How to calculate ‘income from house property’ for income tax purposes

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Income from House Property covers the rent earned from the House property which is chargeable to tax. Sometimes, the owner may have to pay tax on ‘deemed rent’ in case the property is not let out or vacant. The income from house property would be taxable if it satisfies the following three essential conditions:

The assessee is the owner of that property
The property must consist of house, buildings and/or land.
The property may be used for any purpose except used by the owner for the purpose of running his business or profession.

Steps involved in the Computation of Income from House Property

(1)Computation of Gross Annual Value
(2)Computation ofNet annual Value
(3)Computation of Deduction available U/s 24

Basis of computing of Income from House Property:

Income from House property is computed as under :

Gross Annual value **********
Less : Munispal Taxes
(It is deductible when it is born by the owner and actually paid by him during the year. ) (*********)
Net Annual value **********
Less : Deduction U/s 24
(i)Standard Deduction @ 30% ( Section 24(a) (*********)
(ii)Interest on borrowed Capital (Section 24(b) (*********)
Income from House Property **********
Gross Annual Value (GAV)
Why ‘GrossAnnual Value’ is calculated to compute income from house property?
The answer to this is that tax on house property is not on actual rent but on inherent capacity of building to generate income. In other words, how much rent the property can fetch. Through Gross Annual Value, taxable income from house property is calculated.
Gross Annual Value
Gross Annual Value is determined as under:

Step I Find out reasonable expected rent of the property
Step II Find out Actual rent received or receivable ( Note 1 )
Step III Higher of the I or II above
Step IV Find out Loss due to vacancy
Step V Step III minus step IV is the Gross Annual Value

Note 1: Unrealized rent if any has to be deducted from rent received or receivable
If certain conditions are fulfilled.

Net Annual Value

Gross Annual Value minus Municipal taxes like property tax, paid by the owner.

Deductions from House Property

Following two types of deductions from annual value are available u/s 24 of the Income Tax Act to arrive atthe taxable income from HP.

Standarddeduction @ 30% of Net Annual value (Note 2)
Deduction of Interest on borrowed capital

Note 2: No any other deduction towards expenditure such as insurance, repairs, electricity, water supply etc. is allowed.

The above procedure is explained with an illustration:

Mr. Z owns a residential property in Mumbai. He earned ₹ 12,00,000 as a rent  from it in Financial Year 2017-18. The Municipal Valuation (MV) is ₹ 9,60,000, Fair rent (FR) is ₹900000 and Standard Rent (SR) under Rent Control Act is ₹ 8,40,000. However, out of ₹ 12,00,000, unrealized rent is ₹ 1,00,000. Further, He has paid interest of ₹4,60,000in the current year and in pre construction period Rs. 20,00,000 on loan taken on this property and municipal tax of ₹ 60,000. What is the Income from House Property of Mr. Z for or Assessment Year 2018-19 (FY 2017-18).
First we have to calculate Gross Annual Value (GAV):
Computation of Gross Annual Value

Particulars Amount
Step I : Reasonable Expected Rent (Higher of MV or FR subject to SR ) 8,40,000
Step II : Rent actually received or receivable after reducing
unrealised rent ( 1200000-100000) 11,00,000
Step III : Higher of step I or Step II 11,00,000
Step IV : Loss due to vacancy Nil
Step V : Gross annual value ( Step III- Step IV ) 11,00,000

Now we will compute Income from House property as under:
Computation of Income From House Property

Particulars Amount
Gros Annual Value as above 11,00,000
Less : Municipal Taxes 60,000
Net Annual Value 10,40,000
Less : Deduction u/s 24 Nil
Standard Deduction 30%
Interest On borrowed capital ( 1/5 of 2000000+ 460000) 3,12,000
8,60,000
Income From House Property ( loss ) Note 3 (1,32,000)

Interest on Borrowed Capital (Some important points )

Interest on borrowed capital is allowed on accrual basis.

Interest on unpaid interest (penalty) is not allowable.

Pre-constructioninterest for borrowed capital is availablefor deduction meaning thereby that the interest for the period commencing on the date of borrowing and ended on 31stMarch prior to the date of completion of construction/ acquisition of property will be considered interest of pre- construction period .The deduction is available in 5 equal installments, commencing from the previous year in which house is acquired or constructed.

The income from house property, which is occupied by the owner for the purpose of his own residence or could not be occupied by the owner for his residential purpose due to his employment at other place is taken as nil. However, he is allowed as deduction of interest paid on borrowed capital (including the accumulated interest of the pre-construction period) up to Rs 2.00 Lacs only.

When the assessee has more than one house then, he/she can exercise an option to treat anyone of the house to be self-occupied. The other house(s) shall be deemed to let out.

Calculation of interest on Pre-construction period:

Mr. X has taken loan for construction of the houseon 1st Oct 2009 and construction of house is completed/ possession taken over on 15 Dec 2017.It means interest from 01.10.2009 to FY 2016-17 will be considered as interest of pre- construction period and allowed to be claimed in 5 equal installment commencing from the FY 2017-18. Say Total interest up to FY 2016-17 is Rs. 10,00,000 then it will be allowed to be claimed Rs 200000per year from the FY 2017-18 plus actual interest accrued for FY 2017-18.

Interest on Borrowed Capital for self occupied Property:

Maximum ceiling of interest is Rs 2,00,000

Interest on borrowed capital is allowed up to Rs. 200000 (inclusive of pre construction interest), on fulfillment of the following conditions:

Loan is taken after 1/4/1999 for purchase or construction of property.

Purchase or construction should be completed within 5 years (3 years up to FY 2015-16) from the end of financial year when loan is taken. Suppose loan is taken 1/1/2010. Construction should be completed up to 31/03/15.

There is certificate from lender that interest is payable in respect of amount given for purchase or construction of property.

Maximum ceiling in any other case is Rs 30,000

If all the above three conditions are not satisfied then deduction is allowed up to Rs 30000 only. In other words in the following cases interest on borrowed capital is allowed up to Rs 30,000:

If capital is borrowed before 1/4/1999 for purchase, construction, reconstruction, repairs of a property or

If capital is borrowed after 1/4/1999 for repair, reconstruction or renewal of property.

Deduction of interest in Case of Co-Borrower:

If the home loan is taken on joint names then the deduction is allowed to each co-borrower in proportion to his share in the loan. For taking such deduction, it is necessary that such co-borrower must also be co-owner of that property. If the assessee is a co-owner but is repaying the full loan himself, then he can claim deduction of full interest paid by him.

The limit of deduction in case of Self occupied property applies individually to each co-borrower. In other words, each co-borrower can claim deduction up to Rs. 2 Lacs. Meaning thereby the Co-owner may claim interest up to Rs 400000 (i.e. Rs 200000 each). No limit is applicable to let out property.

Major Change Applicable from the Financial Year 2017-18

Until FY 2016-17, Loss under the head Income from House Propertycould be set off against other heads of income without any limit. However, from FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs only.

This amendment would not effecton self-occupied house property, however this will have an impact on let-outproperties. Though there is no bar on the amount of interest that can be claimed as a deduction under Section 24 for a rented house property, but the losses whicharises on account of such interest repayment can be set off with other heads of income)only to the extent of Rs 200000 lacs.

Explaining the concept and impact

Mr. X is residing in Delhi has a salary income of Rs 10 lakhs for FY 2016-17 and FY 2017-18 and Interest income from FD of Rs 4 lakhs. He owns three residentialhouse properties as under:

Property A
(Delhi ) Self-occupied for which Interest on housing loan paid Rs 280000
Property B
( Bombay ) This properly could not be occupied because of employment in Delhi. So it is considered as deemed let out .Annual value is considered as Rs 300000 .Interest on housing loan is Rs 240000
Property C
( Delhi ) Let out for residential purpose , the annual value is Rs 5,20,000 and Municipal taxes Rs 20,000 .Interest on borrowed capital is Rs 600000

Computation of total income and tax liability

Description FY 2016-17 FY 2017-18
Salary income 1000000 1000000
FDR interest 400000 400000
Income from HP ( see working below ) *(390000) *(200000)
Gross total income 1010000 1200000
Deduction 80C (150000) (150000)
Taxable income 860000 1050000
Tax including cess 99910 131325
Additional tax out go due to amendment 31415

*Working on computation of Income from House property

FY 2016-17 FY 2017-18
Property A (Self-occupied)

Annual value Zero Zero
Less :Interest on loan limited to Rs 200000 200000 200000
Loss from House Property A (200000) (200000)

Property B ( Deemed Let- out )
Annual value 300000 300000
Less : Interest on housing loan 240000 240000
Net Income from House Property B 60000 60000

Property C ( Let- Out )
Gross Annual Value 520000 520000
Less :Municipal Taxes 20000 20000
Net annual Value 500000 500000
Less :Standard Deduction 30% 150000 150000
Less : Interest (pre Construction+ Current) 600000 600000
Loss from House Property C (250000) (250000)

Total Income (Loss ) from House Property ( A+ B +C ) (390000) (390000)
Adjustment of loss and carry forward in subsequent year The loss of Rs 390000 is fully adjusted with the other income say with the salary. If unadjusted in the same year then to carry forward in next 8 AY to be adjusted with house property Income only. Here all the losses can be adjusted with salary Out of above loss only 200000 will be adjusted with other Income (say with salary).
Balance loss of 190,000 will be carried forward in next 8 AY and to be adjusted with house property Income Only.

FAQ on Rental Income From House property

Q.1 Is rental income from sub-letting chargeable to tax under the head “Income from house property”?

Ans: Rental income in the hands of owner is charged to tax under the head “Income from house property”. Rental income of a person other than the owner cannot be charged to tax under the head “Income from house property”. Hence, rental income received by a tenant from sub-letting cannot be charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be.

Q.2 Under which head is the rental income from a shop charged to tax?
Ans : To tax the rental income under the head “Income from house property”, the rented property should be building or land appurtenant thereto. Shop being a building, rental income will be charged to tax under the head “Income from house property”.

Q.3 What is the tax treatment of composite rent when the composite rent pertains to letting of building along with other assets?
Ans: Composite rent includes rent of building and rent towards other assets or facilities. The tax treatment of composite rent is as follows:-

(a) In a case where letting out of building and letting out of other assets are inseparable (i.e., both the lettings are composite and not separable, e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. Nothing is charged to tax under the head “Income from house property”.

(b) In a case where, letting out of building and letting out of other assets are separable (i.e., both the lettings are separable, e.g., letting out of refrigerator along with residential bungalow), rent of building will be charged to tax under the head “Income from house property” and rent of other assets will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. This rule is applicable, even if the owner receives composite rent for both the lettings. In other words, in such a case, the composite rent is to be allocated for letting out of building and other facilities.

Q.4 Can interest paid on loans taken from friends and relatives be claimed as deduction while calculating house property income?

Ans: Yes, if the loan is taken for purchase, construction, repair, renewal or reconstruction of the house. If the loan is taken for personal or other purposes then the interest on such loan cannot be claimed as deduction.

Q.5My spouse and I jointly own a house in which both of us have invested equally out of independent sources. Can the rental income received be split up between us and taxed in the individual hands?
Ans: Yes, if the share of each co-owner is ascertainable

Q.6What will be the tax implications if a person occupies more than one property for his residence? Can he treat all the properties as self occupied (SOP) and claim gross annual value (GAV) as Nil?

Ans: The SOP benefit (i.e., treating property as SOP and claiming GAV as Nil) is available only in respect of one property occupied by the owner for his residence. If a person occupies more than one property for his residence, then the SOP benefit will be granted only in respect of any one property as selected by him and other property/properties will be treated as “Deemed to be let-out”.

Q.7Mr x owns two houses. One is a farmhouse that he visit on weekends and the other is in the city that he uses on weekdays. Is it correct to treat both these residences as self occupied?

Ans: No, for the purpose of Income-taxlaw you can claim only one property as self occupied property and other property will be deemed to be let-out property

Q.8What is the tax treatment of arrears of rent?

Ans: The amount received on account of arrears of rent (not charged to tax earlier) will be charged to tax after deducting a sum equal to 30% of such arrears. It is charged to tax in the year in which it is received. Such amount is charged to tax whether or not the taxpayer owns the property in the year of receipt.
Disclaimer
Author does not make any claim that the information provided in this article is correct and up-to-date. The contents of this article cannot be treated or interpreted as a statement of law. The reader may visit Income Tax Web site for resolving their doubts/clarifications.

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