Computation of income from house property

Income from house property is one of the sources of income that an individual assessor of Income tax has to declare in his/her income tax returns. Section 22 to 27 of Income Tax Act, deal with various aspects of Income from House Property.

As per Section 22, the annual value of property consisting of any building and/or vacant land of which the assessor is the owner/deemed owner shall be subjected to income tax under the head Income from House Property after claiming certain deduction as per Section 24.

There are four factors to be taken into consideration for arriving at the total income chargeable for income tax. Municipal Value is the rent value determined by the municipal authorities in respect of a property for fixing municipal taxes. Fair Value is the reasonable expected rent fetched by similar property in the same/similar area. Standard Value is the maximum rent which a person can legally recover from his tenant under Rent Control Act. Actual Value is the actual rent received by the assessor during the assessing financial year.

The first step is to find the reasonable rent by comparing Municipal Value and Fair Value. The higher of the two will be compared with the Standard Value and the higher of the two will be compared with the Actual Value for arriving at the Gross Annual Value.

Section 24 deals with the deduction that an assessor is eligible in computing the taxable income. The Municipal Tax paid by him during the year is eligible for 100% deduction from the Gross Annual Value. Under Section 24(a), he is eligible for a Standard Deduction of 30% of the Gross Annual Value and under Section 24(b), he is eligible for deduction pertaining to interest on the housing loan he has availed for its acquisition/construction. This will be the Net Annual Value.

The assessor will be eligible for 100% deduction of interest paid on housing loan provided he has rented out his property. However, if the house is self occupied, he is eligible for a deduction to the extent of Rs 2 lakh only from net annual value. This is subject to three conditions. Firstly, he should have availed the loan on or after April 1, 1999. Secondly, the loan should be for acquisition or construction of the property, and thirdly, the construction should have been completed within five years from taking the loan.

If any one of the above three conditions is not met, then the assessor is eligible for a deduction of Rs 30,000 only from the net annual value.

Any unrealised rent of previous years or arrears of rent received by the assessor during a financial year will be treated as income for the concerned financial year and taxed accordingly after providing a standard deduction of 30%. An assessor can claim deduction of unrealised rent provided four conditions are met. Firstly, the tenancy should be bonafide. Secondly, the tenant has vacated the property, thirdly, the owner has initiated steps for recovery of the rent through legal means and lastly, the Assessing Officer is satisfied about the claim. If a property is co-owned, then the tax will also be distributed among the co-owners according to the ratio of co-ownership.

An assessor is treated as deemed owner, if he is in possession of a property even though he is not the true owner of the property. The holder of an impartible estate shall be treated as a deemed owner. A member of a Cooperative Society to whom a part of the building is allotted or leased under the House Building Scheme shall be treated as deemed owner for income tax purposes. If there is more than one residential house, which is in the occupation of the owner, then he may exercise option to treat any one of the houses to be self occupied. The other house will be deemed to be let out and the annual value of such house will be determined as if the property might reasonably be expected to be let out.

In some cases there can be loss under the head Income from House Property. In respect of self occupied property, the annual value is taken as nil. No deduction is allowed except, interest on borrowed funds up to a maximum of Rs 2 lakh. In such cases, the negative Net Annual Value can be adjusted to the total income of the assessor. The Net Annual Value can also be negative if Municipal Taxes paid by the owner are more than the Gross Annual Value.

(The writer is Assistant Professor, Senior Scale, at Manipal Academy of Banking, Bengaluru)