Income From House Property PDF

Module – II INCOME FROM HOUSE PROPERTY  INCOME FORM HOUSE PROPERTY House property refers to any building or land attached to a building that is owned by an individual and is used to earn income. This can include: Residential properties (apartments, houses). Commercial pr...

Module – II INCOME FROM HOUSE PROPERTY  INCOME FORM HOUSE PROPERTY House property refers to any building or land attached to a building that is owned by an individual and is used to earn income. This can include: Residential properties (apartments, houses). Commercial properties (offices, shops). Vacant land (if it generates income) Annual value of a property is assessed to tax only in the hands of the owner even if he is not in receipt of any income. Any person other than the owner, even though he is in receipt of rent shall not be liable to tax under this head. That is why, income from sub-letting is not taxable under this head but under the head ‘Income from other sources’. Legal Owner / Beneficial Owner / Deemed Owner A. Legal owner: ▪Legal owner means a person who has the legal title of the property as per the Transfer of Property Act, Registration Act, etc. B. Beneficial owner: ▪For income tax purpose it is not necessary that the property must be registered in the name of the assessee. ▪If the assessee is enjoying the property as an owner to full extent he will be treated as a beneficial owner of such property and will be charged under the head ‘Income from house property’. C. Deemed Owner [Sec. 27] When an individual transfer a house property to: ▪His or Her Spouse or ▪A Minor Child - without adequate consideration, then transferor shall be treated as deemed owner of such property. E.g.: Mr. X transfers his house property worth Rs.5,00,000 to Mrs. X out of love and affection. In such case, though Mrs. X is the legal owner but Mr. X will be liable to tax as deemed owner of such property. Basics of House Property Tax A house property could be a home, an office, a shop, a building or some land attached to the building like a parking lot. The Income Tax Act does not differentiate between commercial and residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. An owner for the purpose of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on someone else’s behalf. Income tax classifies the properties in two ways: a. Self-Occupied House Property Used for residential purposes, may be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property can also be considered self-occupied for the purpose of Income Tax. Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. From the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and the remaining house as let out for Income tax purposes. b. Let Out House Property A house property that is rented for the whole or part of the year is considered a let-out house property for income tax purposes. A house property in excess of 2 self-occupied properties, is deemed a let-out property (treated as a let-out even if vacant). Inherited Property: An inherited property is one which is one donated from parents, grandparents, etc. and again, can either be a self-occupied one or a let-out one based on its usage as discussed above. Income from letting out of vacant land is taxable under the head “Income from Other Sources” or “Profits or gains from business or profession”.  Calculation of Income from House Property a.Determine Gross Annual Value (GAV) of the property: ▪The gross annual value of a self-occupied house is zero. ▪GAV for let out property is rent for a let-out property. ▪In case of deemed let out property GAV is the market value of the rent received. b. Reduce Property Tax: ▪Property tax, when paid, is allowed as a deduction from GAV of the property. ▪The property taxes which the owner pays during the previous year are only to be deducted to arrive at NAV. c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual Value – Property Tax d. Reduce 30% of NAV towards Standard Deduction: ▪30% on NAV is allowed as a standard deduction from the NAV under Section 24 of the Income Tax Act. ▪No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section. ▪One can claim 30% expense deduction even if he has not actually incurred the expenses.  e. Reduce Home Loan Interest: ▪A deduction under Section 24 is also available for interest incurred on a housing loan used to purchase or construct a property. ▪In the case of construction, however, the interest deduction is available only after the completion of the construction. f. Determine Income from House Property: ▪The resulting value is the income from house property. ▪This is taxed at the slab rate applicable. ▪In case of opting for new regime interest deduction on housing loan is available only in case of let out property. g. Loss from House Property: ▪When you own a self-occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. ▪This loss can be adjusted against income from other heads.  Calculation of Gross Annual Value of the Let-out Property GAV should be calculated for both let-out property and deemed let-out property. GAV is determined by taking into account many factors. i. Municipal Valuation: Fixed by the local authorities on the basis of income earning capacity of the property. It is fixed to calculate the house-tax to be paid by the owners. ii. Actual Rent: Rent received or receivable from the tenant during the year, including rent during vacancy periods. iii. Fair Rent / Reasonable Rent: The rent of similar properties in the same locality iv. Standard Rent: The rent fixed by the Rent Controller under Rent Control Act. Where the standard rent is applicable, reasonable rent and municipal value will not be taken into consideration even though they are higher than the standard rent. Where the property is let out for the whole year, then the GAV would be higher of: Expected Rent (ER): ▪ER - Higher of the Fair rent and Municipal value. ▪ER - Cannot exceed Standard rent. Example: Manoj owns a house that is let out, Determine the GAV. Municipal value - Rs.80,000, Fair Rent – Rs.90,000, Standard Rent - Rs.75,000, Actual Rent - Rs.72,000. Solution: Particulars Amount 1. Municipal Value Rs.80,000 2. Fair Rent Rs.90,000 3. Higher of (1)and (2) Rs.90,000 4. Standard Rent Rs.75,000 5.Expected Rent (Lower of (3) and (4)) Rs.75,000 6. Actual Rent Received Rs.72,000 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.75,000 Example: Mallika owns a house that is let out, Determine the GAV. Municipal value - Rs.65,000, Fair Rent – Rs.70,000, Standard Rent - Rs.75,000, Actual Rent - Rs.72,000. Solution: Particulars Amount 1. Municipal Value Rs.65,000 2. Fair Rent Rs.70,000 3. Higher of (1)and (2) Rs.70,000 4. Standard Rent Rs.75,000 5.Expected Rent (Lower of (3) and (4)) Rs.70,000 6. Actual Rent Received Rs.72,000 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.72,000 Example: Rama is the owner of a house (not covered under Rent Control Act) which is let out at Rs. 1,500 per month. Municipal taxes of the house are Rs. 1,200 (being 10% of the municipal value) out of which Rs. 700 are paid by the tenant. The reasonable rent is Rs. 10,000 per annum. What is NAV? Solution: Particulars Amount 1. Municipal Value (Given: Municipal Tax : Rs.1200) (1200*100/10) Rs.12,000 2. Fair Rent Rs.10,000 3. Higher of (1)and (2) Rs.12,000 4. Standard Rent - 5.Expected Rent (Lower of (3) and (4)) Rs.12,000 6. Actual Rent Received (1500*12) Rs.18,000 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.18,000 8. Net Annual Value = (GAV – Municipal Tax) = (18,000 – 500) Rs.17,500 Example: Determine the Annual Value of house of Mr. Pramod for the A.Y. 2023-24 Municipal value Rs.70,000 House let-out @Rs.8,000 p.m Municipal tax paid by landlord Rs.7,000 (10% of M.V.) Fair rent Rs.80,000 House remained vacant for 2 months. Solution: Particulars Amount 1. Municipal Value Rs.70,000 2. Fair Rent Rs.80,000 3. Higher of (1)and (2) Rs.80,000 4. Standard Rent - 5.Expected Rent (Lower of (3) and (4)) Rs.80,000 6. Actual Rent Received (8,000*10) Rs.80,000 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.80,000 8. Net Annual Value = (GAV – Municipal Tax) = (80,000 – 7,000) Rs.73,000 Unrealized Rent: Let-out house, which remains vacant during a part of the previous year and there is unrealized rent. GAV of such house will be calculated as: From the GAV, taxes actually paid by the landlord and amount of unrealized rent will be subtracted. Rules for Unrealised Rent: ▪The amount of rent which the owner cannot realize shall be equal to the amount of rent payable but not paid by a tenant of the assessee. ▪The tenancy is bonafide. ▪The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property ▪The defaulting tenant is not in occupation of any other property of the assessee ▪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. Example: Determine the annual value of house of Varun for the A.Y. 2023-24. Municipal value Rs.2,00,000 Fair rent Rs.1,80,000 Actual rent (PM) Rs.25,000 House remained vacant for 2 Months during the P.Y. Unrealized Rent Rs.40,000. Municipal tax paid by the landlord Rs.20,000. Solution: Particulars Amount 1. Municipal Value Rs.2,00,000 2. Fair Rent Rs.1,80,000 3. Higher of (1)and (2) Rs.2,00,000 4. Standard Rent - 5.Expected Rent (Lower of (3) and (4)) Rs.2,00,000 6. Actual Rent Received (25,000*10) Rs.2,50,000 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.2,50,000 8. Net Annual Value = (GAV – Municipal Tax – Unrealized Rent ) = (2,50,000 – 20,000 – 40,000) Rs.1,90,000  CALCULATION OF INCOME FROM HOUSE PROPERTY Particulars Amount Gross Annual Value (GAV) XXXX Less: Municipal Taxes paid during the year (XXX) Net Annual Value (NAV) XXXX Less: Deduction U/S 24(a) @30% of NAV XXX U/S 24(b) on Interest XXX (XXX) Income from House Property XXXX  Example: Let's consider a property with the following details: Gross annual value: Rs.5,00,000 Municipal taxes paid during the year: Rs.20,000 Interest on loan borrowed for the year: Rs.1,00,000 Solution: Income From House Property Particulars Amount (Rs.) Gross Annual Value (GAV) 5,00,000 Less: Municipal Taxes paid during the year 20,000 Net Annual Value (NAV) 4,80,000 Less: Deduction under section 24 Deduction under section 24(a) @ 30% of NAV 1,44,000 Deduction under section 24(b) on interest 1,00,000 2,44,000 Income from House Property 2,36,000  SELF-OCCUPIED HOUSE The owner of house can: A)Occupy the house for full year B)Occupy the house for a part of the previous year and for the remaining of the previous year it is let out C)Occupy a part of the house for full year and a part of the house for the part of the year (i.e. a part of the house is let out for a part of the previous year).  A. When the house is Self-Occupied for the full year: a.The annual value of the house which is occupied by the owner for his residential purposes is NIL. b.If a part of the house is self-occupied by the owner for full previous year and the remaining part is let out for full previous year, the annual value shall be determined as under: i.From the annual value of the full house, the proportionate annual value for self-occupied part for whole year will be deducted; ii.The balance left will be the annual value of the let out part for full year.  B. If the whole house is self-occupied by the owner for a part of the previous year and the whole house is let out for a part of the previous year: The annual value shall be determined as under: i.First of all the annual value of the whole house shall be determined. ii.Then, the annual value for that period shall be deducted during which the house is self-occupied by the owner. iii.The balance left shall “be the annual value of the house”. Example: From the following information of Mr. A, compute the adjusted annual value of the let out period of the house for the Assessment Year 2023-24. Municipal value Rs.20,000; Municipal tax paid Rs.4,000; House was self-occupied for first six months and for the remaining six months it was let out at the rate of Rs.2,000 p.m. Solution: Income From House Property Particulars Amount (Rs.) Municipal Value 20,000 Actual Rent (2,000 * 6) 12,000 Gross Annual Value (GAV) (Highest of the above) 20,000 Less: Municipal Tax Paid 4,000 Annual Value 16,000  C. If a part of the house is let out for a part of the previous year or a part of the house property is self-occupied by the owner for full year and a part is occupied by the owner for a part of the year (i.e. a part of the house is let out for a part of the previous year), the annual value shall be determined as under: i.First of all from the annual value of the full house, the proportionate annual value of the self-occupied part which is self-occupied for full year shall be deducted. ii.The balance left shall be the annual value for let out portion for the let out period. Example: Mr.Ajaykumar has a house property in Allahabad whose Municipal Valuation is Rs.2,00,000. Its fair rental value is Rs.2,40,000. This property was self-occupied by Mr.Ajaykumar from 01.04.2022 to 31.07.2022 w.e.f 01.08.2022, it was let out at Rs.14,500 per month. Compute the annual value of the house property for the AY 2023-24, if Mr.Ajaykumar has paid the Municipal Taxes Rs.20,000 on 28.02.2023. These taxes include Rs.5,000 of PY immediately preceding the PY. Solution: Computation of Annual Value for AY 2023-24 of Mr. Ajay Kumar Particulars Amount 1. Municipal Value Rs.2,00,000 2. Fair Rent Rs.2,40,000 3. Higher of (1)and (2) Rs.2,40,000 4. Standard Rent - 5.Expected Rent (Lower of (3) and (4)) Rs.2,40,000 6. Actual Rent Received (14,500*8) Rs.1,16,000 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.2,40,000 8. Net Annual Value = (GAV – Municipal Tax) (2,40,000 – 20,000) Rs.2,20,000 Example: CA Pawan owns a house of which 50% portion is let out for the purpose of residence at Rs.4,400 pm. 25% portion is used by him for his profession and remaining 25% portion is used for his residence. From the following particulars, find out annual value of the house property: i) Municipal valuation Rs.60,000; ii) Fair rent of property Rs.70,000 iii) Municipal Taxes 10%. Solution: Computation of Annual Value of CA Pawan Particulars (Let out Portion : 50%) Amount 1. Municipal Value (50% of Rs.60,000) Rs.30,000 2. Fair Rent (50% of Rs.70,000) Rs.35,000 3. Higher of (1)and (2) Rs.35,000 4. Standard Rent - 5.Expected Rent (Lower of (3) and (4)) Rs.35,000 6. Actual Rent Received (4,400*12) Rs.52,800 7. Gross Annual Value (GAV) Higher of (5) and (6) Rs.52,800 8. Net Annual Value = (GAV – Municipal Tax@10%) (52,800 – 60,000*10%*50%) Rs.49,800 Example: Ms. Richa is the owner of a house at Mumbai, particulars of which for the year ended 31st March, 2023 are as under: a. Actual rent received Rs.4,800 b. Municipal Valuation Rs.4,200 c. Total Municipal Tax Rs.630 d. Municipal Tax paid by Ms. Richa Rs.400 c. Municipal Tax paid by the tenant Rs.230 d. Interest on loan taken for renovation of the house Rs.200 Compute Ms. Richa’s Income from House Property for the A.Y. 2023-24. Solution: Computation of Income from House Property of Ms. Richa for the AY 2023-24 Particulars Amount (Rs.) Amount (Rs.) GAV (Actual Rent being Higher than Municipal Value) 4,800 Less: Municipal Tax Paid by the Owner 400 4,400 Annual Value 4,400 Less: Standard Deduction (4,400*30%) 1,320 Interest on Loan 200 1,520 Income from the House Property 2,880 Example: Aliya is the owner of a house property in Pune. It is let out for Rs. 90,000 p.a. The municipal tax payable by the owner comes to Rs. 10,000 but the landlord has taken an agreement from the tenant stating that the tenant would pay the tax direct to the municipality. The landlord, however, bears the following expenses on tenant’s amenities under an agreement: Water charges 1500 Lift maintenance 1000 Lighting of stairs 800 Gardener’s salary 700 The landlord claims the following deductions: Repairs 20000 Land Revenue 2000 Collection Charges 6000 Legal expenses in connection with house is built 24000 Compute the taxable income from house property for the A.Y. 2023-24. Solution: Computation of Taxable Income from House Property A.Y 2023-24 Rent realized Rs. 90000 Less: Value of tenant’s amenities provided by the landlord: Water charges 1500 Lift maintenance 1000 Lighting of stairs 800 Gardener’s salary 700 Rs.4000 Gross Annual Value Rs.86000 Less: Municipal tax paid by the owner Rs.00000 Annual Value Rs.86000 Less: Standard Deduction (30% of A.V) Rs.25800 Taxable Income from House Property Rs. 60200 34