Self-occupied House Property

Introduction

Income is taxable under the head 'house property' if it arises from a property consisting of any building or land appurtenant thereto. For the computation of income under this head, a house property is classified into three categories:

(a) Let-out

(b) Self-occupied

(c) Deemed let-out house property.

The income from house property is computed on the basis of its annual value. Various factors such as municipal valuation, fair rent, standard rent, and actual rent are considered to arrive at an annual value.

About

The rental Income (Annual Value) is taxable under the head income from house property if the following two conditions are satisfied:

a) There should be a building and land appurtenant thereto; and

b) The assessee should be the owner of such property.

Building and Land Appurtenant thereto

For chargeability of income under this head, the property must consist of any building or land appurtenant thereto.

Example: If any income is derived from vacant land then such income shall not be chargeable to tax under the head 'Income from house property' as the property does not consist of any building. Such rental income is chargeable to tax under the head 'Income from other sources'.

The land is called land appurtenant to the building if it is an indivisible part and parcel of a building for its use and enjoyment by the occupiers, and it is not put to any other use and is not yielding any income assessable under this head. Generally, playgrounds, parking lots, garages, backyards, gardens, etc. are treated as land appurtenant to a building.

Ownership of Property

To become an owner of a property, a person must hold the legal title of the property in his name. He should be able to exercise the rights of the owner, not on behalf of the owner but in his own right. However, in certain situations, despite not holding the legal ownership of a property, a person is considered as deemed owner of the property, and, accordingly, income from such property is chargeable to tax in his hands even though he is not the legal owner of such property.

If a person deriving rental income from a property is not the owner of such property, then the income so derived shall be chargeable to tax either as business income or residual income but not as income from house property.

When is the annual value of house property not charged to tax?

The annual value of a house property is not chargeable to tax under this head if the following conditions are satisfied:

(a) The owner of the property utilizes the property to carry on his business or profession; and

(b) Income of such business or profession is chargeable to tax.

Computation of Income from House Property

For the computation of income from house property, a house property has to be classified into the following categories:

(a) Let-out;

(b) Self-occupied; and

(c) Deemed let-out.

The income from the let-out house property is computed in the following manner:

Computation of Gross Annual Value

'Annual Value' is a notional figure arrived at after an objective consideration of various factors such as municipal valuation, fair rent of the property in a similar location, standard rent under the Rent Control Act, actual rent received or receivable, and the period for which the property was vacant and facts and circumstances of a particular case. The annual value of the property shall be determined in the following steps:

* If the Rent Control Act is applicable, the Expected rent of the property cannot exceed the amount of Standard rent which means expected rent shall be the higher of Municipal Rental Value and Fair Market Rent but subject to Standard Rent.

As per Section 23(1)(c) of the Income-tax Act, where 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 expected rent, the amount so received or receivable shall be deemed to be the annual value.

This provision would be applicable in the following circumstances:

a) The property or any part of the property was let;

b) Such property was vacant either for the whole or any part of the previous year; and

c) Owing to such vacancy, actual rent is lower than expected rent.

Under the aforesaid circumstances, the annual value of the property would be Actual Rent.

Municipal Rental Value - Municipal valuation is an important guiding factor in arriving at the notional income of a house property. A local authority makes a periodic survey of rental valuations of all buildings within its area for determining municipal taxes payable by a house owner. The rental value so determined by municipal authority is treated as the 'Municipal Rental Value' of the house.

Fair Market Rent - Fair rent is the sum for which a property might reasonably be expected to be let out from year to year. It is determined on the basis of rent fetched by a similar property in the same or similar locality. An important aspect of determining fair rent is to find out what would be the rent between the lesser and lessee if they are unrelated parties and transactions are made on an arm's length basis.

Standard Rent - Where Rent Control Act is in operation in any state, the landlord cannot charge anything more than the standard rent fixed or determinable under the Rent Control Act. Thus, the standard is the maximum rent which a person can legally recover from his tenant under Rent Control Act.

Actual rent received or receivable - Actual rent is the amount received or receivable by the landlord from a tenant in occupation of the property. The actual rent cannot be construed to mean the rent actually coming into the hands of the owner. It may be calculated after the inclusion or exclusions of certain amounts.

  •  Inclusion – Non-refundable deposits will be included on a pro-rata basis.

  •  Exclusion – The following amount paid by the tenant shall not be added –

  ○  Stamp duty paid for drawing up the lease deed and the registration

  ○  Refundable deposit

  ○  Municipal taxes

  ○  Repair cost

  ○  Commission paid to the broker

  ○  Advance rent

  ○  Maintenance charges paid to the service provider

Unrealized Rent - The amount of unrealized rent, which an owner cannot realise from his tenant, is allowed to be deducted from actual rent received or receivable only if the following conditions are satisfied:

a) The tenancy is bona fide;

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 assessee; and

d) 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.

Further, the amount of rent received in arrears or the amount of unrealized rent realized subsequently by an assessee shall be charged to income- tax in the previous year in which rent is received or realized. The following points should be noted:

(a) The recipient of arrears of rent is chargeable to tax in the year in which such rent is received, regardless of whether he owns the house property in the year of receipt.

(b) The recipient can claim 30% of the arrears of rent, or the unrealized rent realized subsequently as a deduction.

Computation of Net Annual Value

Municipal taxes levied by the local authority in respect of the house property are allowed to be deducted from the gross annual value if such taxes are borne by the owner and actually paid by him during the year. Municipal taxes are allowed to be deducted only in the case of let-out property or deemed let-out property and not in the case of self-occupied property.

If municipal taxes are due but not paid during the year, then the deduction in respect thereof is allowed in the year in which they are actually paid.

Further, no deduction is allowed if the municipal taxes are borne and paid by the tenant. Municipal taxes shall not include the other charges levied by the local authority towards repair, regularization charges, etc.

Standard Deduction

While computing income from house property, the standard deduction is allowed at the rate of 30% of net annual value irrespective of the amount of expenditure incurred on maintenance, etc. of the property. No further deduction can be claimed in respect of the amount incurred on insurance, repairs, electricity, water supply, security, etc.

Interest on housing loan

Where a house property is let-out by the assessee, the amount of interest paid or payable on the loan, taken to purchase, construct, renovation, repair or reconstruction of such house, is allowed as deduction without any limit. The deduction for interest is allowed even if it exceeds the annual value of the property.

Meaning of deemed let-out house property

Where a person owns more than two house properties, he can claim the annual value as 'nil' of any two of such house properties if the same is used for his own residence or unoccupied due to business or employment at any other place. All other house properties are deemed to be let out.

Even if a person held the house property as stock-in-trade, it shall be deemed to be let out after the expiry of 2 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. The annual value of such property is taken as 'nil' for up to two years.

Which house should be treated as deemed let-out house property?

If an assessee has more than two house properties, which are not let out during the year, he should exercise the option to treat two houses as self-occupied.

Computation of annual value of deemed let-out house property

The annual value of a deemed let-out house property shall be computed in the same way in which the annual value of let-out house property is computed. As no actual rent is received from a deemed let-out property, the expected rent of such property is deemed as annual value.

Standard deduction and Interest on housing loan

The standard deduction and interest for housing loans shall be allowed in the same manner as allowed while computing income from let out house property.

Meaning of Self-Occupied Property

House property is considered self-occupied house property if it is in occupation of the owner for his own residence or it cannot be occupied by the owner due to his employment, business, or profession carried on at any other place and he has to reside at that other place in a building not belonging to him.

Computation of annual value of self-occupied house property

The annual value of a self-occupied house property is considered as nil only if such property is not actually let out at any time during the year and no benefit is derived therefrom by the owner. Unlike let-out house property, no deduction is allowed towards municipal taxes and standard deduction.

However, interest on a housing loan can be claimed as a deduction to the extent of Rs. 30,000/Rs. 2,00,000, depending upon the case.

If the house property is let-out for part of the year, even for a single day during the year, the assessee cannot exercise this option to claim that such house property is a self-occupied house property.

How many houses can be claimed as self-occupied?

If the assessee has more than two house properties, then he can claim the annual value of any two house properties as 'nil' provided such properties if the owner occupies it for his own residence or cannot actually occupy it due to any reason.

All houses, other than the two houses in respect of which the option to treat them as self-occupied house property has been exercised, shall be treated as deemed let-out.

When a property is self-occupied for part of the year

Where a house property is self-occupied for part of the year and let out for the remaining part of the year, the annual value of such property shall be calculated as if it is let out. In this case, the period for which the property remains self-occupied shall be irrelevant, and the annual value shall be determined as if it is let out for part of the year. Therefore, the expected rent of the property shall be taken for the full year but the actual rent received or receivable shall be taken only for the period for which the property is let-out and the gross annual value shall be higher than the expected rent or actual rent.

Interest on housing loan

Any interest on a home loan taken for purchase, construction, renovation or repair, etc. of the house is allowed as a deduction while computing the income from house property. For Self-occupied property, deduction is allowed in following manner:

(a) Deduction up to Rs. 30,000

In respect of two self-occupied house properties, the assessee can claim aggregate amount of deduction of up to Rs. 30,000 towards the interest paid or payable on the loan taken to purchase, construct, renovation, repair or reconstruction of such properties.

(b) Deduction up to Rs. 2,00,000

In respect of two self-occupied house properties, the assessee can claim aggregate amount of deduction of up to Rs. 2,00,000 towards the interest paid or payable on the loan taken to purchase or construct such properties, if following conditions are satisfied:

a) The loan should be taken on or after 01-04-1999 for purchase or construction of the house;

b) The property is purchased or constructed within 5 years from the end of the financial year in which the amount is borrowed;

c) The assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, that the amount of interest is payable on the amount advanced to the assessee for acquisition or construction of a property or as re-finance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.

Where different parts of the property are used for different purposes

Where part of a house property is used for own residence and part of the property is let-out, such property shall not be treated as a single unit. In such cases, each part of the property shall be treated as a separate house and, accordingly, the income from each part shall be computed separately as per the relevant provisions. The municipal value, fair rent, municipal tax, and interest shall be apportioned on the basis of the built-up area.

Property owned by co-owners

Where a house property is owned by two or more persons (known as co-owners) and their respective shares are definite and ascertainable, then each co-owner's share in the income from the property is computed separately. In a situation where the share of co-owners is not ascertainable, the income from the house property shall be taxable in the status of Association of Person/Body of Individual.

Where the co-owners share is certain and the house property is let-out, the annual value of the property is computed as if one owner owns the property and, thereafter, the computed annual value is apportioned between each co-owner as per their respective share in the property. Each co-owner shall be entitled to claim standard deduction and deduction in respect of interest on a home loan according to their contribution in repayment of interest.

Pre-construction period interest

If the loan is taken to acquire a house property but the property is acquired or constructed in the subsequent year, the interest for the pre-acquisition period shall be allowed to be deducted in 5 annual installments, commencing from the previous year in which the property is acquired or constructed.

The pre-construction period begins from the date of borrowing and goes till 31st March, immediately preceding the previous year in which the property is acquired or constructed, or the date of repayment of the loan, whichever is earlier.

This provision applies to every house property, that is, let-out, deemed let-out, or self-occupied house property.

Interest on loan taken to repay the original loan

Circular No. 28, dated 20-08-1969, clarifies that if a fresh loan has been raised to repay the original loan taken for the house property, the interest payable in respect of the second loan is also admissible as a deduction.

Interest on arrears of Interest

If interest is paid on the arrears of interest or for making a default in payment of EMI, no deduction is allowed for such penal interest charged by the lender.

Treatment of Loss from House Property

Where the net result of computation under the head Income from house property is a loss and the assessee has income assessable under any other head of income, he can set off such losses from income taxable under such other head of income.

However, a maximum loss of Rs. 2 Lakhs under the head house property can be set off during the year against income taxable under any other head. The unabsorbed loss, if any, shall be carried forward for 8 years for set-off in subsequent years. The loss under the head house property can be carried forward even if the Income-tax return is filed after the due date.

Income from letting out of a residential house

Explanation 3 to Section 28 provides that any income from letting out of a residential house or a part of the house by the owner shall not be chargeable under the head “Profits and gains of business or profession” and shall be chargeable under the head “Income from house property”.

Exemption and relief for house property income -

Income-tax Act provides exemption and relief with respect to income derived from house property in the following cases:

  -  Income from farm building [Section 2(1A)(c)]

  -  Rent derived from agriculture land [Section 2(1A)(a)]

  -  Income from property held under trust [Section 11]

  -  Palace of an ex-ruler [Section 10(19A)]

  -  Income of local authority [Section 10(20)]

  -  Income of certain institutes like educational, medical, charitable, and religious institutions [Section 10(23C)]

  -  Income of a registered trade union [Section 10(24)]

  -  Income of a political party [Section 13A]

  -  Self-occupied house property [Section 23(2)]

  -  House property used for own business or profession

  -  Income of co-operative society