Income from House Property is one of the five heads of income under the Income Tax Act, 1961. It deals with income earned from ownership of buildings and land attached to buildings. The taxability under this head is not based only on actual rent received. Even if no rent is received, income may still be charged on the basis of annual value. This head applies to residential, commercial, and industrial buildings, provided they are not used by the owner for business or profession.
Basis of Charge:
Income from House Property is charged to tax under Section 22 of the Income Tax Act, 1961. According to this section, the annual value of any building or land attached to a building is taxable in the hands of the owner. Ownership is the most important factor for charging income under this head. The person who is the legal owner or deemed owner is liable to pay tax, even if the property is not in his physical possession.
The basis of charge does not depend on whether the property is actually let out or not. If a property has the capacity to earn income, it is considered for taxation. However, if the property is used by the owner for his own business or profession, then income from such property is not taxable under this head. In such cases, related expenses are allowed under the head Profits and Gains of Business or Profession.
The following conditions must be satisfied to tax income under this head.
- The property must be a building or land attached to a building.
- The assessee must be the owner of the property.
- The property should not be used for own business or profession.
If all these conditions are fulfilled, income is taxable under the head Income from House Property.
Types of House Property:
1. Self–Occupied Property
A self-occupied property is a house that the owner uses for his own residence. Only one property can be treated as self-occupied at a time. No annual value is charged under this type, meaning no notional rent is taxed. However, interest on housing loan for purchase or construction is allowed as a deduction under Section 24. If the owner cannot occupy due to employment elsewhere, the property still qualifies as self-occupied.
2. Let Out Property
Let out property refers to a house that is rented to a tenant. Taxable income is based on gross annual value, which is the higher of expected rent or actual rent received, minus municipal taxes. Standard deduction at 30% and interest on borrowed capital are allowed as deductions. Income is computed annually even if rent is partially or fully unrealized, subject to conditions.
3. Deemed Let Out Property
Deemed let out property is a property owned by a person but not actually rented, such as a second self-occupied house. For tax purposes, it is treated as let out, and notional rent is charged as annual value. Deductions such as 30% standard deduction and interest on borrowed capital are allowed. The owner must pay tax on the notional income, even if no rent is received.
Determinants of Annual Value of House Property:
1. Annual Value of Self-Occupied Property
For a self-occupied house property, the annual value is generally Nil. This means no tax is charged on notional rent for one self-occupied property. Even if the property is vacant or the owner cannot occupy it due to employment at another location, it is still treated as self-occupied. However, interest on a home loan is allowed as a deduction under Section 24. If the owner has more than one property, only one can be self-occupied; others are treated as deemed let out and annual value is calculated accordingly.
2. Annual Value of Let Out Property
For a let out property, annual value is based on the property’s earning capacity. It is computed as the higher of actual rent received or expected rent. Expected rent is determined as the higher of municipal value or fair rent, but not exceeding standard rent fixed under the Rent Control Act. Gross annual value is reduced by municipal taxes paid by the owner to arrive at net annual value. Unrealized rent is excluded if legal conditions are satisfied. Standard deductions and interest on borrowed capital are allowed to compute taxable income.
3. Annual Value of Deemed Let Out Property
A deemed let out property is not actually rented but is taxed as if it were rented. Annual value is calculated using the same method as a let out property, considering municipal value and fair rent. Actual rent received is irrelevant. Standard deduction of 30% and interest on borrowed capital are allowed. The purpose of treating additional properties as deemed let out is to prevent tax evasion and ensure income from multiple properties is taxed even when not rented.
Deductions and exemptions of House Property:
1. Standard Deduction (Section 24(a))
A standard deduction of 30% of Net Annual Value is allowed from the income of a house property. This deduction is given irrespective of actual expenses incurred by the owner. It covers expenses like repairs, maintenance, insurance, and collection charges. The deduction applies to both let out and deemed let out properties. For self-occupied property, standard deduction is also allowed but net annual value is Nil. This deduction reduces taxable income and simplifies compliance for taxpayers.
2. Interest on Borrowed Capital (Section 24(b))
Interest paid on loans taken for purchase, construction, repair, renewal, or reconstruction of a house property is allowed as a deduction. For self-occupied property, maximum deduction is Rs 2,00,000 per year if the loan is for purchase or construction and conditions are met. For let out or deemed let out property, the entire interest is deductible without any limit. Pre-construction interest can be claimed in five equal installments starting from the year of completion of construction.
3. Municipal Taxes
Municipal taxes such as property tax, water tax, and sewerage tax are allowed as deduction from gross annual value to arrive at net annual value. Deduction is available only if the taxes are borne and paid by the owner during the year. Taxes paid by tenants are not deductible. Municipal tax deduction is applicable for all types of properties—self-occupied, let out, and deemed let out.
4. Exemption for Self-Occupied Property
Income from one self-occupied house property is exempt from tax, meaning its annual value is considered Nil. No notional rent is taxed. Interest on borrowed capital is still allowed as deduction under Section 24(b), subject to limits. If the owner cannot occupy the property due to employment at a different place, it is still treated as self-occupied. If the taxpayer owns multiple self-occupied properties, only one is exempt and the remaining are treated as deemed let out.
5. Income of Local Authorities
Income from house property owned by local authorities is fully exempt under Section 10(20). Such income is not charged under income from house property. This ensures that municipal bodies, local governments, or statutory authorities are not taxed on properties used for public purposes.
6. Farm House Exemption
Income from a farm house is treated as agricultural income and is exempt from tax, subject to certain conditions. The property must be used primarily for agricultural purposes and located in rural areas. This ensures that income from agricultural activities is not taxed under the head of house property.
7. House Property Used for Business
If the house property is used for own business or profession, it is excluded from income under house property. Related expenses are allowed under the business income head. This prevents double taxation and ensures that income is taxed in the correct category based on use.
8. Arrears of Rent
Arrears of rent received in the current year are taxable, but a 30% standard deduction is allowed on the amount of arrears. This ensures relief to taxpayers who receive delayed payments. Unrealized rent may also be excluded if certain conditions are satisfied, and recovered unrealized rent is taxed in the year of receipt.
9. Co-Owned Property
Income from co-owned property is divided according to ownership shares. Each owner is taxed separately on his share. Deductions like standard deduction, municipal taxes, and interest on borrowed capital are allowed in proportion to the owner’s share. This ensures fair taxation and clarity in assessment.
10. Loss Set-Off and Carry Forward
Loss from house property, mainly due to interest on borrowed capital, can be set off against other heads of income up to Rs 2,00,000 in a year. Any unabsorbed loss can be carried forward for eight assessment years and set off only against house property income. This provides relief to taxpayers and encourages housing loans.
