Direct Taxation Prof. Shahid Qureshi

INCOME FROM HOUSE PROPERTY Sec 22 - 27

Content GAV Municipal Tax Deduction under section 24 Calculation on Interest on Loan Concept of Interest on Loan Deduction under section 24 Municipal Tax GAV

INTRODUCTION When an assessee earns any income from a house property, it is taxed under the head ‘Income from house property’ as per the Income Tax Act. Tax calculation on such income varies depending on the type of house property & several other factors.

Basis Of Charge Income from House Property as per Section 22 of the Income Tax Act. There should be property. The property must consist of Building & Land attached thereto. The assessee must be the owner/deemed owner of the property.

Property That Exempt Agricultural Income Farm House Palace of Ex-Ruler Self-occupied House Property Property used for Charity purpose House Property used for own Business of Profession House Property used for registered Trade Union/ Local Union

GAV

To understand how income on house property & subsequent tax on such income is calculated, one needs to gain some knowledge about the following related terms: Annual value: It is the capacity of the property to earn income. Municipal value: It is the value of the property as derived by municipal authorities. Fair Rental Value: It is an assumed rental value of the property which is calculated by comparing it with a similar property having similar features. Standard rent: It is a fair amount of rent prescribed by Rent control Act which ensures that tenants are not exploited while owners receive a fair amount of rent. Actual rent received/receivable: It is the actual amount of rent received by the owners from the tenants.

How to find GAV? Particulars LOP DLOP SOP Municipal Value (MV) XX Fair Rent (FR) Whichever is Higher (FR1) Standard Rent (SR) Expected Rent (FR2) Actual Rent (AR) N.A Gross Annual Value NIL Note: If FR2 > AR Due to vacancy: AR is GAV Any other reason: FR2 is GAV If FR2 < AR AR is GAV

Q.1 Sangam Provides Following Details Calculate GAV Particulars Amt Municipal Value 90,000 Fair rent 1,40,000 Standard Rent 1,20,000 Actual Rent p.m. 12,000 Months Let Out 9 Months Vacant 3

Solution:- M.V. F.R. 90,000 1,40,000 F.R.1 S.R. 1,40,000 1,20,000 F.R.2 A.R. 1,20,000 1,08,000 Due to Vacancy GAV = AR = 1,08,000

Types Of House Property Self Occupied Property (SOP) :- The property which is used by assessee or owner for own residential purpose, it is known as ‘Self Occupied Property’. Let Out Property (LOP) :- The assessee’s 2nd house which he/she gave on rent, it is known as ‘Let Out Property’. Deemed Let Out Property (DLOP) :- The 2nd house of assessee which is not ‘Let Out’ but it assumed to be a Let Out, it is known as ‘Deemed Let Out Property’. Vacant Let Out Property (VLOP) :- The 2nd property of assessee which is vacant for a particular period, it is known as ‘Vacant Let Out Property’.

Sub-Letting Property:- The assessee’s 2nd Property which is let out & that property is rented by tenant directly, then such property is known as ‘Sub-letting Property’. Composite Rent:- Rent which is taken by the assessee on property which is rented providing with facilities like AC, fridge or any asset. Assesse take rent on property he rented as well as on assets which is used by tenant differently, this is known as ‘Composite Rent’.

Municipal Tax Municipal tax means which paid to municipality or local authority. The following point important in connection with Municipal Tax:- Municipal Tax must be actually paid in the current year that is previous year, if municipal tax are outstanding than it shall not be allowed (Ignore). Municipal Tax must actually paid by owner, if municipal tax are paid by the tenant shall not be allowed (Ignore).

If Municipal Tax are paid by the owner but reimbursed by the tenant than it shall not be allowed (Ignore). However municipal tax are paid by the tenant but reimbursed by the owner than it shall be allowed. If Municipal Tax is given in %form then such % must be applied on municipal value. Municipal Tax also known as local authority Tax, Corporations Tax, Water Benefit Tax, Sewerage Tax, Property Tax.

Municipal Taxes Paid Any taxes paid to the government during the financial year (for which the income is being computed) on the property owned, such as house tax, are allowed for deduction from the Gross Annual Value which is calculated on the basis of the total rent receivable/received/deemed rent for the property for that FY. If the owner does not pay the taxes on a property then he cannot avail the deduction too. Owner can claim deduction even for arrears of house tax in the financial year in which these arrears are actually paid.

Deduction Under Section 24 This is a comprehensive guide for those who own a residential property. It will help you in understanding how your income derived from house property is taxed and the tax benefits you can avail to minimize your tax liability. We will talk about tax deductions and calculation of income in 2 different sections. First section will help you understand how your income from house property is calculated and taxed. Second section will give you detailed information on the tax benefits available for those who buy property with home loans.

Standard Deduction A tax deduction of 30% of net annual value of the property is allowed to the taxpayer. Net annual value is calculated as gross annual value minus municipal taxes Paid. This deduction is allowed irrespective of the amount spent on insurance, repairs, water and electricity supply, etc.

Deemed to be let out property Self-occupied property Format Let out property Deemed to be let out property Self-occupied property NAV = Rent received – Municipal taxes paid NAV = Reasonable rent of a similar place – Municipal taxes paid NAV = NIL Calculation of Net Annual Value of Properties: Note: Since annual value of a self-occupied property is zero or nil, therefore standard deduction allowed is also zero or nil.

Interest on Borrowed Capital

Calculation of interest on borrowed capital U/S 24 Interest on borrowed capital LOP/DLOP SOP 100% deduction on int For relevant for pre- on Loan previous year const. period loan taken before loan taken after 01/04/1999 01/04/1999 Max Rs. 30,000 Max Rs. 2,00,000 can be allowed as deduction can be allowed as deduction

Interest on Loan The maximum tax deduction that you can get here on interest payment of home loan taken for a self-occupied property is Rs. 2 lakhs. In case the property for which the home loan has been taken is not self-occupied i.e. rented or deemed to be rented, no maximum limit for tax deduction has been prescribed and the taxpayer can take deduction of the whole interest amount u/s 24. However, if the owner has not occupied the property himself due to his employment, business or profession carried on at any other place, which has forced him to reside at any other place, then the amount of tax deduction available u/s 24 stays limited to Rs 2 lakhs only.

Important Points to remember If the loan is taken prior to 1/4/1999 a maximum deduction of Rs. 30,000 can be allowed whereas if the loan is taken after 1/4/1999 a maximum deduction of Rs. 2,00,000 can be allowed. Construction or acquisition of the property must be completed within 3 years from the end of the year in which loan was taken. Fresh loan taken for repayment of the original loan is allowed as deduction.

Brokerage paid for arranging the loan will not be allowed as deduction. Penalty paid for delay in payment of loan installment will not be allowed as deduction. Interest paid in the pre-construction period will be allowed as deduction in five equal installments under the post construction period. This deduction will only be allowed if provision no. 2 is satisfied.

Computation of Income From House Property Format Assessee: P.Y.: 2017-18 Status: Individual ROR A.Y.: 2018-19 Computation of Income From House Property Particulars SOP LOP Gross Annual Value (GAV) NIL XXX (-) Municipal Tax Net Annual Value (-) Deduction U/S 24: Std Ded. U/S 24 a 30% of NAV Interest on Borrowed Capital U/S 24 b IFHP

Q.2 Swati Sharma requests you to calculate income from house property from following details:- Rent received: 60,000 Fair rent: 80,000 Municipal Tax: 3,000 Water benefit tax: 2,000 Land revenue: 1,000 Loan taken for construction Rs. 2,00,000 on 1.7.2009 & const. completed on 1.4.2012. Rate of interest 10% p.a.

GAV Calculation M.V. F.R. -- 80,000 FR1 SR 80,000 -- FR2 AR 80,000 60,000 FR2 is GAV:- Rs.80,000

Computation of Income From House Property Solution:- Assessee: Swati Sharma P.Y.: 2017-18 Status: Individual ROR A.Y.: 2018-19 Computation of Income From House Property Particulars Amt Gross Annual Value (GAV) 80,000 (-) Municipal Tax (3,000) NAV (Net Annual Value) 77,000 (-) Ded U/S 24 30% of NAV(77,000*30%) (23,100) Int. on Borrowed Capital Loan U/S 24 (W.N. – 1) (31,000) IFHP 22,900

W. N. – 1 Pre-construction = 2,00,000 loan amt Interest :- 10% p. a W.N. – 1 Pre-construction = 2,00,000 loan amt Interest :- 10% p.a. Date of Loan:- 1/07/2009 Date of completion :- 1/04/2012 09-10 :- 9 months :- 2,00,000*10%*9/12 = Rs. 15,000 10- 11 :- 12 months :- 2,00,000*10% = Rs. 20,000 11- 12 :- 12 months :- 2,00,000*10% = Rs. 20,000 15,000+ 20,000+ 20,000 = 55,000*1/5 = 11,000

13-14 14-15 15-16 16-17 17-18 20,000 31,000

THE END

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