Taxable Income from a Self-Occupied House Property

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In the case of a Self-Occupied House Property, the Procedures for determining Taxable Income is as follows:

1. Features to regulate Tax Incidence on Self-Occupied House Properties:

Before steps for computation are explained, it would be advisable to highlight the following features which regulate tax incidence on self-occupied properties:

  • When the letting out of residential quarters to employees is subservient and incidental to the main business, the property is considered as occupied by the owner for the purpose of his own business. Where, however, the employer charges rent from his employees for the property in question, such rent is chargeable under the head “Profits and gains of business or profession”.
  • Where the person has occupied more than one house for his own residential purposes, only one house (according to his own choice) is treated as self-occupied and all other houses will be “deemed to be let out”. In the case of such properties as are “deemed to be let out”, the taxable income will be calculated  as Let-Out House Property.
Taxable Income from a Self-Occupied House Property
Taxable Income from a Self-Occupied House Property

2. Computation of Annual Value of one Self-Occupied House Property –

In the case of a self-occupied property, treated as such, the procedure for determining taxable income is as follows:

(1). A House Property fully utilised throughout the previous year for Self-Residential Purposes [Section 23(2)(a)] –

Where the property consists of one house in the occupation of the owner for his own residence, the annual value of such house shall be taken to be Nil, under section 23(2)(a), if the following conditions are satisfied:

(1). The property (or part thereof) is not actually let during whole (or any part) of the previous year; and

(2). No other benefit is derived therefrom.

The following are some of the examples where the above conditions are satisfied—

1. X owns a property. Throughout the previous year 2017-18, it is used by him (and his family members) for own residence purposes. No part of the property is let out or put to some other use.

2. Y owns a property. It is transferred on December 1, 2017. Between April 1, 2017 and December 1, 2017 it is used by Y and his family for residential purpose. It is neither let out nor put to any other use.

3. Z purchased a property on June 1, 2017. Since then it is occupied by Z for his residential purposes. Neither it is let out nor it is put to some other use.

In the case of one property (which is not let out nor put to any other use) used throughout the previous year by the owner for his residential purpose, income shall be determined as follows—

Gross annual valueNil
Less: Municipal taxNil
Net annual valueNil
Less: Deduction under section 24xxx
Standard deductionNil
Interest on borrowed capitalDeductible
Income from one self-occupied propertyXXXXXX

(2). A House Property, which is not actually Occupied by the Owner owing to Employment or Business/ Profession, carried on at any Other Place [Section 23(2)(b)]–

Section 23(2)(b) is applicable if the following conditions are satisfied—

  1. The taxpayer owns a house property, which cannot actually be occupied by him by reason of the fact that owing to his employment, business or profession, carried on at any other place;
  2. He has to reside at that other place in a building not owned by him;
  3. The property mentioned at (A) (or part thereof) is not actually let out during whole (or any part of the previous year); and
  4. No other benefit is derived from the above property by the owner.

If the above conditions are satisfied, income from the property shall be determined accordingly.

(A) Where the Annual Value of such House Property shall be Nil [Section 23(2)(a) & (b)]:

Where the property  consists of a house or part of a house which— 

(a) is in the occupation of the owner for the purposes of his own residence; or 

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or  profession carried on at any other place, he has to reside at that other place in a building not belonging to  him, 

the annual value of such house or part of the house shall be taken to be nil. 

(B) Where the Annual Value of such House Property shall not be Nil [Section 23(3)]:

The annual value of self occupied house shall not be nil: 

(i) if such house or part of the house is actually let during the whole or any part of the previous year; or 

(ii) any other benefit therefrom is derived by the owner from such house. 

In the above cases, the annual value shall be determined as per provisions applicable for let out properties i.e.  under clause (a), (b) or (c) of section 23(1). 

(C) Where Assessee has more than Two Houses for Self Occupation [Section 23(4)]:

If there are more than  two residential houses, which are in the occupation of the owner for his residential purposes then he may exercise  an option to treat any two of the houses to be self-occupied. The other house(s) will be deemed to be let out and the annual value of such house(s) will be determined as per section 23(1)(a) i.e. the sum for which the property  might reasonably be expected to let from year to year. 

In other words, the annual value of two self-occupied houses opted by the assessee can be taken as nil. 

The assessee in this case, should exercise his option in such a manner that his taxable income is the minimum.  Such option may be changed from year to year. However, if an assessee has a house property which consists of  two or more residential units and all such units are self-occupied, the annual value of the entire house property  shall be taken as nil as there is only one house property though it has more than one residential units. 

1. Annual value as per Income-tax is after deduction of municipal taxes, etc. paid, if any. 

2. The benefit of exemption of two self-occupied houses is available only to an individual/HUF. 

3. If the assessee lets out his house to his employer, which in turn allots the same to him, as rent free  accommodation, such house will not be treated as self occupied for the above purpose, because he is not  occupying his own house in the capacity of owner

(D) Deduction in respect of One or Two Self-Occupied Houses where Annual Value is Nil:

Where annual  value of one or two self-occupied house is nil, the assessee will not be entitled to the standard deduction of 30%,  as the annual value itself is nil. However, the assessee will be allowed deduction on account of interest (including  1/5th of the accumulated interest of pre-construction period) as under:— 

(a) Where the property is acquired or constructed with capital  borrowed on or after 1.4.1999 and such acquisition or  construction is completed within 5 years of the end of the  financial year in which the capital was borrowedActual interest payable subject to  maximum ₹2,00,000 if certificate  mentioned in point 2 in box given below  is obtained
(b) In any other case, i.e., borrowed for repairs or renewal or  conditions mentioned in clause (a) are not satisfiedActual interest payable subject to  maximum of ₹30,000

Note.—

Where the assessee has opted for two houses to be treated as self occupied, the deduction of amount of interest  given above shall in aggregate remain ₹30,000 or ₹2,00,000, as the case may be, whether assessee has opted for one  residential house or two residential houses to be self occupied. 

Thus the aggregate of the amount of deduction of interest in the case of first and second self occupied house shall not  exceed ₹2,00,000.

1. It may be noted that the deduction of interest of ₹30,000 is allowed for purpose of repair or renewal or  reconstruction of house property where as the deduction to the maximum of ₹2,00,000 is allowed only for  acquisition or construction of house property, subject to other conditions being satisfied. Further, if  conditions mentioned in para (a) are not satisfied i.e. capital is borrowed before 1.4.1999 or house is not  completed within 5 years (3 years upto A.Y. 2016-17) of the end of the financial year in which the capital  is borrowed, deduction of interest shall be allowed to the maximum of ₹30,000. 

2. For getting deduction of interest of maximum of ₹2,00,000, it will be necessary to obtain a certificate from  the person to whom such interest is payable specifying the amount of interest payable by the assessee for  the purpose of acquisition/construction of the property or conversion of the whole or any part of the capital  borrowed which remains to be repaid as a new loan. 

3. It may be observed that for let out/deemed to be let out property, the entire interest is allowed as deduction  whereas in case of one or two self-occupied property the interest shall be allowed to the maximum of  ₹30,000 or ₹2,00,000 as the case may be.   

3. Interest on Borrowed Capital [Section 24(b)] –

Interest on borrowed capital [of the current year and pre-construction period] is deductible. However, it is deductible subject to a maximum ceiling given below—

(A). Maximum Ceiling if Capital is Borrowed on or after April 1, 1999 –

If the following three conditions are satisfied, interest on borrowed capital is deductible up to Rs. 2,00,000 —

(1). capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;

(2). the acquisition or construction should be completed within 5 years (3 years, applicable up to the assessment year 2016-17) from the end of financial year in which the capital was borrowed; and

(3). the person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.

The following points should be noted—

1. If capital is borrowed for any other purpose (e.g., if capital is borrowed for reconstruction, repairs or renewals of a house property), then the maximum amount of deduction on account of interest is Rs. 30,000.

2. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before April 1, 1999 but, if the aforesaid three conditions are satisfied, the higher deduction of Rs. 2,00,000* would be available. Also there is no stipulation regarding the construction/acquisition of the residential unit being entirely financed by the loan taken on or after April 1, 1999. It may be so in part. However, the higher deduction of Rs. 2,00,000* towards interest can be claimed only in relation to that part of the loan which has been taken and utilised for construction/ acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry deduction of interest up to Rs. 30,000 only (as stated in para given below)—Circular No. 8/2007, dated December 5, 2007.

(B) Maximum Ceiling in any Other Case –

If the above three conditions [(1), (2) and (3) (supra)] are not satisfied, then interest on borrowed capital is deductible up to a maximum of Rs. 30,000.

In other words in the following cases, interest on borrowed capital is deductible up to Rs. 30,000—

(1). if capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of a house property;

(2). if capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.

4. Other Points for Computing Taxable Income of Self-Occupied House Property –

The following points should also be kept in view—

  1. Some nexus between the fact of residing in a building not belonging to the assessee and his employment, business or profession must be shown before the benefit of section 23(2)(b) can be availed in respect of residential house which is not occupied by the assessee, the assessee did not occupy his own residential house but resided with his father in the same town in a house two miles away. The assessee was a bachelor and, therefore, for his own convenience resided with his father. It was held by the High Court that since the assessee had not left his house vacant on account of business compulsion but on account of personal convenience, he was not entitled to the benefit of section 23(2)(b).
  2. Section 23(2)(b) would apply in all those cases where officials and dignitaries, under the Constitution of India and even otherwise had to reside in official residences instead of their own residences by reason of their office

5. When a Part of House Property is Self-Occupied and a part is Let Out –

If a house property consists of two or more independent residential units, one of which is self-occupied for own residential purposes and other unit(s) are let out, income is computed as follows—

1. Unit self-occupied for residential purpose throughout the previous year (which is not let out nor put to any other use) 
2. Let out units 
3. Unit self-occupied for residential purpose for a part of year and lying vacant for remaining part because of business or profession is situated at some other place 

6. Computation of Income of House Property which is Partly Let-Out and Partly Self-Occupied –

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.

7. Other Points for consideration for determining Taxable Income from Self-Occupied House Property-

All the aforesaid rules are applicable only in the case of natural persons. In other words, limited liability companies, firms, associations and clubs cannot claim the benefit of steps mentioned above as they cannot occupy a house for residential purposes. The karta of a Hindu undivided family (being a natural person) is, however, entitled to the aforesaid benefit.

When Owner Occupies a House in some other capacity –

The aforesaid provisions cannot be applied to cases where the owner of the house is not occupying his own house in his capacity as “owner” for residential purposes. If the assessee lets out his house to his employer-company which, in turn, allots the same to him as rent-free quarter, the assessee is not entitled to the aforesaid benefits, as he occupies the house not as owner but only in his capacity as sub-tenant of the employer-company.

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