The value obtained from house property is taxable under the head “Income from House Property” i.e. the annual value of the property, which includes building or land appurtenant thereto, of which the assessee is the owner, is subject to taxable under this head “income from House Property”. However, if the property is owned and used by the assessee for any business or profession and also if the rental income is received from vacant plot of land (building not appurtenant thereto) , is not taxable under this head, but taxable under “income from Business or Profession” or “income from Other Sources”, depending upon the nature. The term “building” includes residential houses, bungalows, office buildings, warehouses, docks, factory buildings, music halls, lecture halls, auditorium etc. The appurtenant lands in respect of a residential building may be in the form of approach roads to and from public streets, compounds, courtyards, backyards, playgrounds, kitchen garden, motor garage, stable or coach home, cattle-shed etc., attached to and forming part of the building. In respect of non-residential buildings, the appurtenant lands may be in the form of car-parking spaces, roads connecting one department with another department, playgrounds for the benefit of employees, etc.
The annual value after undergoing few deductions is taxable under this head. The rent received during the financial year is not only the sole value to determine annual value. Section 23 of Income Tax Act, 1961 determines the Annual Value, which in simple terms enunciates that:
Step 1. The greater of Municipal rent and Fair rent
Step 2. The lesser of Step 1 determined and Standard rent
Step 3. The greater of Step 2 determined and Annual Rent Received
The greater amount determined under step 3, will be the Gross Annual Value (GAV) and municipal taxes (which includes corporation and water tax) paid by the assesse during the year can be deducted from GAV to arrive at Net Annual Value. If the tenant on behalf of owner assesse pays the municipal taxes or if the owner assesse resides himself in the house property cannot claim this deduction from GAV. There are two main deductions enunciated under section 24 which shall be deducted from NAV to determine the taxable income from House Property. The 2 deductions are:
- Standard deductions (30% of NAV determined), this deduction is for expenditure faced by the assessee like repairs, electricity, water supply etc. and can be claimed only upto 30% even if the expenditure incurred is greater or lesser than standard deduction.
- Deduction of interest on Home Loan for the property, in case if the assessee takes any loan for purchase, construction, for repair, renovation or reconstruction of House Property, can claim deduction on accrual basis (i.e. even if interest is not paid deduction can be claimed) from NAV, a self-occupied owner assessee can also claim this deduction however, the total amount allowed towards this deduction for a self-occupied house property is Rs. 2,00,000 beginning assessment year 2015-16
During the construction period the interest will be accumulated and deduction can be claimed on post construction period in 5 equal instalments along with that year’s interest paid. For this purpose, the construction of building shall be completed within 3 years from the genesis of loan received and the loan should have been received after 1st April 1999 and the assessee shall have the interest certificate, otherwise Rs.30,000 deduction only can be claimed if the loan is received prior to 1st April, 1999 and loan is received before, on or after 1st April, 1999 for repairs, renovation or construction of house property.
There is a concept called deemed owner, wherein if the assessee registers a property in his/ her spouse’s or minor child’s name, the transferor shall be said to be deemed owner who shall be liable to pay tax.
In case if the property is partly let out and partly self-occupied by the assessee, tax shall be paid only on that partly let out property and if the property is partly occupied and partly left vacant the GAV shall be determined for the entire financial year as let out.
The assessee can come across with unrealised rent, section 25AA of Income Tax Act, 1961 deals with unrealised rent, wherein, if the assessee cannot realise rent from house property let out to tenant, subsequently realises is subject to tax as the income of previous year in which such income is realised, whether or not the assessee is owner of the House Property in the previous year. The rent which is not realised in that particular year, shall be deducted from the GAV, however, to claim this the assessee should have been filed a suit before the court of law for recovery of unrealised rent or shall be taken necessary steps for the recovery of the same. And another concept is Arrears of Rent, wherein section 25B of Income Tax Act, 1961 unequivocally enunciates that due to increase of rent with retrospective effect etc., the rent is received in the subsequent year, which should have been received in the previous year, and which is not taxed shall be made taxable in the year in which it is received with a special provision enumerating the assessee to claim 30% standard deduction from the amount received as arrears of rent.
In order to conclude with the same, the head “Income from House Property” is a simple and small concept, which contributes one of the major part of revenue to the government. And as per the recent statistics one of the major contribution of tax to the government is Corporation Tax which is paid by every assessee who owns a house property which in turn makes the same to comply the provisions under this head.