Income From House Property

The term ‘house property’ denotes any building, land or apartment owned by a taxpayer. Under the Income Tax laws, house property could also refer to any property such as warehouses, cinema complexes, factory sheds, agricultural land, farmhouses, and so on. Income which is classifiable under the head “Income from house property” is imposed on a taxpayer for income earned from house property. In this article, we discuss the income tax provisions related to the head ‘Income from house property”.

Chargeability

The annual value of property that consists of any buildings or land appurtenant thereto of which the assessee is the owner would be subjected to Income-tax under the head 'Income from house property' after claiming the deduction amount under section 24 provided that the property or any portion of such property is not used by the taxpayer for the purposes of any profession or business which is carried on the profits of that are liable to Income Tax. The term 'house property' gives the impression that only residential properties are chargeable to tax under the Act. However, the actual scenario is that all properties, whether used for residential, commercial or charitable purposes, attract chargeability under the head 'Income from House Property'. The only criterion for deciding whether chargeability is attracted under this head or not is checking whether there is a superstructure attached to the land. In other words, if the immovable property is merely a land without any accompanying buildings, the land is not considered as a house property. On the other hand, if the immovable property consists of buildings, it will be considered as a house property.

Basis of Charge

The basis of computing income from the house property is the annual amount. This is the basic capacity of the property to earn income. Income from house property is possibly the only income that is charged to tax on a notional basis. The charge is not because of the letter of any income but is on the inherent potential of house property to generate income. The annual value is the amount for which the property would reasonably be expected to let from year to year.

Conditions for Taxability

The following requirements are to be satisfied for an income to be taxed under the head “Income from house property”: The respective taxpayer must own the property. Any income derived from a property which is not owned by the assessee cannot be taxed under this head. The ownership includes both free-hold and lease-hold rights and also includes deemed ownership. Taxpayers should take note that the income-tax laws contain a provision for deemed ownership, wherein a taxpayer can be deemed to be the buyer of the property, despite not being its rightful legal owner. The property should comprise of buildings or land or apartment. If any income is obtained from vacant land then this income would not be taxed because there is no building. The income would be taxed under the head income from other sources or income from business depending upon the facts of the case. The owner should n0t utilize the property for commercial purposes. For the purpose of charge under the head income from house property, the crucial words are buildings or lands appurtenant thereto. The purpose for which the building, etc. is being used is not material. Thus house property would be let by the assessee for residential purposes or for commercial purpose. The income that is derived from letting out of such house property will always be taxable under this head.

Exceptions

The annual value of the house property portion of the house property that is used for the purpose of the business/ profession that is carried on by the assessee does not fall under this head, provided profits of such business or profession are chargeable to income tax.
Where the property is let out to employees with the subject of carrying on the business of the taxpayer in an efficient manner, then the rental income would be taxable as business income because the letting out of the property is incidental to the main business of the assessee and in this case deductions/ allowances would have to be calculated as relating to profits/ gains of business of the assessee more efficiently, the rental income from such buildings would be taxable as business income.
Where the letting of the property is inseparable from letting of other assets such as machinery, furniture, etc. the entire income would be taxable as profits or gains of business and profession or income from other sources.

Calculation of Net Annual Value

As per the provisions of the Income Tax Act, tax payable under the head “Income from house property” is determined by calculated the NET Annual Value, which can be done in the following manner: Step 1:- Determine the annual rental income value and reduce the same from municipal taxes, whereby the Net Annual Value will be determined. Step 2:- Sum it up with the applicable deductions under Section 24. This effectively concludes the calculation of “Income from house property”.

Section 24 of the Income Tax Act

Net Annual Value of a house property is calculated after deductions under Section 24 of the Income Tax Act. Let us now examine these deductions in brief:

Standard Deductions

The standard deduction is a mechanism in which the respective taxpayer will be allowed a standard deduction which is equivalent to 30% of the Net Annual Value. This deduction will be performed on the total Net Annual Value computed above.

Interest on Borrowed Capital

The deduction is allowed for the interest on capital pertaining to a property which has been acquired, constructed, repaired, renewed or reconstructed with the borrowed capital. Under this method of deduction, the liability of interest of the previous years will be aggregated and allowed as a deduction for five succeeding Financial Years, starting from the year of acquisition/completion.

Unrealized Rent

Unrealized rent, as the name would convey, refers to the rent which the owner of a property cannot realize. Unrealised rent can be deducted while computing the gross annual value. The amount of unrealised rent which the owner cannot realize must be equivalent to the amount of rent liable yet unpaid by the tenant. Hence, rent that is proved to be unrecoverable would be termed as unrealised rent and allowed as a deduction. Deduction under unrealized rent can be performed on the satisfaction of the following conditions:

The tenancy is bona fide.
The particular tenant has been vacated or was attempted to be vacated.
The tenant hasn’t occupied any other property of the owner.
The owner has done everything in his/her capacity to legally recover the unpaid rent or convinces the Assessing Officer that legal proceeding would not result in a recovery.

Provision for Self-Occupied Property

Rental income for a self-occupied property will be considered to be ‘Nil’, as the property is occupied by the owner, due to which there is no scope for any receipt of rent. As a result, neither municipal taxes nor standard deduction can be made. Deductions are nevertheless allowed on the sum of interest. On the other hand, if the respective owner is in possession of more than one residential property, the person is entitled to treat any person of the properties as self-occupied. The other properties will be considered as let out and the value will be calculated accordingly.

Co-ownership and Pertinent Implications

If the ownership of a property is equally vested with multiple taxpayers, and their representative shares are definite and determinable, they wouldn’t be assessed by an AOP with respect to such property. The share held by such persons would instead be computed in accordance with the provisions of Section 22-25 and shall be included in the total income in a manner that is applicable.