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Rental income from house property

Income from House Property under Income Tax Act, 1961

Jun 10, 2022

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Income from House Property

To ease the tax calculation and collection Income Tax Department of India has divided the income received by an individual into different heads. One of the important sections is “Income from House Property”. In simple terms when the individual house is rented, the rent received is taxable. But in another scenario, if the same property is being used for a business purpose, it is not taken into tax consideration. 

If the following three conditions are met then income from house property becomes taxable:

  • The individual taxpayer is the owner of the property 
  • The individual property is not used for any business purpose
  • The house property includes a building, or land attached to it
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      Income leaking due to heavy tax is not preferred by any individual at any cost. At the same time, one cannot also turn away from taxation but reduce it for sure. There are certain law-abiding tax-reducing points that when considered can be like a relief bag. Some of them are:

      • The second property registered under the name of an individual spouse or relative to cope get exemption from heavy tax
      • Individuals and spouses can co-own the same property to get their tax divided so that they can claim exemption towards payment of principal and interest.
      • If an individual owns multiple house property then only one of the properties will be considered as self–occupied. Tax evaluation is done on the basis that, a property that attracts the highest tax rate will be used for self-usage of the individual and others are to be given out to rent.
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      Some of the widely used terms are

      1. Annual Value: It is the actual rent that is collected by the individual when one rents a house.
      2. Municipal Value: For imposing municipal taxes it is the value that is being calculated.
      3. Standard Rent: Under the Rent Control Act, Standard Rent is being described. In this, if the property owner has set fixed rent and declared it under Rent Control Act then higher rent cannot be charged by one at any cost.
      4. Fair Rent Value: It is the valuation of the property which is done with the property which has similar features.
      5. Gross Annual Value: It is generally considered to be chosen among the highest value among rent, fair market value, and Municipal Valuation. But when Rent Control Act has been applied the highest value between standard rent and received rent is chosen.
      6. Net Annual Value: In short it is called NAV and is calculated by subtracting Municipal taxes paid to the Gross Annual Value. 
      7. Reasonable expected rent: It is the amount for which the property can be reasonably be expected to be let out from year to year. It cannot exceed the standard rent as determined in Rent Control Act but can be higher than the Municipal Valuation or Fair Rent
      8. Deductions: Under Section 24 of the Income Tax Act 1961 there are two types of deductions that taxpayers can claim. One is a standard deduction and the other is Interest on the home loan. For the former one assessee can claim 30% deductions (for rent, repair, etc)

      Note: Deduction will not be considered if GAV is NIL

      And for the latter one, Home loan interest, up to Rs. 2 Lakhs can be availed as per Section 24 of the Income Tax Act.

      1. Composite Rent: In case the building is let out along with the movable assets, then this whole forms a part of a single transaction and is inseparable. Under the head, “Income from other sources” or “Profits and gains from business or profession” shall be taxable. Otherwise in a situation where letting out of the building is separate from letting out of assets then income will be charged and will be taxed as per the heading “Income from House property” or in another case “Income from other sources/ Profits and gains from business or profession”
      2. Co-owner and Deemed Owner: In the case of co-owner where the share of individuals is definitely subject to the prescribed condition each co-owner will be entitled to claim benefit with respect to their share. Whereas when the share is not defined the income will be assessed considering the case of the Association of persons.

      While in the case of the deemed owner the income that one gets from the house property is taxable. Conditions such as

      1. An individual, who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;
      2. Individual who hold impartible estate is considered to be deemed owner of all the properties in the estate.
      3. A member such as of co-operative society, an association of persons or company to whom the building or part of it is allotted or leased under house building scheme is known to be deemed owner or part.
      4. As per Section 53A of the Transfer of Property Act, one is considered to be deemed the owner of that building or part of it.
      5. As per Section 269UA(f), if a person acquires any rights with respect to any building or any part of it is considered to be deemed owner of that building or part of
      Income from House property notes

      Calculation of Gross Annual Value in Income from House Property

      To calculate the Gross Annual value of house property two aspects such as:

      • Self-Occupied
      • Let-Out

      Are considered while calculating.

      For the formal one where one occupies property the annual value will be nil. However if one has many properties then among them one will be considered to be occupied by the individual while the remaining will be taxed considering the properties were rented. In concern with the latter one, reasonable expected rent of the property is calculated,&  actual rent received or receivable, whichever is higher of the two options is considered to be the Gross Annual Value.

      Unrealized rent and Arrears of rent

      Unrealized rent is the rent that is not recognized or realized by the owner. It is allowed to be deducted from the rent received given the following conditions:

      • 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 taxpayer has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

      Whereas arrears under Section 25A is the amount which is received with respect to any recovery of unrealized rent is deemed to be taxed under “Income from house property” (the year in which rent is realized or received). Additionally, 30% of such rent shall be allowed as a deduction.

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