Practical issues in computing income under the

head

Income from House Property

By: Sumeet Pendse
Saturday, 28th June 2016

Contents

A. Basic concepts & chargeability of income under

the head
B. Gross Annual Value
C. Interest deduction u/s 24(b)
D. Taxability of unrealized rent & arrears of rent
E. Co-owned properties
F. Deemed ownership
G. Practical issues

Practical issues in computation of House property

income

Saturday, 23rd April 2016

Conditions for chargeability

What is a house property?

Any building and land appurtenant thereto of which
the assessee is the owner.
Basic Conditions: [Sec. 22]
Property should consist of any building or land appurtenant thereto
Assessee must be the owner of the property
The property may be used for any purpose, but it should not be
used by the owner for the purpose of any business or profession
carried out by him, the profit of which is chargeable to tax

Practical issues in computation of House property

income

Saturday, 23rd April 2016

Conditions for chargeability

Building or land appurtenant:

Buildings include not only residential buildings, but also
factory buildings, offices, shops, etc.
Land appurtenant means land connected with the building
like garden, garage, etc.

Ownership of property:
Person who owns the building need not also be the owner of
the land upon which it stands.
Ownership includes deemed ownership

Property held as stock in trade:

Where it is held by assessee as stock in trade of a business
Where the assesse is engaged in the business of letting out a
property on rent.
Practical issues in computation of House property
income

Saturday, 23rd April 2016

Which of these incomes would be

computed as house property
incomes ??

a. Warehousing charges received for storing goods in a

warehouse?
b. Income from renting a farm house?
c. Letting out properties is supplementary to the main
business of the assessee?
d. Mr. X has let out his cotton mill (commercial building
along with machinery) ?
e. Income from sub-letting ?
Practical issues in computation of House property
income

Saturday, 23rd April 2016

Basic structure of computation

Particulars
Gross Annual Value
(Higher of Expected rent & Actual rent)
Less: Municipal taxes paid
Net Annual Value (NAV)

Amoun
t (`)
xxx
xx
xxx

Less: Deductions under section 24

a. Standard deduction (30%)

xx

b. Interest on borrowed capital

xx

Income from House Property

Practical issues in computation of House property

income

xxx

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Gross Annual Value

GAV is the higher of Expected Rent & Actual rent

received/receivable.
Expected rent is the higher of Fair Rent & Municipal Value,
but restricted to Standard Rent.
Fair Rent: Rent which similar property in the same locality
would fetch.
Municipal Value: Value determined by the municipal
authorities for levying municipal taxes.
Standard Rent: As per the Rent Control Act.
GAV in case of vacancy loss:
If the expected rent is 1,80,000/- & the monthly rent is 20,000/- ,
the property being vacant for 4 months, what will be its GAV ??

If the actual rent received/receivable is lower than the

expected rent owing to the vacancy loss, then Actual rent will
be the GAV.
So in this case, the GAV would be 1,60,000/-.
Practical issues in computation of House property
income

Saturday, 23rd April 2016

Interest deduction u/s 24(b)

From whom can the loan be taken?

- Anyone, i.e. Banks, FIs, money lenders, etc.
Interest deduction is allowed on accrual basis (even if
books are kept on cash basis)
In case interest is paid outside India, then deduction is
allowed only if tax has been deducted & paid on the
payment. [Sec. 25]
Pre-construction interest will be allowed in five equal
installments.
Pre-construction period: Period commencing on the date of
borrowing and ending on
31st March immediately
construction/acquisition
Date of loan repayment
Whichever is Earlier.

prior

Practical issues in computation of House property

income

to

date

of

completion

of

Saturday, 23rd April 2016

Interest deduction u/s 24(b)

Maximum deduction limits

(in case property is self occupied for
whole of the PY)

` 2,00,000/-

Capital is borrowed on or
after 1st April 1999 for
acquiring or constructing a
property
AND
The acquisition or
construction should be
completed within 3 years,
from the end of FY in which
capital was borrowed

Practical issues in computation of House property

income

` 30,000/-

Amount is borrowed before

1st April 1999 for any
purpose
OR
Capital is borrowed after 1st
April 1999 for
reconstruction, repairs or
renewals of property
Saturday, 23rd April 2016

Unrealized rent & Arrears of

rent
Unrealized Rent

Arrears of rent

Section 25AA

Section 25B

If the unrealized rent If

the
assesse
has
which is earlier claimed
increased
the
rent
as
a
deduction
is
payable and the same
recovered subsequently,
has been in dispute but is
it is taxable u/s 25AA.
recovered later, is taxed
u/s 25B.
No deduction
allowed.

shall

be

30% of the amount of

arrears shall be allowed
as deduction.
Both these incomes are taxable
in the hands of the
assesse whether he is owner of the property or not.

10

Property owned by Co-owners

[Sec. 26]

11

When would section 26 be applicable?

i. House property is owned by two or more persons
ii. Their respective shares are definite & ascertainable
If both these conditions are satisfied, the income cannot be
taxed as income of an AOP.
In case if property is self-occupied:
i. The NAV for both co-owners would be NIL.
ii. Each co-owner would be entitled to interest deduction
upto 2,00,000/30,000 as applicable.
In case if property is let-out:
i. Compute the net income as if there is a single owner.
ii. Apportion the income between the two co-owners in
ratio of their respective share.
Practical issues in computation of House property
income

Saturday, 23rd April 2016

Deemed owners

[Sec. 27]

12

Following persons though not the legal owners, are deemed to

be the owners for the purposes of sections 22 to 26.
i.

Transfer to spouse otherwise than for adequate

consideration.
Exception: in connection with an agreement to live apart.

ii.

Transfer to a minor child (except to a minor married

daughter) otherwise than for adequate consideration.
What if Mr. A transfers cash to his spouse/child & the
transferee later acquires a property??

iii.

Holder of an impartible estate:

Impartible estate is a property which is not legally divisible.

Practical issues in computation of House property

income

Saturday, 23rd April 2016

Deemed owners

[Sec. 27]

13

iv. A member of a co-operative society, company or other

association of persons to whom a building or part thereof
is allotted or leased under a House Building Scheme.
v.

Person allowed to take or retain possession of any

building or part thereof in part performance of a contract
as in section 53A of the Transfer of Property Act. This
includes cases when:
Possession has been handed over to the buyer
Sale consideration has been paid or promised to be paid
Sale deed not executed but certain other documents such as
agreement to sell
have been executed.

vi. Person who acquires any rights in or with respect to a

building by way of lease for not less than 12 years. [as
per 269UA(f)]

Practical issues in computation of House property

income

Saturday, 23rd April 2016

Set off & Carry forward of HP loss

14

The loss under the head Income from House

property can be set off against incomes from any
other head for the relevant AY.
The loss can be carried forward & set off in the
next 8 AYs.
However, this brought forward loss can be set off
only against House Property income.
Such loss can be carried forward even if return of
income is not filed within the time limit u/s 139(1).

Practical issues in computation of House property

income

Saturday, 23rd April 2016

Certain exempt incomes

i.

Income from any farm house forming part of

agricultural income.
ii. Annual value of any one palace in the
occupation of an ex-ruler.
iii. Income from house property of a local authority
iv. Income from house property of an approved
scientific research association.
v. Property income of any registered trade union
vi. Property income of any political party
vii. Property used for own business or profession
viii. One self occupied property of an individual/HUF

15

10(1)
10(19
A)
10(20)
10(21)
10(24)
13A
22
23(2)

Some practical issues

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If the tax payer constructed a house property by

borrowing an interest free loan; and hehadto
takeinterest bearingloan to repay the original loan, the
interest is allowed as deduction even though the original
loan is interest free.
If there is a dispute regarding the ownership, decision
about who is the owner rests with the Income tax
Department.
Income from residential quarters built for the employees
by the employer cannot be taxable as income from
house property.
Depreciation cannot be claimed on the property on
which income is admitted as house property income &
Practical issues in computation of House property
income 30% deduction is also claimed.
Saturday, 23rd April 2016

Some practical issues

17

Can a property not used for residence by the taxpayer be

treated as self occupied property ?
A self-occupied property means a property which is occupied
throughout the year by the owner for his residence. Thus, a property
not occupied by the owner for his residence cannot be treated as a
self occupied property. However, there is one exception to this rule. If
the following conditions are satisfied, then the property can be
treated as self-occupied and the annual value of a property will be
"Nil", even though the property is not occupied by the owner
throughout the year for his residence :
(a) The taxpayer owns a property;
(b) Such property cannot actually be occupied by him owing to his
employment, business or profession carried on at any other place and
he has to reside at that other place in a building not owned by him;
(c) The property mentioned in (a) above (or part thereof) is not
actually let out at any time during the year;
(d)No other benefit is derived from such property.
Practical issues in computation of House property
income

Saturday, 23rd April 2016

Some practical issues

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What kind of information would be sought by the AO

for determining income from House Property?
i. Nature (Bungalow/flat/shop) and size (built up area/extent)
of the property
ii. Valuation of similar properties in the same locality.
iii. Rent or lease agreements
iv. Agreement for services, furniture & fixtures, in case part
payment relates to services or provisions other than
property.
v. In case of home loan, interest certificate from bank/FI.
vi. In case of second loan taken to repay the original loan,
necessary linkage documents.
vii. Municipal tax challans
viii. Relevant documents depending on the situation to
examine the ownership u/s 27 of the Act.
Practical issues in computation of House property
income

Saturday, 23rd April 2016

19

THANK

Practical issues in computation of House property

income

YOU!

Saturday, 23rd April 2016