How rental income from House Property is chargeable to tax?
The annual value of property consisting of building or supportive land is taxable in the hand of owner under the head of Income from House Property.
However, annual value of property is not taxable if property held for the purpose of running business or profession.
Who is require to pay tax?
Taxable in the hand of owner including deemed owner. Ownership includes both free-hold and lease-hold rights
Who is Deemed Owner?
The following persons though not the legal owners of a property are deemed to be the owners:-
(a) Transferor (husband), if transfer to a spouse (wife) for without/inadequate consideration.
However, in case of property transfer without/inadequate consideration with an agreement to live apart, then transferor not deemed to be owner.
(b) Transfer to a minor child (Not married daughter)
(c) Holder of an impartible estate
(d) Member of a Co-operative Society to whom flat is allotted/leased.
(e) Person in possession of a property as per section 53A of transfer of property act, 1882.
What is Annual Value of Property?
The annual value of any property shall be the rental amount for which the property might reasonably be expected to be let out.
How to compute Income from House Property?
|1||Gross Annual Value||XXXX|
(a) The amount of rent which could not be realized
(b) Taxes actually paid and borne by owner to local authority
|3||Net Annual Value [1-2]||XXXX|
|4||Less : Deductions allowed u/c.24
(a) Standard Deduction @ 30% of NAV
(b) Interest on borrowed capital
|5||Income Chargeable under the head ‘Income from House Property’ [3-4]||XXXX|
How to determine Gross Annual Value if House property which is let throughout the year?
The GAV is the HIGHER of the following:-
- Actual rent received/receivable
- Expected rent of house property
How to compute expected rent?
Expected rent is the LOWER of the following:-
- Municipal Value of house property
- Fair Rental Value of house property
However, if property governed by the Rent Control Act then expected rent cannot be more than standard rent (fixed or determinable).
How to determine Gross Annual Value if House property let out for part of the year and was vacant during another part of the year?
There is two situations arrived:-
First Situation: If Actual rent received/receivable > Annual Expected Rent, even the property vacant for the part of year.
Then, GAV is Actual Rent Received/Receivable
Second Situation: Owing to such vacancy, the actual rent received or receivable is less than the annual expected rent.
Then, GAV is Actual Rent Received/Receivable
Second one is little bit tricky situation let’s try to understand with the help of example:-
Let say, House property expected rent is Rs. 10,000/- per month and actual rent is Rs.12,000/- per month and property is occupied for 7 months. Then Actual rent is Rs. 84,000/- (7 X 12,000/-) and annual expected rent is Rs. 1,20,000/- (12 X 10,000/-)
Here, Actual Rent < Annual expected rent on account of vacancy because if property fully occupied then actual rent would be more than annual expected rent (i.e. Rs.1,44,000/- > Rs. 1,20,000/-). Therefore, in this case GAV is Rs.84,000/-
Let’s understand with one another example:-
Let say, House property expected rent is Rs. 10,000/- per month and this time actual rent is Rs. 8,000/- per month and property is occupied for 7 months. Then Actual rent is Rs. 56,000/- (7 X 8,000/-) and annual expected rent is Rs. 1,20,000/- (12 X 10,000/-)
Here, Again Actual Rent < Annual expected rent but NOT on account of vacancy because if property fully occupied then actual rent would be still less than annual expected rent (i.e. Rs. 96,000/- > Rs. 1,20,000/-). Therefore, in this case GAV will be Annual expected rent NOT actual rent received/receivable.
How to determine Gross Annual Value if House property let out for part of the year and was occupied for self residence during another part of the year?
In this case, the expected rent shall be taken for the full year but the actual rent received or receivable shall be taken only for the period let out.
Therefore, the GAV is the actual rent received/receivable or the annual expected rent, whichever is higher
Can Municipal Taxes claimed as deduction?
Municipal taxes can be claimed as deduction ONLY when the same is paid by the owner and not by the tenant.
It must be noted that the taxes are allowed as deduction only in the financial year in which these taxes are paid.
Municipal taxes, etc. due but not paid shall not be allowed as deduction and same is allowable in the financial year in which they are actually paid.
Even where the property is situated outside the country, taxes levied by the local authority in that country are deductible in deciding the annual value of the property. [CIT. Vs. R.Venugopala Reddiar (1965) 58 ITR 439 (Mad)].
Can expenses w.r.t to property like repair, whitewash, etc claimed as deduction?
No owner cannot claim any deduction with respect to any expenditure incurred on property (other than municipal taxes and interest on borrowed capital) because Government already allowed adhoc deduction of 30% of NAV whether or not owner incurred expenditure on it.
How deduction of Interest on borrowed capital is allowed?
Deduction w.r.t interest on borrowed capital is allowed if loan is borrowed for acquisition, construction, repair, renewal or reconstruction of property.
Deduction of interest is allowed on accrual basis irrespective of whether the interest is paid or not during the same financial year.
The interest deduction is available only to the extent of Rs. 2,00,000/- in each financial year. However, if the property is let out then there is no limit defined for interest deduction hence owner can claim as much he/she incurred interest expenses on property.
If the property is co-owned by two or more person then limit of Rs 2,00,000/- deduction is available to each and every co-owner subject to interest incurred by respective co-owner.
Further, owner has to furnish a certificate from the lender evidencing the amount of interest payable by owner for the purpose of such acquisition or construction of the property.
Interest on borrowed capital can be claimed only from the financial year in which construction is completed.
What about Interest attributable to the period prior to completion of construction?
Aggregate Interest on Housing Loan pertaining to the period prior to completion of construction is allowed at 1/5th every year for 5 years starts from the financial year in which construction is completed.
Pre- construction Interest will be aggregated from the date of borrowing till the end of the financial year (i.e. 31st March) prior to the financial year in which the house is completed and not till the date of completion of construction.
Is deduction of interest still available on rollover of home loan to fresh home loan ?
Where a fresh loan has been raised to repay the original loan if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Income Tax Officer, the interest paid on second loan would also be allowed as a deduction.
Is still a property is chargeable to tax if house is self occupied?
Yes, even self occupied property is chargeable to tax. However, the following property is exempt from tax:-
(a)One house for the purposes of his own residence; or
(b)One Property cannot actually be occupied by the owner by reason of the owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,
The benefit of exemption of one Self occupied house is available only to an individual/HUF.
However above benefit shall not be available if such house or part of the house is actually let during the whole or any part of the financial year OR any other benefit there from is derived by the owner from such house.
What if where assessee has more than one house for self occupation?
If there is more than one residential house for his residential purposes, then owner may exercise an option to treat any one of the houses to be self-occupied. The other house(s) will be deemed to be let out and the annual value of such house(s) will be the rental value for which the property might reasonably be expected to let from year to year and such rental value chargeable to tax.
The assessee in this case, should exercise his option in such a manner that his taxable income is the minimum. Such option may be changed from year to year.
However, if an assessee has a house property which consists of two or more attached residential units and all such units are self-occupied, the annual value of the entire house property shall be taken as nil as there is only one house property though it has more than one residential unit. Hence all residential units are exempt from tax.
What if tenant defaulted paying rent, is the unrealized rent taxable?
Unrealized rent which is lost & irrecoverable should be deducted from GAV. Therefore, same is not taxable.
However, rent which the owner cannot realize and so proved to be lost and irrecoverable shall be deductable only if fulfills the below mentioned conditions–
(a) The tenancy is bona fide;
(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) The defaulting tenant is not in occupation of any other property of the assessee;
(d) The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that the legal proceedings would be useless;
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