Income from House Property

Basis of Charge

1. The property should consist of buildings or lands appurtenant thereto.

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

3. The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax..

 

Computation of Income from House Property

1. Gross Annual Value [Section 23(1)]
   

The following four factors have to be taken into consideration while determining the Gross Annual Value of the property:

STEP 1 – Find expected reasonable rent i.e. higher of 1 and 2 subject to 3

1. Municipal valuation of the property.
   
2. Fair rental value (market value of a similar property in the same area).
   
3. Standard rent payable under the Rent Control Act.
   

STEP 2 – Find of actual rent i.e. Rent payable by the tenant (actual rent) excluding unrealized rent but before deducting loss due to vacancy (including loss of vacancy.). Unrealized can be deducted only when(a) The tenancy is bona fide;

(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.

(c) The defaulting tenant is not in occupation of any other property of the assessee;

(d) The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfied the Assessing Officer that legal proceedings would be useless.

 

STEP 3 – Find higher of 1 or 2

STEP 4 – Find out loss due to vacancy

STEP 5 – GAV = STEP 3 – STEP 4

1. Deducting Municipal taxes to compute NAV (Net Annual Value). municipal taxes are to be deducted if the following conditions are fulfilled:
   

   • The property is let out during the whole or any part of the previous year
   

   • The Municipal taxes must be borne by the landlord (If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed).
   

   • The Municipal taxes must be paid during the year (Where the municipal taxes become due but have not been actually paid, it
   

   
    

2. Providing Deduction u/s 24
   

Statutory deduction:

30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.

Interest on borrowed capital:

The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. Amount of interest ayable for the relevant year should be calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the year or not. However, there should be a clear link between the borrowal and the construction/purchase etc., of the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction. The following points are to be kept in mind while claiming deduction on account of interest on borrowed capital:

1. In case the property is let out, the entire amount of interest accrued during the year is deductible. The borrowals may be for construction/acquisition or repairs/renewals.

2. A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction etc., of the property. In such a case also, the interest on the fresh loan will be allowable.

3. Interest payable on interest will not be allowed.

4. Brokerage or commission paid to arrange a loan for house construction will not be allowed.

5. When interest is payable outside India, no deduction will be allowed unless tax is deducted at source or someone in India is treated as agent of the non-resident.

Also , Interest attributable to period prior to construction/acquisition i.e. Money may be borrowed prior to the acquisition or construction of the property. In such a case, the period commencing from the date of borrowing and ending on the date of repayment of loan or on March 31 immediately preceeding the date of acquisition or completion of construction, whichever is earlier, is termed as the pre-construction period. The interest paid/payable for the pre-construction period is to be aggregated and claimed as deduction in five equal instalments during five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilized for repairs, renewal or reconstruction.