The income from houses, buildings, bungalows, godowns etc. is to be computed and assessed to tax under the head “Income from house property”. The income under this head is not based upon the actual income from the property but upon notional income or the annual value of that building.
The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be subject to Income-tax under the head ‘Income from house property’ after claiming deduction under section 24 provided such property, or any portion of such property is not used by the assessee for the purposes of any business or profession, carried on by him, the profits of which are chargeable to Income-tax.
The basis of calculating income from house property is the annual value. This is the inherent capacity of the property to earn income. Income from house property is perhaps the only income that is charged to tax on a notional basis. The charge is not because of the receipt of any income but is on the inherent potential of house property to generate income. The annual value is the amount for which the property might reasonably be expected to let from year to year.
1. Essential conditions for taxing ‘income from House Property’
The following three conditions must be satisfied before the income of the property can be taxed under the head “Income from House Property”:
(i) The property must consist of buildings and lands appurtenant thereto,
(ii) The assessee must be the owner of such house property,
(iii) 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 on him, the profit of which are chargeable to tax. If the property is used for own business or profession, it shall not be chargeable to tax.
(i) House Property must consist of any Buildings or Lands appurtenant thereto:
Although the Act has used the word ‘property’ in section 22, but income of all types of properties are not taxable under this head. The term ‘property’ has a very wide meaning but ‘property’ in sections 22 to 27 has not been used in its wider sense or meaning. It is very much limited to a type defined by the language of the section i.e. buildings or lands appurtenant thereto. In other words, there must be a house property which must consist of buildings or land appurtenant thereto.
If any income is derived from vacant land then this income would not be taxed under the head ‘house property’ because there is no building. Such income shall, however, be taxed under the head income from other sources or income from business depending upon the facts of the case.
(ii) Ownership of the House Property:
The assessee must be the owner of such house property. Any income derived from a property which is not owned by the assessee cannot be taxed under this head e.g. X takes a house on rent of ₹25,000 p.m. and sublets it to Y and receives a rent of ₹30,000 p.m. for this house. The rent derived by X cannot be taxed under this head because X is not the owner of the house. This income will be taxed either as business income or as income from other sources.
Ownership includes both free-hold and lease-hold rights and also includes deemed ownership.
(iii) Use of the House Property:
For the purpose of charge under the head income from house property, the crucial words are buildings or lands appurtenant thereto. The purpose for which the building, etc. is being used is not material. Thus house property may be let by the assessee for residential purposes or for any commercial purpose. The income derived from letting out of such house property will always be taxable under this head. Even if it is the business of the assessee to own and give houses on rent the annual value of the houses owned by him during the previous year would be taxable as ‘Income from house property’. The annual value of house property, though belonging to a business, must be charged under this head and not under section 28, if the property is not used by the assessee for the purposes of his business. It will remain so even if property is held by the assessee as stock in trade of a business. House owning, however profitable, is neither trade nor business for the purpose of the Act.
However, the following are the exceptions to the above rule:
(A) The annual value of the house property/portion of the house property which is used for purpose of the business or profession carried on by the assessee does not fall under this head, provided profits of such business or profession are chargeable to income-tax.
If an assessee is running a hotel or paying guest accommodation in a building owned by him, income from such building shall be taxable under the head business or profession. On the other hand, if such hotel building itself has been let out, income from such hotel building shall be taxable under the head house property.
(B) Where the property is let out to employees with the object of carrying on the business of the assessee in an efficient manner, then the rental income shall be taxable as business income (provided letting is not the main business but it is subservient/incidental to the main business) because the letting out of the property is incidental to the main business of the assessee and in this case deductions/allowances would have to be calculated as relating to profits/gains of business and not as relating to house property.
Similarly, where the premises of the assessee are given to any Government agency for locating a branch of a bank, police station, excise office, etc. for the purpose of running the business of the assessee more efficiently, the rental income from such buildings would be taxable as business income.
(C) Where the letting of the property is inseparable from letting of other assets like machinery, furniture, etc. the entire income would be taxable as profits or gains of business and profession or income from other sources.
2. Deemed Ownership of House Property [Section 27]:
As per section 27, the following persons though not the legal owners of a property are deemed to be the owners for the purposes of sections 22 to 26:
(1) Transfer to a Spouse [Section 27(i)]:
If an individual transfers any house property to his or her spouse otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the property so transferred. This would, however, not cover cases where a property is transferred to a spouse in connection with an agreement to live apart.
(A) Transfer to a Minor Child [Section 27(i)]:
If an individual transfers any house property to his or her minor child otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the house property so transferred. This would, however, not cover cases where a property is transferred to a minor married daughter.
Where the individual transfers cash to his/her spouse or minor child and the transferee acquires a house property out of such cash, the transferor shall not be treated as deemed owner of the house property. Such transaction will however, attract clubbing provisions discussed under Chapter 9.
(B) Holder of an Impartible Estate [Section 27(ii)]:
The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate. The impartible estate, as the word itself suggests, is a property which is not legally divisible.
(C) Member of a Co-operative Society, etc. [Section 27(iii)]:
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 of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him although the co-operative society/company/association is the legal owner of that building.
(D) Person in possession of a property [Section 27(iiia)]:
A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be deemed owner of that house property. This would cover cases where the (a) possession of property has been handed over to the buyer, (b) sale consideration has been paid or promised to be paid to the seller by the buyer, (c) sale deed has not been executed in favour of the buyer, although certain other documents like power of attorney/agreement to sell/will etc. have been executed. The buyer would be deemed to be the owner of the property although it is not registered in his name.
(E) Person having right in a property for a period not less than 12 years [Section 27(iiib)]:
A person who acquires any right in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years shall be deemed to be the owner of that building or part thereof. This will not cover the case where any right by way of a lease is acquired from month to month basis or for a period not exceeding one year.
3. ‘Composite Rent’ under House Property Income:
Apart from recovering rent of the building, in some cases, the owner gets rent of other assets (like furniture) or he charges for different services provided in the building (for instance, charges for lift, security, air conditioning, etc.). The amount so recovered is known as “composite rent”. The tax treatment of the composite rent is as follows—
(A). Where Composite Rent includes Rent of Building and Charges for different Services (like Lift, Air Conditioning) –
If the owner of a house property gets a composite rent for the property as well as for services rendered to the tenants, composite rent is to be split up and the sum which is attributable to the use of property is to be assessed in the form of annual value under section 22. The amount which relates to rendition of the services (such as electricity supply, provision of lifts, supply of water, arrangement for scavenging, watch and ward facilities, etc.) is charged to tax under the head “Profits and gains of business or profession” or under the head “Income from other sources”.
X owns a property. It is given on rent to Y. Y annually pays Rs. 1,00,000 as rent of the property and Rs. 20,000 for different services like lift, security, air-conditioning, etc. In this case, Rs. 20,000 is not taxable in the hands of X as income from house property. Rs. 20,000 would be taxed in the hands of X after deducting his actual expenditure for providing different services (lift, security, air-conditioning, etc.) as income from other sources or as business income.
(B) Where Composite Rent is Rent of Letting Out of Building and Letting Out of Other Assets (like Furniture) and the two lettings are not separable –
If there is letting of machinery, plant and furniture and also letting of the building and the two lettings are inseparable (in the sense that letting of one is not acceptable to the other party without letting of the other), then such income is taxable either as business income or income from other sources. This rule is applicable even if sum receivable for the two lettings is fixed separately.
X owns an air-conditioned furnished lecture hall. It is let out, annual rent being Rs. 5,00,000 (it includes rent of building and rent of air-conditioner and furniture). In this case, letting of lecture hall is not separable from the letting of airconditioner/furniture. This income (after excluding expenditure) is taxable as business income or as income from other sources.
(C) Where Composite Rent is Rent of Letting Out of Building and Letting Out of Other Assets and the two lettings are separable –
If there is letting out of building and letting of other assets and the two lettings are separable (in the sense that letting of one is generally acceptable without letting out of the other; for instance letting out of building along with car), then income from letting out of building is taxable under the head “Income from house property” and income from letting out of other assets is taxable either as business income or income from other sources. This rule is applicable even if the assessee receives composite rent from his tenant for two lettings.
X gets Rs. 20,000 per month as rent from Y for letting out of a building and a car [the two lettings are separable in the sense that Y was given an option to take on rent either the building (at Rs. 16,000) or the car (at Rs.4,000) or both]. The rent of the building is taxable under the head “Income from house property” and the rent of car is taxable either as business income or income from other sources.
4. When House Property Income is not Charged to Tax
In the following cases income from property is not charged to tax:
(a) Farm House:
Income from any building owned or occupied by an agriculturist or receiver of rent/revenue of such land provided that the building is in the immediate vicinity of agricultural land and is used as a dwelling house or as a store house or other out-building.
(b) Property held for Charitable Purposes:
As per section 11, where the property is held for charitable or religious purposes the income from such property is exempt from tax.
(c) House Property used for Own Business/ Profession:
(d) Self-Occupied House:
Annual value of two self-occupied house shall be taken as Nil [for detailed discussion see para 5.10]
(e) House property of Registered Trade Union/ Local Authority:
The income from property held by a registered trade union/local authority is not taxable.
(f) Palace of Ex-ruler:
The annual value of any one palace in the occupation of an ex-ruler shall be exempted from tax.
5. Dispute about Ownership of House Property :
OWNERSHIP- If title of ownership of a house property is under dispute in a court of law, the decision about who is owner rests with the Income-tax Department. Thus, mere existence of dispute as to title cannot hold up an assessment even if a suit has been filed. Generally, the person who is in receipt of income or the person who enjoys the possession of a house property as owner, though his claim is disputed, is assessable to tax under section 22.
6. House Property situated in a Foreign Country.
In case an assessee who is resident of India owns a house in a foreign country, income from such a house is taxable in India under the head house property. So income from house property in case of ‘Not Ordinary Resident’ and a ‘Non Resident’ shall be exempted but again it will be taxable in India if it is received or it is payable in India.
7. House Property is Owned by Co-Owners (Section 26) :
Sometimes the property consisting of buildings or the buildings and lands appurtenant thereto is owned by two or more persons, who are known as co-owners. In such cases, if their respective shares are definite and ascertainable, such persons shall not be assessed as an AOP in respect of such property, but the share of each such person in the income from the property, as computed in accordance with sections 22-25, shall be included in his total income as under:
(a) Where House Property is Self-Occupied by each Co-Owner:
Where the house property owned by the co-owners is self-occupied by each of the co-owner, the annual value of the property for each of such co-owner shall be nil and each of the co-owner shall be entitled to the maximum deduction of ₹30,000/ 2,00,000 under section 24(b) on account of interest on borrowed money.
(b) Where the entire or part of the House Property owned by Co-owner is Let:
As regards, the property or part of the property which is owned by co-owners is let out, the income from such property or part thereof shall be first computed as if this property/part is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their definite share.
8. Table showing How to Compute of ‘Income from House Property’ :
9. No Notional Income for House Property held as Stock-In-Trade for a period up to Two Years [Section 23(5)]
Where the property—
— consisting of any building or land appurtenant thereto is held as stock-in-trade: and
— the property or any part of the property is not let during the whole or any part of the previous year,
the annual value of such property or part of the property shall be taken to be nil for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.
10. Interest when not deductible from “Income from House Property” [Section 25]
Interest on borrowed money which is payable outside India shall not be allowed as deduction u/s 24(b), unless the tax on the same has been paid or deducted at source and in respect of which there is no person in India, who may be treated as agent of the recipient for such purpose.
11. Special provision for arrears of rent and unrealised rent received subsequently [Section 25A]
(1) Arrears of rent or unrealized rent received subsequently to be taxed under the head “Income from House Property [Section 25A(1)]:
The amount of—
— arrears of rent received from a tenant, or
— the unrealised rent realised subsequently from a tenant
by an assessee shall be deemed to be the income from house property in respect of the financial year in which such rent is received or realised, and shall be included in the total income of the assessee under the head “Income from house property”, whether the assessee is the owner of the property or not in that financial year.
(2) Standard deduction @ 30% to be allowed from such arrears of rent or unrealized rent [Section 25A(2)]:
A sum equal to 30% of the arrears of rent or the unrealised rent referred to in section 25A(1) shall be allowed as deduction.
12. Can there be any Loss under the head Income From House Property?
This brings us to the question as to whether there can be any loss under this head.
(i) In so far as income from one/two self-occupied property/(ies) is concerned, the annual value is taken as nil. No deductions are allowed except for interest on borrowed funds up to a maximum of ₹30,000/2,00,000. Naturally, therefore, there may be a loss in respect of such property/(ies) up to a maximum of ₹30,000/2,00,000, as the case may be.
(ii) In respect of any other type of house property, namely a house property which is fully let out or part of the year let out, etc., there are no restrictions on deductions and therefore, there can be loss under this head in respect of such properties due to municipal taxes as well as deductions. Similarly, deductions under section 24 in case of property deemed to be let out, can be more than net annual value.