Income from house property(Section 22 to 27)

Chargeability(Sec.22):- Annual value of a property, consisting of any buildings or land appurtenant thereto, of which the assessee is owner, is chargeable to tax under the head of “Income from house property.

Conditions

• 1.The property should consist of any building or lands appurtenant thereto.

• 2.The assessee should be owner of the property.

• 3.The property should not be used by the owner for the purpose of any business or profession.

• Building:- The word Building is neither defined in the Act or nor in the Rules.

• As per Random House Dictionary “Building” means a relatively permanent, essentially box-like construction having a roof and used for any of a wide variety of activities, as living, entertaining or manufacture having a roof and used for a wide variety of activities, as living, entertaining or manufacturing.

• Land appurtenant:-The appurtenant lands in respect of residential building may be in the form of approaches roads to and from public streets, compounds, courtyards, backyards, playgrounds, kitchen garden, motor garage, stable or coach home, cattle-shed, etc.

• Rental income of vacant plot (not appurtenant to building) is not chargeable to tax under the head Income from house property, but is taxable under profits gains of business or Income from other sources.

Assessee should be owner of the property

• Income is taxable under the head Income from house property only if the assessee is the owner of a house property. Income from subletting is taxable U/S 56

• Example:-B owns a house property . He let out to C (rent being Rs20000/ per month). C sublets it to Don monthly rent of Rs30000. Rental income of B is taxable U/S 22. Since C is not owner, his income is taxable U/S 28 or 56.

Meaning of the owner

• Owner means a legal owner. If a person makes gift of rental income to a friend or a relative, without transferring ownership of the property, annual value of property is taxable in the hands of the donor, even if rental income is received by the donee.

Deemed owner

• Besides the legal owner, Sec 27, provides deemed owner of the house property-

• 1.An individual, who transfers house property otherwise than for adequate consideration to his or her spouse not being transfer in connection with an agreement to live part ) or to his minor child (not being married daughter ), is treated as deemed owner of the house property.

• Example- D, is individual, owns a house property. On April 2005, he transfers the property without any consideration to his wife. Rental income is received by Mrs D after April 2005. However for the purpose of charging tax on rental income , D will be deemed owner.

• 2.The holder of impartible estate is treated as deemed owner of the house property.

• Example:- B is one of the ex-Rulers of a former princely State. He has divided all his properties amongst his three sons. However, he could not transfer a building which is given to his eldest son (all the three brothers have the right to enjoy the property. The eldest brother holds the property as trustee on behalf of his younger brothers).

• For the purpose Sec 22, the eldest son , as holder of “impartible estate”, is deemed as owner of the property.

• 3.A member of a Co-operative society, company or other association of person, to whom a building or a part thereof is allotted or lease under a house building scheme of the society or AOPs is treated as deemed owner of such property.

• 4.If a person has acquired a property under a power of attorney transaction by satisfying the condition of Sec 53A of the Transfer of property Act, then he is deemed owner of the property.

• Examples:- Y enters into a written agreement to purchase a property from Z for Rs100000/. He has paid the consideration and taken possession of the property. The sale deed is yet to be registered, He becomes deemed owner of the property.

Property income is exempt from tax in the following cases

• 1. Income from farm houses (Sec2(1A)(c) r.w.s. 10(1)

• 2. annual value of any one palace of an ex-ruler(sec10(19A)

• 3.property income of local authority(sec10(20)

• 4.property income of an approved scientific research association

• 5.property income of university or other educational instituations

• 6.property income of a hospital or other medical educational instituation

• 7. property income of trade union

• 8.house property held for charitable purposes

• 9.Property income of a political party

• 10.property used for own business

• 11one self-occupied property.

Computation of income from a let out house property

• Gross Annual Value xxxxxxxxxxx

• Less municipal taxesxxxxxxxxxxx

• Less standard deduction xxxxxxxxxxx

• Less Interest on borrowedxxxxxxxxxxx– capital

Gross annual value (Sec 23):-

• Reasonable expected rent of the property or rent actually received or receivable whichever is higher is taken as gross annual value of the property.

Reasonable expected rent

• Reasonable expected rent is deemed to be the sum for which the property might reasonable be expected to be let out year to year.

• Municipal value of property or fair market rent of property, which ever is higher is taken as Reasonable expected rent.

• If the property is covered by a Rent Control Act, then the amount so computed cannot exceed the standard rent.

• Municipal value:- Municipal value is calculated on the basis of periodical survey conducted by local authority for collecting municipal taxes.

• Fair Rent of the property:- Fair rent of the property can be determined on the basis of a rent fetched by a similar locality.

• Standard rent under the Rent Control Act:- Standard rent is the maximum rent which a person can legally recover from his tenant under a Rent Control Act.

Municipal Taxes

• Municipal Taxes levied by any local authority in respect of house property.

• It is deductible only:-

• 1.If these taxes are borne by the assessee

• 2.actually paid by the assessee during the P.Y.

Standard Deduction

• 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer

Interest on borrowed capital

• Interest on borrowed capital is allowable as deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction.

• Interest is deductible on accrual basis. It can be claimed even if the interest is not paid during the year.

• Interest of pre-construction period is deducted in five equal annual installment commencing from the P.Y. in which the house is acquired or constructed.

• Unrealized rent was allowed as deduction.

• Subsequently unrealized rent has been received by the assessee in different P.Y. which is taxable without any deduction.