Income derived from renting out a house property, which includes the building or any land associated with it, and the taxpayer is the owner, is categorized as “Income from house property” for tax purposes.
Sub-letting rental income:
If the rental income is received by the house property owner, it is subject to taxation under the “Income from house property” category. However, if the rental income is received by someone other than the owner, such as a tenant sub-letting the house property, it cannot be taxed under the “Income from house property” category. Instead, it should be considered taxable under the category of “Income from other sources” or as profits and gains from a business or profession, depending on the circumstances.
Rental income from a commercial shop:
In the case of rental income from a house property that includes a building or any associated land, and the taxpayer is the owner, it is subject to taxation under the “Income from house property” category. To fall under the “Income from house property” category, the rented property must be a building or have a connection to the land. Since a shop is considered a building, the rental income derived from it will be taxed under the “Income from house property” category.
Definition of a deemed owner
When it comes to the taxation of rental income from a house property, it is typically charged to tax under the category of “Income from house property” for the owner of the house property. However, if the person receiving the rent is not the legal owner of the house property (e.g., rent received by a tenant from sub-letting), the rental income is not taxed under the “Income from house property” category.
However, there are certain circumstances in which a person who is not the registered owner of the house property is still considered the owner (deemed owner) for tax purposes, and the rental income from the house property is charged to tax in their hands. These circumstances include:
- Transfer to spouse or minor child: If an individual transfers their house property to their spouse (excluding transfers related to living apart) or to their minor child (excluding married daughters) without adequate consideration, the transferor is deemed the owner of the house property.
- Impartible estate: The holder of an impartible estate is considered the deemed owner of the house property included in the estate.
- Allotment or lease in cooperative society, company, or association: A member of a cooperative society, company, or association of persons who is allotted or leased a building (or part of it) under a house building scheme of the society, company, or association is treated as the deemed owner of the house property.
- Acquisition under Section 53A of the Transfer of Property Act: A person who acquires property by fulfilling the conditions of Section 53A of the Transfer of Property Act is considered the deemed owner, even if they are not the registered owner. The conditions include a written agreement, payment or willingness to pay the purchase consideration, and taking possession of the property based on the agreement.
- Long-term lease: In the case of a lease for a period of not less than 12 years (including any provision for extension), the lessee is deemed to be the owner of the property. However, this provision does not cover lease rights on a month-to-month basis or for a period not exceeding one year.
In these situations, even though the person may not be the registered owner, they are treated as the deemed owner for tax purposes, and the rental income from the property is subject to taxation in their hands.
Definition of composite rent
Composite rent refers to the situation where, in addition to the rent received for the building itself, the owner also receives rent for other assets (such as furniture) or charges for various services provided within the building (such as lifts, security, air conditioning, etc.). The total amount received in such cases is referred to as “composite rent.”
Tax treatment of composite rent for a building with other assets: The tax treatment of composite rent depends on the nature of the rental agreements and whether the letting of the building and other assets is inseparable or separable. The treatment is as follows:
a) Inseparable lettings: If the letting of the building and other assets is inseparable (e.g., renting out an equipped theater), meaning they cannot be treated as separate lettings, the entire composite rent will be taxed under either the category of “Profits and gains of business and profession” or “Income from other sources,” depending on the circumstances. No portion of the rent is charged under the category of “Income from house property.”
b) Separable lettings: If the letting of the building and other assets is separable (e.g., renting out a refrigerator along with a residential bungalow), meaning they can be treated as separate lettings, the rent for the building will be taxed under the category of “Income from house property,” while the rent for the other assets will be taxed under either the category of “Profits and gains of business and profession” or “Income from other sources,” depending on the circumstances. This rule applies even if the owner receives a composite rent for both the lettings. In such cases, the composite rent needs to be allocated between the rent for the building and the rent for the other assets.
Tax treatment of composite rent when a building is rented along with the provision of services
When a building is rented out along with the provision of services, the composite rent consists of both the rent for the building and charges for various services such as lifts, security personnel, water supply, etc. In this scenario, the composite rent needs to be divided into its components, and each component is subject to different tax treatment:
- Rent for the building: The portion of the composite rent attributable to the use of the house property, i.e., the rent for the building itself, will be charged to tax under the category of “Income from house property.”
- Charges for services: The portion of the composite rent related to charges for the various services provided, such as lift services, security personnel, water supply, etc., will be charged to tax separately. These charges will be taxed under either the category of “Profits and gains of business and profession” or “Income from other sources,” depending on the nature of the services provided and the business/profession involved.
Therefore, the composite rent received in such cases will be bifurcated, with the portion attributable to the use of the property taxed as “Income from house property,” and the charges for services taxed as either “Profits and gains of business and profession” or “Income from other sources,” depending on the specific circumstances.
Calculation of the gross annual value of a house property that is rented out throughout the year follows these steps:
Step 1: Determine the reasonable expected rent of the house property. The method for calculating this is explained in the subsequent section.
Step 2: Calculate the actual rent received for the house property using the appropriate method of computation, as discussed later.
Step 3: Compute the gross annual value based on the method described below.
Computation of the reasonable expected rent for a rented property (Step 1): The reasonable expected rent is the higher of the following two values:
- Municipal value of the property (*): This refers to the valuation of the property established by the municipal authorities.
OR
- Fair rent of the property (Note 1): Fair rent represents the rent that would be reasonably expected in the prevailing market conditions for a similar property in the same locality.
Note 1: If the house property is subject to the Rent Control Act, the reasonable expected rent cannot exceed the standard rent (Note 2). The standard rent is the maximum rent that can be legally charged for a house property covered under the Rent Control Act.
Note 2: The Rent Control Act is a legislation that regulates the rental of properties, including the fixation of rents, in certain jurisdictions.
By applying these guidelines, the reasonable expected rent for the house property can be determined, which is a key factor in calculating the gross annual value.
Meaning of Municipal Value
Municipal Value refers to the value assigned to a house property by the local authorities for the purpose of collecting municipal taxes. The local authorities conduct periodic surveys of all buildings within their jurisdiction to determine their respective values. The value determined by the municipal authorities is known as the municipal value of the house property.
Note 1: Meaning of Fair Rent: Fair Rent refers to the reasonable expected rent that a house property can command in the market. It is determined based on the rental income generated by similar properties in the same or similar locality. Fair rent represents the rent that would be considered reasonable and achievable for a house property of comparable nature and location.
Note 2: Meaning of Standard Rent: Standard Rent is the maximum rent that a person can legally charge or recover from their tenant under the Rent Control Act. This concept is applicable only to properties that are covered under the Rent Control Act, which is a legislation designed to regulate and control rental prices in certain jurisdictions. The standard rent is determined by the Rent Control Act and serves as a cap on the rent that can be legally charged by landlords for such properties.
Computation of actual rent for a rented house property
Actual rent refers to the rent amount for which the house property is leased out during the year. When calculating the actual rent, any rent pertaining to the vacancy period should not be deducted. However, unrealized rent (*) may be deducted from the actual rent if certain specified conditions are met.
(*) Unrealized rent represents the rent that the house property owner could not collect from the tenant, i.e., rent that remains unpaid by the tenant. The deduction of unrealized rent from the actual rent of the year is permissible if the following conditions are satisfied:
- Bona fide tenancy: The tenancy arrangement should be genuine and in good faith.
- Vacation of the property: The defaulting tenant has either vacated the property voluntarily or steps have been taken to legally compel the tenant to vacate the property.
- No occupancy of other property: The defaulting tenant is not occupying any other property owned by the taxpayer.
- Efforts to recover the amount: The taxpayer has made all reasonable efforts to recover the unpaid rent, including initiating legal proceedings if necessary. Alternatively, the taxpayer can demonstrate to the Assessing Officer that pursuing legal action would be futile.
If these conditions are satisfied, the unrealized rent can be deducted from the actual rent of the year for the purpose of computation.
Calculation of gross annual value in the case of a house property that remains vacant for a certain period during the year
If a house property, or any portion thereof, is rented out but remains vacant for the entire or part of the previous year, and as a result of this vacancy, the actual rent received or receivable by the owner is lower than the reasonable expected rent, then the actual rent received or receivable (after deducting the vacant allowance) will be considered as the Gross Annual Value of the house property.
In other words, if the actual rent received or receivable for the vacant period is less than the reasonable expected rent, the actual rent (after reducing the vacant allowance) will be taken as the Gross Annual Value of the house property for the purpose of computation.
The vacant allowance refers to the deduction allowed for the period during which the house property remained vacant. It accounts for the reduced rental income due to the vacancy.
Therefore, in cases where the house property is vacant for all or part of the year, and the actual rent received or receivable is lower than the reasonable expected rent, the Gross Annual Value will be the actual rent (after deducting the vacant allowance) for the house property.
Expenses to be deducted from the gross annual value of a rented house property:
When calculating the taxable income under the head “Income from house property” for a rented house property, only the following expenses can be claimed as deductions from the gross annual value. No other expenses incurred by the taxpayer can be claimed as deductions:
- Deduction for municipal taxes paid by the taxpayer during the year (*):
- Only municipal taxes paid by the owner during the year are eligible for deduction.
- Municipal taxes that are due but not paid during the year or taxes borne by the tenant cannot be claimed as deductions.
- Deduction under section 24(a) at a rate of 30% of the Net Annual Value.
- Deduction under section 24(b) for interest on capital borrowed for the purchase, construction, repair, renewal, or reconstruction of the house property:
- The taxpayer can claim deduction under section 24(b) for the interest on loans taken for the specified purposes.
- There is no limit on the amount of interest that can be claimed as a deduction for a rented house property.
- However, for a self-occupied house property, the limit is Rs. 2,00,000 or Rs. 30,000, depending on the case (details explained later).
Note: From Assessment Year 2020-21 onwards, deduction for interest paid or payable on borrowed capital is allowed for up to two self-occupied house properties. However, the total deduction amount under this provision remains the same, i.e., Rs. 30,000 or Rs. 2,00,000, depending on the case.
Interest is categorized into pre-construction period interest and post-construction period interest.
Pre-construction period
Pre-construction period refers to the period before the completion or acquisition of a house property. When calculating the taxable income under the head “Income from house property” for a rented property, the taxpayer can claim a deduction under section 24(b) for the interest on a loan taken for the purpose of purchase, construction, repair, renewal, or reconstruction of the house property.
The deduction for interest is divided into two categories: interest pertaining to the pre-construction period and interest pertaining to the post-construction period. Here is a detailed explanation:
- Post-construction period interest: This refers to the interest incurred during the relevant year for which the income is being computed. The taxpayer can claim the full amount of post-construction period interest as a deduction.
- Pre-construction period: The pre-construction period starts from the date of borrowing the loan and ends on the earlier of the following dates: a) Date of repayment of the loan, or b) 31st March immediately prior to the date of completion of the construction or acquisition of the house property.
For the interest pertaining to the pre-construction period, the deduction is allowed in five equal annual installments. The deduction starts from the year in which the house property is acquired or constructed. Each installment is equal to 1/5th of the interest pertaining to the pre-construction period.
Therefore, the total deduction available to the taxpayer under section 24(b) for interest will be the sum of 1/5th of the interest pertaining to the pre-construction period (if any) and the interest pertaining to the post-construction period (if any).
Meaning of Self-occupied property
A self-occupied property refers to a house property owned by the taxpayer that is used exclusively by the owner for their own residential purposes throughout the year and is not rented out during any part of the year. It is important to note that a house property can only be treated as self-occupied if it is actually occupied by the owner for their residence.
However, there is an exception to this rule. If the following conditions are met, a property can still be considered self-occupied even if the owner does not occupy it throughout the year for their residence:
a) The taxpayer owns the property.
b) Due to the taxpayer’s employment, business, or profession carried out at another location, they are unable to occupy the house property and have to reside in a building that is not owned by them at that other place.
c) The house property mentioned in point (a) is not rented out at any time during the year, either in whole or in part.
d) No other benefits or advantages are derived from the house property during the year.
If all these conditions are fulfilled, the house property will be treated as self-occupied, and the annual value of the house property will be considered as “Nil” for tax purposes.
Tax Implication of Multiple House Properties Occupied for Residence
The benefit of treating a house property as self-occupied (SOP) and claiming the Gross Annual Value (GAV) as Nil is available only when the house property is occupied by the owner for their residence or when it is not occupied by the owner due to their employment, business, or profession in another location.
If a person owns more than one house property that qualifies for SOP, they can choose one house property to avail the SOP benefit, and the remaining properties will be considered as “Deemed to be let-out.” The income from deemed to be let-out properties will be calculated in the same manner as discussed for let-out properties.
However, starting from Assessment Year 2020-21, a person can claim up to two properties as self-occupied house properties.
Deduction for Interest on Housing Loan in Self-occupied Properties
The provisions for deduction under section 24(b) on account of interest on housing loan in self-occupied properties are the same as those applicable to let-out properties. In other words, the deduction available to the taxpayer under section 24(b) for a self-occupied house property will be 1/5th of the interest pertaining to the pre-construction period (if any) plus the interest pertaining to the post-construction period (if any), as discussed earlier.
However, in the case of self-occupied properties, the aggregate deduction under section 24(b) cannot exceed Rs. 2,00,000 or Rs. 30,000 (depending on certain conditions). If the following conditions are satisfied, the limit for interest on borrowed capital will be Rs. 2,00,000:
- The capital is borrowed on or after April 1, 1999.
- The capital is borrowed for the purpose of acquisition or construction (not for repair, renewal, or reconstruction).
- The acquisition or construction is completed within 5 years from the end of the financial year in which the capital was borrowed.
- The lender certifies that the interest is payable for the amount advanced for acquisition or construction of the house or as a refinance of the outstanding principal amount under an earlier loan taken for acquisition or construction of the house property.
If any of the above conditions are not met, the limit for interest deduction will be reduced to Rs. 30,000.
Computation of Income for House property Self-occupied and Let Out
When a property is let out for a portion of the year and self-occupied for the remaining period, the computation of income under the head “Income from house property” is as follows:
- The house property will be treated as let-out throughout the year for income computation purposes. However, only the actual rent received for the let-out period will be considered for taxable income calculation.
Computation of Income for House property with Self-occupied and Let Out Parts
If a house property consists of two or more independent units, with one unit self-occupied and the rest used for other purposes (let-out or for own business), the income will be computed as follows:
- The self-occupied part/unit, occupied by the taxpayer for their residence throughout the year, will be treated as an independent property. The income from this part/unit will be computed as discussed for a self-occupied property.
- The let-out part/unit will also be treated as an independent property. The income from this part/unit will be computed as discussed for a let-out property.
Computation of Income for House property Held as Stock-in-trade
If a property or part thereof is held as stock-in-trade by the owner and not let out during the whole or any part of the year, the annual value of the property will be considered as nil. This concession is available for a period of up to two years from the end of the financial year in which the completion certificate is obtained from the competent authority.
Tax Treatment of Subsequently Realized Unrealized Rent
Any subsequently recovered unrealized rent will be deemed as income under the head “Income from house property” in the year of realization. The amount received is taxable after deducting 30% of such unrealized rent.
Tax Treatment of Arrears of Rent
The amount received on account of arrears of rent, which was not previously taxed, will be charged to tax in the year of receipt. A deduction of 30% of such arrears is allowed before charging it to tax. This tax treatment applies regardless of whether the taxpayer owns the house property in the year of receipt.
Here are frequently asked questions (FAQs) related to income tax and house property, along with their answers:
- What is Gross Annual Value (GAV) in relation to property?
- Gross Annual Value refers to the expected annual rental value of a property before deducting any property tax or expenses.
- How is Municipal Value determined for a house property?
- Municipal Value is determined by local authorities through periodic surveys of all buildings in their jurisdiction, based on factors such as size, location, amenities, and market conditions.
- Can I claim a deduction for municipal taxes paid on my house property?
- Yes, you can claim a deduction for the municipal taxes paid by you during the year while computing your taxable income from the house property.
- What is the difference between Fair Rent and Standard Rent?
- Fair Rent is the reasonable expected rent that a house property can fetch in the market, while Standard Rent is the maximum rent legally recoverable from a tenant under the Rent Control Act.
- How is Actual Rent calculated for a house property?
- Actual Rent refers to the rent for which the house property is let out during the year. It does not include rent pertaining to a vacancy period but may include unrealized rent, subject to certain conditions.
- Can I deduct unrealized rent from my Actual Rent for tax purposes?
- Yes, you can deduct unrealized rent from your Actual Rent if specific conditions are met, such as a bona fide tenancy, steps taken to recover the rent, and the tenant not occupying any other house property of yours.
- What expenses can be deducted from the Gross Annual Value of a let-out house property?
- Deductions can be claimed for municipal taxes paid, a standard deduction of 30% of the Net Annual Value, and interest on capital borrowed for house property purchase, construction, repair, or reconstruction.
- What is the tax treatment when a house property is vacant for some time during the year?
- If a house property or part of it is let out and vacant during the year, the actual rent received or receivable (reduced by a vacant allowance) will be considered as the Gross Annual Value for tax purposes.
- Can I claim a deduction for interest on a housing loan in case of a self-occupied house property?
- Yes, you can claim a deduction on interest paid on a housing loan for a self-occupied property, subject to certain limits and conditions.
- What is the limit for claiming interest deduction on a housing loan for a self-occupied property?
- The limit for claiming interest deduction on a housing loan for a self-occupied property is Rs. 2,00,000 or Rs. 30,000, depending on the conditions of the loan and completion of the property.
- How is the income computed when a property is self-occupied for part of the year and let out for part of the year?
- In such cases, the property is treated as let out throughout the year for tax purposes, and the actual rent is considered only for the period it was let out.
- What are the tax implications for properties with both self-occupied and let-out parts?
- Each part of the property is treated independently. The self-occupied part is computed as a self-occupied property, while the let-out part is computed as a let-out property for tax purposes.
- Can unrealized rent that is subsequently realized be taxable?
- Yes, any unrealized rent that is subsequently recovered is deemed as income under the head “Income from house property” and is taxable in the year of realization, with a deduction of 30% of such unrealized rent.
- How is the tax treatment for arrears of rent received for a property?
- Arrears of rent received, which were not taxed earlier, are taxable in the year they are received, after deducting 30% of such arrears.
- Can I claim deductions for repairs and maintenance expenses on my property?
- Yes, you can claim deductions for repairs and maintenance expenses incurred on your property, subject to certain conditions and limitations.
- What are the tax implications if I own multiple properties?
- If you own multiple properties, one property can be treated as self-occupied, while the others are treated as deemed to be let-out. Each property will be taxed separately based on its occupancy status.
- Can I claim a deduction for home loan principal repayment?
- The deduction for home loan principal repayment falls under Section 80C of the Income Tax Act, subject to a maximum limit of Rs. 1,50,000.
- Can I claim deductions for expenses related to renovation or improvement of my property?
- Expenses incurred on renovation or improvement of a property can be claimed as deductions under Section 24(b) of the Income Tax Act, subject to certain conditions and limitations.
