Computing Taxable Income from a Let-Out House Property

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Income from a Let-Out House Property is determined as under:

1. Gross annual valueXxxx
2. Less : Municipal TaxesXxxx
Net Annual ValueXxxx
3. Less : Deduction under Section 24Xxxx
– Standard DeductionXxxx
– Interest on borrowed CapitalXxxx
Income from House PropertyXxxx
Taxable Income from a Let-Out House Property
Taxable Income from a Let-Out House Property

1. Gross Annual Value of Let-Out House Property [Section 23(1)] –

According to section 23(1), the annual value of any property shall be deemed to be— 

(a) the sum for which the property might reasonably be expected to let from year to year (i.e. expected rent);  or 

(b) where the property or any part of the property is let and the actual rent received or receivable by the  owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or  receivable i.e. the actual rent. 

It may be observed from the above that for calculating Gross Annual Value of the property which is let, we  have to first calculate expected rent as per clause (a) above and then compare the same with the actual rent  received or receivable as per clause (b). If the actual rent so received or receivable as per clause (b) is more than  the expected rent computed as per clause (a), the Gross Annual Value shall be the actual rent so received or  receivable. On the other hand if the actual rent so received or receivable is less than the expected rent then the  Gross Annual Value shall be expected rent so computed. 

In other words, the gross annual value of the house property let for the whole year shall be higher of the  following two: 

(a) Expected rent; 

(b) Actual rent received or receivable.

2. Find out Reasonable Expected Rent of the House Property [Section 23(1)(a)] –

Reasonable expected rent is deemed to be the sum for which the property might reasonably be expected to be let out from year to year.

In determining reasonable rent, several factors have to be taken into consideration, such as, location of the property, annual ratables value of the property fixed by municipalities, rents of similar properties in neighbourhood, rent which the property is likely to fetch having regard to demand and supply, cost of construction of the property and nature and history of the property. These factors play a vital role in determining reasonable expected rent of a house property. In a majority of cases, however, expected rent can be determined by taking into consideration the following factors:

a. Municipal Valuation of the Property; or

b. Fair Rent of the Property,

The higher of (a) or (b) is generally taken as expected rent.

If, however, a property is covered by a Rent Control Act, then the amount so computed cannot exceed the ‘standard rent’ determinable under the Rent Control Act.

(A) Municipal Valuation of House Property –

For collecting municipal taxes, the local authority makes a periodical survey of all buildings in its jurisdiction. Such valuation may be taken as a strong evidence representing the earning capacity of a building. It cannot, however, be considered to be a conclusive evidence. In some big cities (like Delhi, Bombay, Madras and Calcutta) municipal authorities determine net rateable value after deducting 10 per cent of the gross rateable value on account of repairs and an allowance for service taxes (such as sewerage tax and water tax). The net municipal valuation, therefore, requires an adjustment for determining expected rent for income-tax purposes. 39.1-

(B) Fair Rent of the House Property –

Fair rent of the property can be determined on the basis of a rent fetched by a similar property in the same or similar locality. Though two properties cannot be alike in every respect, the evidence afforded by transactions of other parties in the matter of other properties in the neighbourhood, more or less comparable with the property in question, is relevant in arriving at reasonable expected rent.

3. Find out Rent actually Received or Receivable after excluding Unrealized Rent but before Deducting Loss due to Vacancy –

It may be calculated as under—

Rent of the previous year (or that part of the previous year) for which the property is available for letting outXXXX
Less: Unrealised rent if a few conditions are satisfiedXXXX
Rent received/receivableXXXX

The following points should be noted—

1. Loss due to vacancy shall not be deducted from the aforesaid computation. It shall be deducted under Step IV.

2. Sometimes a tenant pays a composite rent of property as well as certain benefits provided by the landlord. To determine rent received/receivable, composite rent must be disintegrated and it is only that part of it attributable to the let out of property which would form the basis for the aforesaid calculation.

3. Occupier’s (i.e., tenant’s) share of municipal tax realised from the tenant cannot be added to actual rent received/receivable as it is the occupier’s duty to pay municipal tax

4. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot be added to rent received or receivable.

5. No addition can be made to rent received or receivable with respect to any notional interest on deposit made by a tenant with landlord.

When Unrealised Rent shall be Excluded
[Explanation to Section 23(1)] –

Unrealised rent (which the owner could not realise) shall be excluded from rent received/receivable only if the following conditions are satisfied—

1. The tenancy is bona fide.

2. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.

3. The defaulting tenant is not in occupation of any other property of the assessee.

4. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

4. Deduct Municipal Taxes –

From the gross annual value computed above, deduct municipal taxes (including service taxes) levied by any local authority in respect of the house property. Municipal taxes are deductible only if (a) these taxes are borne by the owner, and (b) are actually paid by him during the previous year.

Municipal taxes, levied by local authority but not paid by the assessee during the previous year, are not deductible. If property is situated in a foreign country, municipal taxes levied by foreign local authority are deductible (if such taxes are paid by the owner). The remaining amount left after deduction of municipal taxes is net annual value.

5. Deduction under Section 24 –

The following two deductions are available under section 24—

a. Standard Deduction; and

b. Interest On Borrowed Capital.

The list of allowance of section 24 is exhaustive—In other words, no deduction can be claimed in respect of that expenditure which is not specified in section 24. For instance, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of liftman, etc.

(A) Standard Deduction [Section 24(a)] –

30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.

(B)  Interest On Borrowed Capital [Section 24(b)] –

Interest on borrowed capital is allowable as deduction on accrual basis (even if books of account are kept on cash basis), if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.

 The following points should also be kept in view:

  • As the deduction is available on “accrual” basis, it should be claimed as deduction on yearly basis, even if the interest is not actually paid during the year.
  • Deduction is available even if neither the principal nor the interest is a charge on property.
  • Interest on unpaid interest is not deductible.
  • No deduction is allowed for any brokerage or commission for arranging the loan.
  • Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is allowable as deduction.
  • Any interest chargeable under the Act, in the hands of recipient and payable out of India, on which tax has not been paid or deducted at source, and in respect of which there is no person who may be treated as an agent, is not deductible, by virtue of section 25, in computing income chargeable under the head “Income from house property”.

Interest of Pre-Construction Period –

Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a period prior to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, is deductible in five equal annual instalments, commencing from the previous year in which the house is acquired or constructed.

What is pre-construction period –
Interest of pre-construction period is deductible in five equal instalments. The first instalment is deductible in the year in which construction of property is completed or in which property is acquired. For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending March 31 immediately prior to the date of completion of construction/date of acquisition or date of repayment of loan, whichever is earlier.

6. House Property which is Let and was Vacant during the Whole or Part of the Previous Year :

According to section 23(1), the annual value of such house property shall be deemed to be:—

(a) the sum for which the property might reasonably be expected to let from year to year i.e. the expected rent; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable i.e. the actual rent; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a) the amount so received or receivable i.e. the actual rent, if any:

From the perusal of the above, the following two situations may emerge :

Situation-1 : Where the property is let and was vacant for part of the year and the actual rent received or receivable is more than the sum determined under clause (a) in spite of vacancy period. [This situation falls under clause (b) above]

In this case, clause (c) shall not be applicable as it will be applicable only when actual rent received or receivable is less than the sum referred under clause (a). Hence the Gross Annual Value in this case shall be:

  1. the sum for which the property might reasonably be expected to let from year to year; or
  2. actual rent received or receivable,
    whichever is Higher.

Situation 2 : Where the property is let and was vacant for whole or part of the year and the actual rent received or receivable owing to such vacancy is less than the sum determined under clause (a).[This situation falls under clause (c) above]

The annual value of the property shall be determined under this situation if all the following 3 conditions are satisfied:

  1. The property is let;
  2. It was vacant during the whole or part of the previous year;
  3. Owing to such vacancy, the actual rent received or receivable is less than the value determined under section 23(1)(a)

In this case, both clause (a) and clause (b) shall not be applicable but clause (c) shall be applicable and the Gross Annual Value shall be the actual rent received or receivable.

7. House Property which is Part of the Year Let and Part of the Year Occupied for Own Residence:

In this case the annual value, deductions and the income of the part of the property which is let shall be computed separately under the let-out property and the income of the portion or the part of the property which is self-occupied under the “self-occupied property” category. 

For Example : Where one unit is let out and the other unit is self-occupied, then the whole property cannot be taken as a single unit. Municipal value or fair rent if not given separately, shall be apportioned between the let-out portion and self-occupied portion on built up area basis. 

Similarly, where, in a building the ground floor is self-occupied and first floor is let out or vice-versa, such a property shall not be treated as a single unit. Instead, income from first floor which is let shall be computed separately as per let out provisions and the floor which is self-occupied shall be computed separately as per self-occupied provisions. Municipal tax and interest shall also be apportioned on the basis of built up/floor area space.

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