CHAPTER: INCOME FROM HOUSE PROPERTY

[Notional Income Provisions are applicable]

Sections 22 to 27

Chargeability: (Sec 22)

1. The annual value of property comprising of building or land appurtenant there to, of which the
assesse is the owner is chargeable to tax under the head “Income from House Property”.
2. The annual value of the building or a portion or the building occupied by the assesse for the purpose
of business or profession carried on by him, is not chargeable to tax under this head.
3. It should be specifically noted that the annual value of the building property is taxable under this
head but not the rental income. No doubt, the rental income is considered for determination of
annual value but fair rent plays an important role in case of let out property in determination of
annual value.

Note: If the property is sublet by the tenant, the income derived by tenant from such subletting is charged
under the head “Income from Other Sources” and not under the head “Income From House Property” as he
is not the Owner.

Computation of Income – (Sec 23,24 and 25)

All house properties are divided into following three categories for the purpose of computation:

a) Let out property (Sec 23(1))

b) Self occupied property or Unoccupied property (Sec 23(2)(a)& (b))
c) Deemed to be let out property (Sec 23(4))

Sl Nature of Property Net Result of Computation

NO.
1 Let out property Any amount of income or loss
2 Self occupied property/ Unoccupied Either NIL or loss subject to maximum of
property Rs.2,00,000
3 Deemed to be let out property Any amount of income or loss
NOTE: If a single unit of property is self occupied for few months and let out for few months it shall be
treated as Let out property u/s 23(1). In such a case, fair rent of the property for the whole year shall be
compared with the actual rent and whichever is higher shall be adopted as annual value.
As regards, the deduction of the property taxes and interest on loan is concerned it shall not be restricted to
the let out period and the amount for the whole year shall be considered.

Let out Property: (Sec 23(1))

Below is the format to determine taxable income from house property:

Particulars Amount(Rs.) Amount(Rs.)

Gross Annual Value xxx

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Less: Property Taxes paid to Local Authority (xxx)
NET ANNUAL VALUE XXX
Less: Deductions U/S 24:
a. 30% of Net Annual Value xxx
b. Interest on Borrowed Capital (Paid or Payable) xxx (xxx)
INCOME FROM HOUSE PROPERTY XXX

Steps for determining Gross Annual Value U/S 23:

Gross Annual Value U/S 23:

Step 1: Municipal value (MV) vs. Fair Rent (FR)

[whichever is Higher is Fair Rent of step 1]

Step 2: Fair Rent of Step 1 vs. Standard Rent (SR)

[whichever is Lower Fair Rent of step 2]
[which becomes Fair Rent(FR) to determine Annual Value]

Step 3: Fair Rent of Step 2 vs. Actual Rent (AR)

If Actual Rent > Fair Rent, then Actual Rent =Annual Value
OR
if Actual Rent < Fair Rent, then Actual Rent = Annual Value (only due to vacancy)
OR
if Actual Rent < Fair Rent, then Fair Rent= Annual Value (Due to other factors)

NOTE 1: Step 2 is relevant only if Standard Rent is fixed for the property otherwise, Step 1 is followed by
Step 3.

Note 2: Actual Rent includes actual rent received or receivable for the let out period for a single unit of
property.

Unrealised Rent: (Rule 4)

If any amount of rent is not capable of being realised, then such portion of rent shall not be included in
computing the actual rent. Exclusion of unrealised rent is permissable if the following conditions under
Rule 4 are satisfied:

a) The tenancy is Bonafide

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 assesse.
d) The assesse 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.

Municipal Taxes:
Deduction is permissible in respect of property taxes subject to the following two considerations:
(i) It should be borne by the assesse
(ii) It should be actually paid during Previous Year
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Deductions U/S 24:

30% of Net Annual Value [Sec 24(a)] – This section allows a flat 30% deduction on the Net Annual Value.
It does not depend on the actual expenditure incurred. Assesse can avail this deduction even if there are no
actual expenditure or tenant undertakes the repairs. However, this deduction is not available on the self
occupied property.

Self-Occupied Property: (Sec 23(2))

a) The annual value of self-occupied property shall be adopted as NIL. Accordingly, the Municipal
and other taxes levied by the local authorities and they adopt deduction of 30% of the Net Annual
Value are not deductible.
b) Interest on Loans borrowed up to a maximum of Rs. 2,00,000 (Rs.30,000 in certain specific
situations) shall be allowed as a deduction.
In case a property is acquired or constructed out of a loan and where such acquisition or
construction is completed within 5 years from the end of Financial Year in which the loan is
borrowed, then interest shall be allowed upto Rs.2,00,000. (limit of construction to be completed
within 3 years).
In respect of self-occupied property not falling in this category, the limit of deduction shall be
Rs.30,000.

Interest on Loan: (Sec 24(b))

a) Interest payable on the loans borrowed for the purpose of acquisition, construction, renovation,
repairing or reconstruction can be claimed as deduction.
b) Interest relating to the year of completion of construction can be fully claimed in that year
irrespective of the date of completion.
c) Interest payable during the construction period preceding the year of completion of construction can
be accumulated and claimed as a deduction over a period of 5 years in equal installments
commencing from the year of completion of construction.
d) Any subsequent loan borrowed to repay the original loan shall also be entitled to the same treatment
as the original loan.
e) Any Interest on unpaid interest is not allowed as deduction.
f) Where a person acquires a property and pays only part of the sale consideration, interest payable on
the unpaid purchase price qualifies for deduction in computation of “Income from House Property”.

Deemed to be let out property: (Sec 23(4))

a) If assesse owns more than one house property, then the income from any one such property at
the option of assesse shall be treated as deemed to be let out property.
b) The computation of deemed to be let out property is subject to certain modifications as listed
below:
i. Fair rent (of respective step) has to be adopted as Gross Annual value, the question of
considering the actual rent does not arise.

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 ii. Municipal taxes actually paid can be claimed as deduction.
iii. Both the deduction u/s 24 are permissible. The ceiling limit on the interest on loan
borrowed does not apply to be ‘deemed to be let out property’.
c) Where an assessee owns two or more house properties at the option of assesse, one property
shall be considered as self-occupied and other property can be considered as ‘Deemed to be let
out property’. This option can be changed year after year in a manner beneficial to the assesse.

Generally, the house property with a higher gross annual value shall be treated as self-occupied so that the
house property with lesser Gross annual value shall be liable to tax as it is ‘Deemed to be let out property’.

Unrealised Rent and Arrears of rent received subsequently (Sec 25A) – The amount unrealized rent or
arrears of rent received subsequently from the tenant, shall be taxable at 70% of the amount received, after
allowing a deduction of 30% of unrealized rent or arrears of rent received subsequently. Such income shall
be taxable under the head Income from House Property in the year of receipt. It shall be taxable under this
head even if the recipient is not the owner of the property.

Co-Ownership: (Sec 26)

a) If two or more persons jointly own a property and if their shares are definite and ascertainable, then
the income from such property cannot be taxed as income from an “Association of Persons”.
b) The share of income of each such co-owner should be determined and included in his individual
assessment. Accordingly, actual interest by each co-owner borrowed shall be allowed subject to an
independent limit of Rs. 2,00,000 each.

Composite Rent

1. Composite rent is the rent charged in cases where other facilities are also provided along with the
property let out like lift facility, parking, power back-up, swimming pool, gym etc.
2. If the composite rent is separately identifiable then the income from building shall be taxed under
the head “Income From House Property” and the composite rent shall be taxed under the head
either “Profit and Gains of Business or Profession” or “Income from other sources”
3. If the composite rent is not separately identifiable then it will be chargeable to tax under “income
from other sources”. If the other party does not accept letting out of buildings without other assets,
the rent is taxable either as business income or income from other sources.

Deemed Owner: (Sec 27)

In certain cases the legal ownership may vest with one person. Whereas, the taxability is cast on another
person who is deemed to be the owner. The following are the situations under this section:

1) An individual who transfers otherwise than for adequate consideration, any house property to his or her
spouse, not being a transfer in connection with an agreement to leave apart, or to a minor child not
being minor married daughter , is deemed to be the owner of the house property so transferred.
2) The holder of impartible estate is deemed to be the individual owner of all the properties comprised in
the estate.

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3) A member of co-operative society, company or other Associations of Persons to whom a building or a
part thereof allotted or leased under a house building scheme, shall be deemed to be the owner of that
building or part thereof even though co-operative society, company or legal association.
4) A person who is allowed to take or retain possession of any building or part thereof in part performance
of contract of the nature referred in Sec 53 A of the transfer of property act 1882, is deemed to be the
owner of that property.
5) A person who acquires any rights (excluding any rights by way of a lease from month to month or for a
period not exceeding one year) in/or with respect to any building or part thereof by virtue of the
following transactions shall be deemed to be the owner of the property:
a) Transfer of any land or any building or part thereof by way of sale or exchange or lease for a term
not less than 12 years.
b) Transfer of any rights in/or with respect to any land or building or part there of (whether by way of
admitting as a member or by way of transfer of shares in a cooperative society or a company or
association or by way of any agreement or arrangement or in any other manner what so ever) which
has the effect of transferring or enabling the enjoyment of such property.

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