MODULE III

INCOME FROM HOUSE PROPERTY

Syllabus
Basis of Charge – Annual Value – Deductions from Annual Value – Computation of Income from House
Property.
House property
Income from house property is the second head of income. Rent received from building is taxable
under this head. It also includes value of self-occupied house properties. The process of
computation of income under the head income from house property starts with the
determination of annual value of the property. The property consists of building and land
appurtenant there to, owned by the assessee.

The important points of income from house property are:

1. Buildings: Tax is computed on buildings like house, shop, godown, flats, factory shed,
etc.
2. Land appurtenant there to: It means the land on which house property has been
constructed and includes compound wall, courtyard, parking spaces etc.
3. Use of House property: HP may be self-occupied or let out or used for own business.

Income from house property situated outside India

In case of resident in India, income from house property outside India is taxable. In case of not
ordinarily resident and non- resident it is taxable only when it is received in India.

Exempted Incomes from HP

The following incomes from house properties are exempted from income tax:

1) Income from HP used for agricultural purpose.

2) Income from HP held by charitable Trusts.
3) Income from HP held by Registered Trade Unions.
4) Income from HP held by Local authority.
5) Income from HP held by political party.
6) Income from HP used for own business or profession.
7) Income from two self-occupied house properties (with effect from P.Y. 2019-20).
8) Income from HP held by educational institution or hospital.
9) Income from HP held by Scientific Research Organisation.
10) Income from One HP (palace) of an ex-ruler.
11) Income from house property of a mutual concern or club.

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Exceptions to the general rule
The following are the exceptions to the general rule that the income from house property is
taxable under the head “income from house property”.

1. Building or staff quarters let out to employees and others : Income from business and
not income from house property.
2. If a building is let out to authorities for locating bank or post office : income from
business and not income from house property.
3. Paying of guest accommodation : It is assessable as business income

Important Terms
ANNUAL VALUE

Tax is levied on annual value of house property. Annual value is the sum for which the property
might reasonably be expected to let out from year to year. It may not be the actual rent received
from the house property.

Actual Rent

Rent which is actually received by the owner from the tenant.

Real Rental Value (RRV)

Sometimes, rent includes cost of common facilities like salary of common gardener, watchman
etc., (bills paid by the owner). Such cost should be reduced out of actual rent received and
balance is called Real Rental Value.

Municipal Rental Value (MRV)

It is the rent fixed by local authorities for a building for levying local taxes (Building tax or
Municipal tax)

Fair Rental Value (FRV)

This is the rent which the house property may get. It is computed based on the rent prevailing
for similar types of buildings in the same locality. This is the estimated rental value.

Standard Rental Value (SRV)

It is the rent fixed under the Rent Control Act. The Government may fix rent in big cities under
this act to protect the interest of the tenant from paying excessive rent. This is the maximum rent
which can be collected from the tenant where the act is prevailing.

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Expected Rental Value (ERV)

Expected Rental Value is a derived value based on Municipal Rental Value, Fair Rental Value and
Standard Rental Value. For computing ERV, MRV is compared with FRV whichever is higher is
selected which is compared with SRV and whichever is lower is selected, is the expected rental
value.

Pre Construction Interest

If a loan is taken for construction of a house property and interest on such loan is paid before
completion of the house property, Interest for the period prior to the previous year of completion
of house is called pre-construction interest.

Unrealised Rent

It is the amount of rent which could not be recovered by the assessee even after taking genuine
steps to recover the amount from the tenant. The unrealised rent is allowed as deduction from
rent receivable while calculating annual value.

Composite Rent

When HP is let-out along with furniture and rent is inseparable, it is called composite rent, which
is taxable under the head “Income from other sources” or under the head “Income from business
or Profession” if such letting is his business.

Co-ownership

If a HP is owned by more than one person, the owners are called co-owners and the ownership
is called co-ownership. If the co-owner’s respective shares are definite, the share of each owner
shall be assessed individually and included in his total income.

NET ANNUAL VALUE

From Annual Rental Value (Gross Annual Value) deduct Municipal or Building or Local taxes paid
by the owner in the previous year. The balance is Net Annual Value. Local taxes include service
charges like Sanitation Cess, Library Cess, etc.

Income from HP Negative Value

The net annual value may be positive or negative. When the Municipal taxes paid is more than
the annual rental value then net annual value can be negative.

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Summary of steps for computation property of Net annual value of let out
house property.
1. Compare Municipal Rental Value with Fair Rental Value
2. Take the higher value.
3. Compare the above value (step 2) with Standard Rental Value
4. Take the lower value. This is called Expected Rental Value
5. Compare Expected Rental Value with Actual Rent received after deducting unrealised
rent, if any,
6. From this deduct loss due to Vacancy, if any.
7. This is the Gross Annual Rental Value (GAV).
8. Deduct Building tax paid by the owner during the previous year.
9. This is the Net Annual Value

Annual Value of Self occupied House Property

In the case of self-occupied house, (used for own residential purposes) the annual value will be
nil. With effect from the previous year 2019-20, the assessee can avail the benefit of two self-
occupied houses.

[Link] consists of various independent units: If the house property consists of separate
independent units, the annual value of one unit is taken as Nil and the other units are deemed to
be let out and income is computed accordingly.

If units are inseparable, the entire unit is treated as let out and the benefit of self-occupation will
not be allowed. But rent is taken only for let out portion and for actual let out period.

[Link] is let out for part of the year and under self-occupation for part of the year: The entire
house is treated as let out and the benefit of self-occupation will not be allowed. Rent is taken
only for let out portion and for actual let out period.

[Link] is used for own business:

It is not treated under the head income from house property and its annual rental value is NIL.

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Deductions under section 24
A. Self-occupied:

Interest on loan taken ➢ the actual amount of interest of the previous year
for repairs, renewal (paid or payable) or ₹ 30,000 whichever is less can
and reconstruction: be deducted from annual rental value.
Interest on loan for ➢ If the house is completed or loan is taken before 1-
construction or 4-1999: Actual interest of the previous year (paid
acquisition of house: or payable) or ₹ 30,000 whichever is less can be
deducted from net annual rental value. In addition,
1/5 of pre-construction interest or 30,000
whichever is less can also be deducted.

➢ If the house is completed and loan is taken after 1-

4-1999: The deduction allowable is actual interest
or ₹ 2,00,000 (paid or payable) whichever is less.
Also 1/5 of pre construction interest or 1,50,000
whichever is less can also be deducted. To claim
this deduction the assessee shall have to furnish a
certificate from the loan giving authority
specifying the interest payable by him. He must
also complete the construction within 5 years
from the end of financial year in which the loan is
taken.

B. Let out:

Standard deduction: 30% of Net Annual Value is allowed as

deduction irrespective of any
expenditure.
Interest on loan for construction or Interest full and 1/5 of Pre construction
acquisition of house: interest shall be allowed as deduction
from net annual value.
There is no restriction on the amount of
interest which can be deducted in the
case of let out house property.

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Loss from House Property.
If the total of permissible deductions exceeds the annual rental value, there will be loss from
house property. Loss from house property can be set off against income from another house
property. Any loss which remains unadjusted even after setting off with other house property is
allowed to be set off out of other heads of income. If there is still a balance, it can be carried
forward for 8 succeeding previous years and can be set off only from income from HP.