From House Property
the various sources of income that a person can have, income from
house property is one of the important heads of income under the
Income Tax Act. In most cases it is rather easy to compute taxable
income from house property. At times, however, some complicated
problems of computation of income are faced by the taxpayers who
do not have legal assistance.
booklet brought out under Tax Payers Information Series attempts
to solve this problem by explaining the provisions relating to calculation
of income from house property in a non-legalistic and easy-to-understand
booklet has gone through several editions since 1994 when it was
first published by this Directorate. This edition has been updated
by Sh. I. Satish Kumar, an officer working in the Regional Training
Institute, Bangalore under the able guidance of Smt. Manju Madhavan,
Commissioner of Income-tax. Latest provisions as amended by the
Finance Act, 2001 have been incorporated in it.
is my earnest hope that the booklet, as in the past, shall be found
useful by the taxpayers. Any suggestions for its improvement are
19th November 2001
Director of Income tax (RSP&PR)
from House Property
Property is regarded as a source of income for Income-tax purposes.
Income from house property is one of the heads of income under the
Income tax Act. Your income from different heads like Salaries,
Income from house property, profits and gains of business or profession,
capital gains and other sources are first determined and then added
to get your total income which is subjected to tax at the rates
specified in the Finance Act. The Income tax Act has provided the
manner of computation of income under different heads giving the
permissible deductions and exemptions under each head of income.
ordinary parlance, your income from house property will presuppose
that you have a house from which you are deriving income in the
form of rent. The scope of income from house property for the purpose
of the Income tax Act is, however, much wider. It is quite possible
that the house property in question is not giving you any rent as
is the case when it remains vacant throughout the year or you may
be using it yourself for self-occupation. Yet, for the purpose
of the Income-tax Act, you will have income from house property.
For what is taxed under this head is not the actual rent but the
inherent capacity of the property to earn income. This is technically
known as the “annual value” of the property.
The kind of property
property that we have been speaking of should consist of buildings
or land appurtenant to such buildings. Income from letting out
of vacant plots of land when there is no adjoining building will
not be taxed under this head (but will be taxed as income from other
sources). The existence of a building is, therefore, an essential
prerequisite. Building will of course, include residential house
(whether let out or self-occupied), office building, factory building,
godowns, flats etc. And the purpose for which the building is
used by the tenant is also immaterial. Thus, income from letting
out godowns will be taken as income from house property. It does
not make any difference at all if the property is owned by a limited
company or a firm. However, if the building or part thereof is
used by the owner himself for the purpose of his own business then
there will be no income from such portion of the house property.
Who is liable to pay ?
We have seen that
the inherent capacity of a property consisting of any buildings
or lands appurtenant thereto is subjected to tax under the head
income from house property. But in whose hands? The answer is
in the hands of the owner of the property. The assessee must be
the owner. In case the assessee is not the owner, but gets rent
from sub-letting a property, the income will not be taxed as income
from house property (but will be considered as income from other
sources). Ownership will also include deemed ownership. As per
Sec.27 of the Income tax Act, the following persons are to be treated
as deemed owner of house property for the purpose of charging
to tax income from house property:
individual who has transferred his house property to his spouse
(otherwise than in connection with an agreement to live apart)
or to a minor child (not being a married daughter);
holder of an impartible estate is deemed to be the individual
owner of the properties of the estate;
member of a Co-operative Society, Company etc., to whom a building
or part thereof has been allotted or leased under a house building
person who is allowed to take or retain possession of a property
in part performance of a contract as defined in Section 53A of
the Transfer of Property Act; and
person having long-term lease rights in a property under a lease
agreement extending to 12 years or more in the aggregate including
the term for which the lease may be extended.
when a flat is allotted by a Co-operative Society or a Company to
its members/ shareholders who enjoy the flat, technically the Co-operative
Society/Company may be the owner. However, in such situations the
allottees are deemed to be owners and it is the allottees who will
be taxed under this head. Persons who purchase properties on the
basis of Power of Attorney and under long-term leases (12 years
& more) are also deemed to be owners. The concept of deemed
owner is introduced to prevent misuse like transferring properties
in the name of spouse or minor child etc., and for assessment of
income in the hands of beneficial owner.
must be of the superstructure. It is not necessary that the assessee
should also be the owner of the land. Thus, when someone takes
a piece of land on lease and constructs a building thereon, the
income from such building will be taxed in his hands as income from
sum up, it can be said that the inherent capacity to earn income
of a property consisting of buildings or lands, appurtenant thereto
is charged to tax as income from this property in the hands of the
owner except in respect of the whole or such part of the property
as is used for the purpose of his own business or profession, the
profits of which are chargeable to Income-tax separately.
concept of Annual Value:
basis of calculating Income from House property is the “annual value”.
This is the inherent capacity of the property to earn income
and it has been defined as the sum for which the property might
reasonably be expected to let from year to year. It is not
necessary, as we have seen earlier, that the property should actually
be let. It is also not necessary that the reasonable return from
property should be equal to the actual rent realized when the property
is, in fact, let out. Where the actual rent received is more
than the reasonable return, it has been specifically provided that
the actual rent will be the annual value. Where, however, the
actual rent is less than the reasonable rent (e.g., in case where
the tenancy is affected by fraud, emergency, close relationship
or such other consideration), the latter will be the annual value.
The municipal value of the property, the cost of construction, the
standard rent, if any, under the Rent Control Act, the rent of similar
properties in the same locality are all pointers to the determination
of annual value. However if the property is let and was vacant
during any part or whole of the year and due to such vacancy, the
rent received is less than the notional rent, such lesser amount
shall be the Annual value. For example, in case of a house, whose
municipal valuation is Rs.24,000/- and actual rent received is Rs.36,000/-
the annual lettable value will be taken at Rs.36,000. If the actual
rent received were to be Rs.18,000, Rs.24,000/- would be the annual
value for the purpose of the Income-tax Act.
of Annual Value of Self Occupied Property
understood the concept of Annual Value, we can now go into the details
of its actual determination. Self-occupied house property does
not generate any rent. Yet notional income from it was liable to
tax and causing hardship to tax payers. Presently, a preferential
treatment is given to one self-occupied house property which has
not been actually let out at any time in which case, the annual
value is taken as ‘Nil’. If, one is fortunate enough to own
more than one house property using all of them for self-occupation,
he is entitled to exercise an option in terms of which, the annual
value of one house property as specified by him will be taken at
Nil. The annual value of the other self occupied house property/ies
will be determined on notional basis as if it had been let out.
Value of one house away from work place
going into the final stage of calculation of income from house property,
let us consider two more situations. A person may own a house property,
in Bangalore, which he normally uses for his residence. He is transferred
to Chennai, where he does not own any house property and stays in
a rental accommodation. In such a case, the house property in Bangalore
cannot be used for self-occupation and notional income, therefore,
would normally have been chargeable although he derives no benefit
from the property. To save the tax payer from hardship in such
situations, it has been specifically provided that the annual value
of such a property would be taken to be nil subject to the following
The assessee must be the owner of only one house property.
He is not able to occupy the house property because of his employment,
business etc., away from the place where the property is situated.
property should not have been actually let or any benefit is derived
has to reside at the place of employment in a building not belonging
Value of let out property
respect of a let out house property, the rent received is usually
taken as the annual lettable value as we have discussed earlier.
When, however, the rent is not indicative of the actual earning
capacity of the house, the notional value will have to be found
out. The standard rent in the case of properties subject to Rent
Control Legislation, the annual lettable value fixed by the Municipalities,
rent of similar property in the locality, the cost of construction
of the property are the facts which will determine such notional
annual value. It must, however, be kept in mind that when the
actual rent received or receivable is higher than the notional annual
value as calculated above, the higher figure will be taken for the
purpose of Income-tax.
the annual value as determined above (referred to as annual lettable
value in the Return of Income) municipal taxes are to be deducted
if the following conditions are fulfilled:
property is let out during the whole or any part of the previous
(There is no such deduction in respect of one self-occupied
house property for which ‘nil’ annual value is adopted).
Municipal taxes must be borne by the landlord
(If the Municipal taxes or any part thereof are borne
by the tenant, it will not be allowed).
Municipal taxes must be paid during the year
(Where the municipal taxes become due but have not been
actually paid, it will not be allowed. Similarly, the year
to which the taxes relate to, is also immaterial).
the purpose of determining the Annual value, the actual rent shall
not include the rent which cannot be realised by the owner. However,
the following conditions (these conditions are as per existing
Rule 4 as on 29.06.2001. The new rule has not yet been framed)
need to be satisfied for this :
The tenancy is bona fide ;
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 assessee;
(d) The assessee has taken all reasonable steps to institute legal
proceedings for the recovery of the unpaid rent or satisfied the
Assessing Officer that legal proceedings would be useless ; and
(e) The annual value of the property to which the unpaid rent
relates has been included in the assessed income of theprevious
year during which that rent was due and tax has been duly paid
on such assessed income.
the annual value as determined above, further deductions are allowed.
It has to be borne in mind that the deductions mentioned here
(section 24) are exhaustive and no other deductions are allowed.
The deductions admissible are as under:
& Collection Charges: 30% of the Annual Value. It is
a statutory deduction not dependent on the actual expenditure
incurred on repairs or collection by the owner.
When money is borrowed on interest and the property in question
is either acquired or constructed or repaired or reconstructed
with such borrowed funds, interest payable thereon is deducted
from the annual value. The amount of interest payable for the
relevant year should be calculated and claimed as deduction.
It is immaterial whether the interest has actually been paid during
the year or not. However, there should be a clear link between
the borrowal and the construction/purchase etc., of the property.
If money is borrowed for some other purpose, interest payable
thereon cannot be claimed as deduction.
attributable to period prior to construction/acquisition
may be borrowed prior to the acquisition or construction of the
property. In such a case, interest paid/payable before the final
completion of construction or acquisition of the property will be
aggregated and allowed in five successive financial years starting
with the year in which the acquisition or construction is completed.
This deduction is not allowed if the loan is utilized for repairs,
renewal or reconstruction.
The assessee took a loan of Rs.3,00,000/- in April 1999 from a Bank
for construction of a house on a piece of land which he owns at
Meerut. The loan carried interest @ 15% p.a. The construction
is completed in April 2001 and the house is given on rent from May
2001. Meanwhile he has already paid interest of Rs.90,000 (over
and above the yearly interest) in five equal installments of Rs.18,000/-
each starting from the assessment year 2002-03.
Note relating to interest
In case the property is let out, the entire amount of interest
accrued during the year is deductible. The borrowals may be for
construction/acquisition or repairs/renewals. In the case of
Self-occupied property, the deduction will be:
the actual amount accrued or Rs.30,000/- whichever is less.
the borrowal is on or after 1.4.99 and construction or acquisition
is before 1.4.2001-deduction is Rs.75,000/- applicable to
borrowal is on or after 1.4.99 and construction or acquisition
is before 1.4.2003-deduction is Rs.1,00,000/- applicable
to A.Y 2001-02.
borrowal or acquisition is before 1.4.2003- deduction is
Rs.1,50,000/- applicable to A.Y 2002-03 and onwards.
Thus in the case of Self-occupied property, if the borrowal is
for repairs, renewals or reconstruction, the deduction is restricted
to Rs.30,000. If the borrowal is for construction/acquisition,
higher deduction as noted above is available.
fresh loan may be raised exclusively to repay the original loan
taken for purchase/ construction etc., of the property. In such
a case also, the interest on the fresh loan will be allowable.
payable on interest will not be allowed.
or commission paid to arrange a loan for house construction will
not be allowed.
interest is payable outside India, no deduction will be allowed
unless tax is deducted at source or someone in India is treated
as agent of the non-resident.
regarding the deductions
respect of self occupied house property and a property away from
work place, the annual value has been taken as NIL and no other
deduction other than interest to the extent of Rs.30,000/- (Rs.150000/-
as the case may be).
The deductions mentioned in the section are exhaustive. Therefore,
no deduction, which is not mentioned here, will be allowed. Thus
there is no provision for allowing deduction in respect of salary
paid to a caretaker, stamp duty and registration charges in respect
of lease of the house, interest on enhanced ground rent etc.
When a house is built or acquired with borrowed funds to be repaid
with interest, there are two elements of repayment – repayment
of principal and repayment of interest. It is the interest element
alone on which deduction is allowed (subject to the conditions
already discussed) in computing income under the head “Income
from House Property”. Repayment of principal upto a maximum
amount of Rs.20,000/- is eligible for rebate u/s.88 along with
Life Insurance Premium etc., subject to the conditions mentioned
in that section. Taxpayers, therefore, should invariably give
a break-up of the interest and principal when the repayment consists
of both the elements.
unrealised rent is received subsequently, is it taxable ?
any rent cannot be realised, and subsequently if such amount is
realized, such an amount will be deemed to be the income from house
property of that year in which it was received. We have seen earlier
that the basic requirement for assessment of this income is the
ownership of the property. However, in the cases where unrealised
rent is subsequently realised, it is not necessary that the assessee
continues to be the owner of the property in the year of receipt
of rent: When the owner of a building receives arrears of rent from
such a property, the same shall be deemed to be the income from
house property of the year of receipt. 30% of the receipt shall
be allowed as deduction towards repairs, collection charges etc.,
(prior to the A.Y 2002-03, the rate of deduction was 25%). No other
deduction will be allowed. As in the case of unrealised rent, the
assessee need not be the owner of the property in the year of receipt.
there be loss under the head Income from House Property?
brings us to the question whether there can be any loss under this
head. In so far as income from a self-occupied property is concerned
and in respect of a property away from workplace, the annual value
is taken at nil, no other deductions are allowed except for interest
on borrowed capital upto a maximum of Rs.30,000. In such cases,
there may be loss upto a maximum of Rs.30,000 (or Rs.1,50,000 as
the case may be). In respect of other type of house property, namely
a house property that is let out, there are no restrictions on deductions
and therefore, there can be loss under this head :
treatment of such loss
loss is determined in respect of house property, the next question
would be regarding the to be given to such losses. The loss from
one house property can be set off against the income from another
house property. The remaining loss, if any, will be set of against
incomes under any other heads like salary. In case the loss does
not get wiped out completely, the balance will be carried forward
to the next assessment year to be set off against the income from
house property of that year. However, such carry forward is restricted
to eight assessment years only.
has a property, which is self-occupied. The net loss from this
property is Rs.15,000. ‘A’ has income from salary of Rs.60,000.
The loss can be set off from salary income (after standard deduction).
a salaried employee (salary Rs.85,000/- after standard deduction)
has two properties which are let out. The net loss from one
property ‘X’ is Rs.20,000. The income from the other property
‘Y’ is Rs.14,000. The loss from property ‘X’ can be set off against
income from property ‘Y’. There will still be a loss of Rs.6,000/-
in respect of property ‘X’. This can be set off against his salary
case of joint ownership of any property, when the share of each
co-owner is definite and ascertainable, it has been provided that
each of the owners will be assessed individually in respect of share
of income from the property. In other words, income from the property
will be determined and allocated to each co-owner according to his
share. When each of the co-owners of a property uses it for his
residence, each of them will also get the concessional treatment
in respect of one self-occupied property.