Monday, March 20, 2017

Income Under the Head House Property

Unit – 4: Income under the Head House Property
Q.1. Explain the Basis of Charge of Income under the head Income from House Property.
Ans: Basis of charge of tax on income generated under the “income from house property”
Under section 22 of the income tax act, The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from house property’. However, if a house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head.
Thus, three conditions are to be satisfied for property income to be taxable under this head
1) The property should consist of buildings or lands appurtenant thereto: The scope of this head of income is limited to the income from building or land appurtenant thereto. Land which is not appurtenant to any buildings does not come within the scope of this section.
2) The assessee should be the owner of the property: It is only the owner of the house property who can be tax under this head of income. The tax under this section is in respect of the legal or beneficial owner and not the occupation or possession of house property.
Again, the assessee who is deemed to be the owner of the house property is also is also chargeable to tax under this head.  Under Section 27 of the Income Tax Act the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property:-

(a)   If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes.
(b)   The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.
(c)    A member of a co-operative society, company or association of persons, to whom a property or a part thereof is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property.
(d)   A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year.
3) The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. But where the profits of such business or profession are not chargeable to tax, the annual value of the house property is chargeable under this head.
Q.2. Define annul value. How would you determine the annual value of the house used by assessee as let-out and self occupied residence in computing taxable income from house property?
Ans: Annual Value (Section 23)
The Annual Value of a house property is the inherent capacity of the property to earn income and  it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.
Computation of annual value: Computation of Annual Value for the determination of Income from House property requires three steps.
Ø  STEP 1 Determine the Gross Annual Value(GAV)
Ø  STEP 2 Determine the value of Municipal taxes
Ø  STEP 3 Compute the Net Annual Value
STEP 1- Determine the Gross Annual Value (GAV):
Calculation of GAV based on the following factors:
1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.
2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.
4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.
5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:
a) Tenancy is in good-faith.
b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.
c) The defaulting tenant doesn't continue to occupy any other property of the assessee.
d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use. 
6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.
7) Unoccupied property: The House property which cannot be occupied by its owner by reason of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.
It should be noted that the procedure for determination of Gross Annual Value is not same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:
1) Property is let out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.
2) Let out property is vacant for a part of the year (Section 23(1) (c)):  If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV.  If the ARR < ERV for any other reason, GAV = ERV.  If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let out period only and the ERV is for whole year as usual.
3) Self-occupied or Unoccupied property (Section 23(2)): GAV = Nil 
4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)):  GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)
5) Deemed to be let out property (Section 23(4)):  This case arises when the assessee has more than one Self-occupied properties in a previous year. In such case, only one of such properties is treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.
6) A portion of the property is let out and the remaining portion is self-occupied:  GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.
Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.
Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.
STEP 2 - Determine the value of Municipal taxes:
The municipal tax or the property tax paid is allowed as deduction from the Gross Annual Value if the following two conditions are satisfied.
(a)    The property is let out during the whole or any part of the previous year,
(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.
STEP 3 - Compute the Net Annual Value:
Gross Annual Value                                        ++++++
Less: Municipal Taxes                                     ++++++
Net Annual Value                                            ++++++
Q.3. What deductions are allowed from the annual value in computing taxable income from house property?
Ans: Deductions allowable under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a)    Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.
(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Limit of deduction u/s 24(b)
A. In case of Let out/ deemed to be let out house property: Interest on Money borrowed is allowed as deduction without any limit. Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP) interest. PCP started from the date of borrowing and ended on 31st mar immediately preceeding (Before) the year of completion.
B. In Case of Self Occupied House Property:  Max. Rs. 150000 is allowed as deduction if the following conditions are satisfied:
Ø  Loan taken after 1 – 4 – 99
Ø  For construction/purchase (Capital expenditure) of house
Ø  Construction completed within 3years from the end of financial year in which loan is borrowed.
Ø  Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000
Q.4. Write Short Notes on:
1.       Exempted House Property Income
2.       Deemed Ownership
3.       Unrealised rent and its Treatment
4.       Property owned by co-owners
5.       Dispute about ownership
6.       Deduction of Municipal tax
1. Properties exempted from tax under the head income from house property (Sec. 10)
1) Income from a farm house.
2) Annual value of one palace in the occupation of an ex-ruler.
3) Property income of a local authority.
4) Property income of an approved scientific research association.
5) Property income of an educational institution and hospital.
6) Property income of a registered trade union.
7) Income from property held for charitable purposes.
8) Property income of a political party.
9) Income from property used for own business or profession.
10) Annual value of one self occupied property.
2. Deemed Ownership
Under Section 27 of the Income Tax Act the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property:-
(a)   If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes.
(b)   The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.
(c)    A member of a co-operative society, company or association of persons, to whom a property or a part thereof is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property.
(d)   A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year.
3. Treatment of unrealized rent
For the purpose of determining the Annual value, the actual rent shall not include the rent which cannot be realized by the owner. However, the following conditions need to be satisfied for this:
(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 for the recovery of the unpaid rent or satisfied the assessing Officer that legal proceedings would be useless.
(e) Unrealised rent of earlier years is not deductible.
Treatment of unrealized rent recovered
Where any rent cannot be realized, and subsequently if such amount is realized, such an amount will be deemed to be the income from house property of that year in which it is received. However, in the cases where unrealized rent is subsequently realized, it is not necessary that the assessee continues to be the owner of the property in the year of receipt also.
4. Sec. 26: Property owned by co-owners
If the share of co-owners if determinate, the income of such house property is calculated as one house and income is divided amongst co-owners. They shall be entitled to relief u/s 23(2) as if they are individually owners of such property.
5. Dispute about ownership:
Ø  In case of dispute, receiver of rent liable to pay tax.
Ø  If long time lease is taken, then the person who takes the lease is the owner
Ø  In case of mortgage loan, mortgager is the owner.
Ø  Property in the name of partnership, firm is the owner.
Ø  A person whose property is vested in the custodian to evacuee property is not the owner.
Ø  Subletting rent is treated as income from other sources.
6. Deduction of Municipal Taxes from Annual Value
From the annual value municipal taxes are to be deducted if the following conditions are fulfilled:-
(a)    The property is let out during the whole or any part of the previous year,
(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.
Important Points:
1. It is the annual value of the property (not the actual rent received or receivable) considered for income from house property.
2. Rent from vacant land does not attract under the head.
3. House property used for OWN BUSINESS is not considered under this head.
4. He/she should be the OWNER of the property. (Need not be the owner of the land) e.g. Owner of apartment.
5. House property either rented to someone for commercial (including business) or for residential or for self occupation.
6. There must be a building. Building includes a large stadium with or without roof, rent from swimming pool, rent from godown, music hall, dance hall lecture hall, other public auditorium
7. Residential building normally have roof. Non residential building need not have roof.
8. Building area includes adjacent area like approach roads, garage, garden, cattle shed etc.
9. If property is transferred for inadequate consideration either to spouse or minor children the income from house property is calculated in the hands of the transferee (wife or minor children) but will be included in the hands of transferor under section 64(1).
10. If part payment is made after making a contract for sale for immovable property, and such house is occupied by the buyer it amounts to transfer even though the property is not registered (section 53A of the Transfer of property act).
 11. If house property is rented to own employees where renting is not their business such income is under business, not under house property.
12. If house property is rented to non employees or activity which is not subservient and incidental to one’s own business then such income is from house property.
13. Rent from bank, post office, police station, central excise office, railway staff quarters which is for carrying on its business efficiently and smoothly, such income comes under income from business.
14. If house property is foreign country, annual property will be computed as if property is situated in India. Therefore municipal tax paid during the previous year in foreign country is also deductible.
15. Municipal taxes paid in the previous year and interest payable is deductible.
 16. Interest payable outside India without deducting tax at source is not deductible.
17. Pre construction period means interest payable up to 31st March proceeding to the year of completion.

18. Pre-construction period interest is deductible only in the first five installments starting from 1st April of the year of completion.

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