tenancy is bona fide• The defaulting tenant has vacated or steps have

been taken to compel him to vacate the property.• The defaulting tenant is not in occupation of any

other property of the assessee.• The assessee has taken all reasonable steps to

institute legal proceedings for the recovery of unpaid rent or satisfies the AO that the legal proceeding would be useless.

Unrealised Rent realised subsequently

• It will be deemed to be income from house property in the year of realisation ,whether the assessee is owner of the property in that year or not.

• No deduction under Sec 23 or 24 would be available.

Deemed Let out property

• It can be self occupied or unoccupied• In case two or more houses are meant for self

occupation assessee can treat one as self occupied and other one as deemed let out.

• Generally the property with higher gross annual value is treated as self occupied.

• While interest without limit can be claimed as deduction in case of deemed to let out property, the interest in case of self occupied property will be upto Rs 150000/-

Example

• Mr Arvind owns two houses and both are used for own residence. Advise him on which house to be taken as self occupied on the basis of following data.

Particulars House-1 Rs House-2 Rs

Municipal Valuation

30000 42000

Municipal Taxes paid

6000 8000

Repairs 12000 4000

Insurance Premium 1500 1800

Interest on loan 12000 60000

AnswerParticulars Option-1 Option-2

House-1 Self occupied

House -2 Deemed let out

House-1 Deemed let out

House-2 Self Occupied

Gross Annual Value

Nil 42000 30000 Nil

Less Municipal Tax

- 8000 6000 -

Net Annual Value Nil 34000 24000 Nil

Less deduction u/s 24

30% of Net Annual Value

- 10200 7200 -

Interest on loans 12000 60000 12000 60000

Income from HP (12000) (36200) 4800 (60000)

Example

• Ms Shanti owns a house property which was self occupied upto 30th June 2008 and let out from July onwards on a monthly rent of Rs 4000.Municipal valuation of the property is Rs 45000/-.Property taxes paid including arrears of Rs 2000 during the year 2008-09 is Rs 6000. Determine income from house property for the assessment year 2009-10.

Answer

• Gross annual value- Rs 45000/-(Rent received 36000 or fair rent whichever is

higher)Less municipal tax –Rs 6000/-Net Annual Value- Rs 39000/-Less deduction u/s24 30% Rs11700Income from house property-Rs 27300/-

Example• Mr Ramesh completed construction of his house

property on 31st May 2008.The house property was self occupied during June and July 2008 and let out thereafter for a rent of Rs 10000/- per month. The municipal valuation of the house is Rs 72000/-.Following expenses are paid during the year Municipal Tax- Rs 6000,Repairs Rs 12000,Ground rent Rs24000 and insurance premium Rs 4000. Determine the taxable income for the AY 2009-10.

Answer• Gross Annual Value 72000 or 80000* whichever

is higher Rs 80000/-• Less municipal tax Rs 6000/-• Net Annual Value Rs 74000/-• Less deduction u/s 24 30% Rs 22200/-• Income from house property Rs 51800/-*Where the house has come into existence during

the previous year the annual value has to be computed only for the period for which the house is existed.

Example

• Mr Abraham is having a house of which 25% is let out at a monthly rent of Rs 2000/- and balance is self occupied. Municipal value of the house is Rs 80000/- and municipal taxes amounting to Rs 6000 was duly paid during the year. Compute the Income from House property

Answer

• GAV 2000*12=24000/-• Less municipal taxes 6000*.25=1500• NAV 22500/-• Less deduction u/s 24 30% Rs6750/-• Income from HP=Rs 15750/-

Decided case

• The assessee company is engaged in the business of letting out the property on rent .It is contended that since house owning is done as a profitable activity the income is chargeable as business income and not income from house property. The company wants to claim depreciation.

Decission

• Income derived from owning and letting of building is chargeable only under the head “Income from House Property”

Case

• Assesee constructs residential quarters and lets them out to its employees as an incidental act to business

• The assessee makes part of its business premises available to the Govt for locating a branch of Nationalised Bank,post office etc to carry on its business smoothly

Decission

• The assessee is not letting out the building for the sake of letting out.The property is let out for carrying out the business in an efficient manner.The act of letting out is incidental to the carrying on of assessee business and therefore come under business income.