Calculation of ‘’Income from House Property’’ under the Income tax act.

What is House property income is a question that taxpayer wants while filing his income tax return. It has been seen that taxpayers often get confused that what income should be included under the head of ‘’Income from House Property’’. Under the income tax act 1961 the owner of the house property is taxed on the rental income in the form of its annual value under the head of ‘’Income from House Property’’.

Who is owner- It is a legal owner of a house property who is chargeable to tax in respect of property income. As per the section 27 of the income tax act following persons are deemed to be owner of the house property for the purpose of computing income from property:

  1. An individual, who transfers house property otherwise than for adequate consideration to his or her spouse or to his minor child is treated as deemed owner of house property.
  2. The holder of impartible estate.
  3. A member of co-operative society, company or other association of persons, to whom building has been allotted or leased under a scheme is treated as deemed owner of house property.
  4. A person who comes to have control over the property in part performance of a contract of the nature referred to under section 53A of the transfer of Property act is deemed to as owner of such property. (It covers, acquiring property under a power of attorney or taking property on a lease for not less than 12 years)

Gross annual value- Though tax under the head ‘’Income from House property is levied on Income, still it is not a tax upon rent but upon inherent capacity of a building to yield income. Gross annual value of a property is a value at which property might reasonably be expected to be let out during the year. It is like a notional rent that an owner of property could have earned in case property had been let out.

Gross annual value is determined as follows:

Step 1: Find out reasonable expected rent of the property

Step 2: Find out rent actual received or receivable after excluding unrealized rent but before deducting loss due to vacancy

Step 3: Find our which one is higher of Step 1 or Step 2

Step 4: Find out loss because of vacancy

Step 5: Gross annual value= Step 3 – Step 4

Deduction of Municipal taxes: Municipal taxes are deducted for the gross annual value only if

  1. Taxes are borne by the owner and
  2. Taxes are actually paid during the year by the owner

Deduction under section 24:  There 2 deductions are available under section 24-

  1. Standard deduction {Section 24(a)}: 30% of net annual value is deductible irrespective of any expenditure incurred by taxpayer
  2. Interest on borrowed capital {Section 24(b)}: Interest on borrowed is allowed as deduction on accrual basis, if capital is borrowed for the purpose of purchase, construction, repair, renewal, or reconstruction of the house property.

Interest on Pre-Construction period- Interest payable in respect of borrowing capital pertaining to a period prior to the previous year in which house property was acquired or constructed is deductible in 5 equal installments starting from the year in which house is acquired or constructed.

Determination of Income from House Property

Gross Annual Value                                                   ********

Less: Municipal Taxes                                               ********

Net Annual Value                                                        ********

Less Deduction under section 24            

          Standard Deduction (30%)                           ********

          Interest on borrowed capital                        ********

          Income from House Property                   ********

Important Points:

  • Interest payable outside India is not deductible if tax (TDS) is not deducted at source. Special care should be taken by the taxpayer while making payment of interest outside India (Section 24b).
  • Municipal taxes are paid on payment basis not on due basis.
  • Deduction of interest is available on accrual basis, even if interest is not paid during the previous year.
  • Interest on unpaid interest is not deductible.
  • Deduction not available for brokerage or commission for arranging the loan.

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