Session-7, Income from house property by B.Pani M.Com,LLB,FCA,FICWA,ACS,DISA,MBA

Owner Legal Owner Deemed Owner i)Who transfers house property otherwise than for adequate consideration to his or her spouse(not being in connection with an agreement to live apart) or to his minor child(not being a married daughter) ii)Holder of an impartible estate iii)A member of a co operative society to whom a building or part thereof is allotted under house building scheme

Property owned by Co-owners Where the shares are ascertainable such persons will not be assessed as AOP. The share of each person in the income from the property will be included in his income.

Chargeability The annual value of any property comprising of building or land appurtenant thereto of which the assessee is the owner, is chargeable to tax under the head Income from house property. The annual value of any building or portion of a building occupied by the assessee for the purpose of business or profession carried on by him is not taxable.

Gross Annual Value Reasonable expected rent Rent received or receivable Whichever is higher Reasonable Expected Rent is normally higher of the following i)Municipal valuation of the property ii)Fair rent of the property If however,a property is covered by Rent Control Act than the amount so computed cannot exceed the standard rent determinable under the Rent Control Act

Annual value The sum for which the property might reasonably expected to let from year to year or Where the property or any part thereof is let out and the actual rent received or receivable by the owner is in excess of the sum as above, the amount so received or receivable or Where any property or any part thereof is let and was vacant during the whole or any part of the previous year and owing to such vacancy the rent received or receivable is less, the amount so received or receivable. The tax levied by local authority shall be deducted in determining the annual value of the property of that previous year in which such taxes are actually paid by him

Overview of Income-tax Act,1961 INCOME FROM HOUSE PROPERTY Gross Annual Value Self occupied propertyVacant propertyRented out property Higher of: Actual rent received/ receivable Reasonable Expected Rent Gross Annual value of Rented property ( - ) Rent for the period of vacancy Nil Co ownership – Each owner taxable on a proportionate basis Net Annual Value (NAV) = Gross Annual Value minus municipal taxes Income from house property = NAV – standard deduction and interest on borrowed capital DETERMINATION OF ANNUAL VALUE

Reasonable Expected Rent ABCDE Municipal Value 40 Fair Rent Standard Rent NA Reasonable expected Rent

SituationsGross Annual Value If rent received /receivable is lower than reasonable expected rent only because of vacancy Rent received /receivable is taken as Gross Annual Value If rent received /receivable above is lower partly because of vacancy and partly because of other factors (like letting out of property at lower rent, unrealised rent etc) Reasonable expected rent minus loss due to vacancy is taken as gross annual value. If rent received /receivable is lower because of factors other than vacancy Reasonable expected rent becomes gross annual value.

Illustration X owns a house property municipal valuation Rs /-,fair rent Rs /-, standard rent Rs /-.It is let out throughout the previous year rent being Rs 8000/- per month upto Nov and Rs 14000/- per month thereafter. The property is transferred by X to Y on January 31 st 2009.Findout the Gross Annual value of the property in the hands of X for the assessment year

Answer Municipal value /12*10= Rs120833/- Fair rent /12*10= Rs /- Standard rent /12*10= Rs /- Actual rent 8000* *2.5= Rs 95000/- Gross Annual Value Rs /-

Exemption on the basis of ownership Farm house outside the specified area-Sec10 (1) Building owned by a charitable or educational institution.-Sec 10 (23C) Building owned by a trade union-Sec 10(24) Building owned by a political party-Sec 13A

Nil Annual value for one house If in the occupation of the owner for his residence. Can not be occupied owing to his employment, business or profession carried out at other places and he has to reside in other place in a building not belonging to him. The house is not actually let out in whole or in part No other benefit is derived by the owner.

Deduction from Income from House Property A sum equal to 30% of annual value. Interest on borrowed capital to the extent of Rs /-

Example Ramani owns a flat which is assessed by the local authority with annual value of Rs The property was let out for Rs 7500 pm. However, the tenant vacated the property on 30/09/08.The flat was vacant from Oct 2008 to Jan In Feb 2009, a new tenant occupied the house at rent of Rs pm.

Answer Fair rent Rs 90000/- Actual Rent Rs 65000/- As per sec 23(1)(c)when the actual rent is less than the fair rent on account of vacancy, then actual rent has to be taken as Annual Value. Therefore Annual value is Rs 65000/-

Example Radhika owns a flat whose annual value assessed by municipal corporation is Rs 60000/-.The property was let out for Rs pm in April 2005 and interest free rental advance equal to three months rent was collected.There is stipulation in the agreement that 25% increase shall be made in the rent on completion of 3 years tenancy period.From April 2008 the company paid Rs pm as per the terms of the agreement.The company ran into financial crisis in June 2008 and no rent was paid thereafter.Rental advance has been adjusted for rent due for June,July and partly for August.The balance amount is not realisable and the company vacated in March 2009

Answer Fair rent Rs 60000/- Rent received =Rs 55000/- Since the balance amount of rent is unrealisable the same should not be considered for determination of actual rent. In a situation where actual rent is less than the fair rent on account of property remaining vacant, rent should be considered as Annual Value In this case the property was occupied throughout the year and was never vacant. Therefore the fair rent i.e.Rs 60000/- would be treated as gross annual value

When unrealised rent shall be excluded The tenancy is bona fide 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 unpaid rent or satisfies the AO that the legal proceeding would be useless.

Unrealised Rent realised subsequently It will be deemed to be income from house property in the year of realisation,whether the assessee is owner of the property in that year or not. No deduction under Sec 23 or 24 would be available.

Deemed Let out property It can be self occupied or unoccupied In case two or more houses are meant for self occupation assessee can treat one as self occupied and other one as deemed let out. Generally the property with higher gross annual value is treated as self occupied. While interest without limit can be claimed as deduction in case of deemed to let out property, the interest in case of self occupied property will be upto Rs /-

Example Mr Arvind owns two houses and both are used for own residence. Advise him on which house to be taken as self occupied on the basis of following data. ParticularsHouse-1 RsHouse-2 Rs Municipal Valuation Municipal Taxes paid Repairs Insurance Premium Interest on loan

Answer ParticularsOption-1Option-2 House-1 Self occupied House -2 Deemed let out House-1 Deemed let out House-2 Self Occupied Gross Annual Value Nil Nil Less Municipal Tax Net Annual ValueNil Nil Less deduction u/s 24 30% of Net Annual Value Interest on loans Income from HP(12000)(36200)4800(60000)

Example Ms Shanti owns a house property which was self occupied upto 30 th June 2008 and let out from July onwards on a monthly rent of Rs 4000.Municipal valuation of the property is Rs 45000/-.Property taxes paid including arrears of Rs 2000 during the year is Rs Determine income from house property for the assessment year

Answer Gross annual value- Rs 45000/- (Rent received or fair rent whichever is higher) Less municipal tax –Rs 6000/- Net Annual Value- Rs 39000/- Less deduction u/s24 30% Rs11700 Income from house property-Rs 27300/-

Example Mr Ramesh completed construction of his house property on 31 st May 2008.The house property was self occupied during June and July 2008 and let out thereafter for a rent of Rs 10000/- per month. The municipal valuation of the house is Rs 72000/-.Following expenses are paid during the year Municipal Tax- Rs 6000,Repairs Rs 12000,Ground rent Rs24000 and insurance premium Rs Determine the taxable income for the AY

Answer Gross Annual Value or 80000* whichever is higher Rs 80000/- Less municipal tax Rs 6000/- Net Annual Value Rs 74000/- Less deduction u/s 24 30% Rs 22200/- Income from house property Rs 51800/- *Where the house has come into existence during the previous year the annual value has to be computed only for the period for which the house is existed.

Example Mr Abraham is having a house of which 25% is let out at a monthly rent of Rs 2000/- and balance is self occupied. Municipal value of the house is Rs 80000/- and municipal taxes amounting to Rs 6000 was duly paid during the year. Compute the Income from House property

Answer GAV 2000*12=24000/- Less municipal taxes 6000*.25=1500 NAV 22500/- Less deduction u/s 24 30% Rs6750/- Income from HP=Rs 15750/-

Decided case The assessee company is engaged in the business of letting out the property on rent.It is contended that since house owning is done as a profitable activity the income is chargeable as business income and not income from house property. The company wants to claim depreciation.

Decission Income derived from owning and letting of building is chargeable only under the head “Income from House Property”

Case Assesee constructs residential quarters and lets them out to its employees as an incidental act to business The assessee makes part of its business premises available to the Govt for locating a branch of Nationalised Bank,post office etc to carry on its business smoothly

Decission The assessee is not letting out the building for the sake of letting out.The property is let out for carrying out the business in an efficient manner.The act of letting out is incidental to the carrying on of assessee business and therefore come under business income.