Income From House Property

House- everyone dreams of this, save there part of income for this and hopes to achieve it one day. Owing a house property comes with some amount of responsibilities. Paying house property taxes is one of them. 

There are mainly two reason to calculate taxable income from house property 

1. If you have given your property on rent, you may have to pay tax. 

2. If you have not given it for rent & taken a home loan, you can save tax. 

Now let understand some of the basic terminologies.

1. House Property- Building or land appurtenant*thereto (connected with the building like garden, garage etc.)

2. Building Includes-  Residential Building, Office Building, Shops, Factory, etc

3. Self-Occupied house property- Your property. You are the owner of that property.

3. Let out- It means giving your property on rent to other person.

4. Sub-Let out- Means you give your rented property on rent to somebody else. (rent on rent)

Now to arrive at the figures which show the taxable income from property you need to know some things 

1. Property must be given on rent.

To calculate the taxable income from property it should be given on rent. If it is not given on rent but has bought by taking loan then we will save our tax. Will explain it below separately.   

2. Gross Annual Value-  

It refers to the income that can be earned from immovable property.  

3. Municipal Value-

Value assigned to property by a municipality for the purpose of municipal tax assessment.

4. Fair Rental Value-

Rent which a similar property in the same locality would have fetched.

5. Standard Rent

Rent of the property fixed by Rent Control Act

6. Actual Rent Received / Receivable

It means actual rent received or receivable as per agreement between owner & tenant. 

Below table is used to compute taxable income from the house property.

Step for Computation of Gross Annual Value of Let out Property

Step 1. Compute Expected Rent (ER) (ER-Higher of Market Value & Fair Rent, but restricted to Standard Rent)

Step 2. Compute actual rent received (AR) [AR received Less Unrealised Rent]

Step 3. Compare ER & AR received.

Step 4. Gross Annual Value is the Higher of ER & AR received. 

Let us understand it with an example. 

Mr. Mangesh is the owner of two houses & all the house are let out. From the particulars, find out the Gross Annual Value.

Particulars                               House I                        House II

Municipal Value                        60,000                            52,000

Fair Rental Value                       72,000                            56,000

Standard Rent                            60,000                            70,000

Actual Rent Received                42,000                            72,000

Solution

Particulars                                                                  House I    House II

Step1- Higher of Municipal Value 

           & Fair Rental Value                                          72,000       56,000

Step2- Lower of Step 1 value & Standard Rent          60,000      56,000

Step3- Higher of Step 2 & Actual Rent received.       60,000      72,000

Gross Annual Value                                                       60,000      72,000

From Above example we understood how to calculate the Gross Annual Value of a House Property. Now we will look into an example which will help to understand the overall calculation to determine the taxable income from house property.

INTEREST ON BORROWED CAPITAL/LOAN

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

Pre-Construction Period

1. Starts from the date of borrowing, &

2. Ends on-

    a) 31st March preceding the year of completion of construction/acquisition

    b) Date of repayment of loan whichever is earlier.

Interest payable relating to pre-construction period is allowed as deduction in 5 equal instalments beginning with the previous year in which the house is completed & 4 succeeding years. 

Lets Understand with an example

Mr. Bhujbal started construction of a house on 01/09/2020. He raised a loan of Rs. 20,00,000 at 15% interest for this purpose. The construction was completed on 31/03/2022. Calculate the amount of interest allowable under section 24 for the Assessment Year 2022-23

Solution

- Starts on the date of borrowing i.e. 01/01/2020

- Ends on:-

a) 31st March preceding the year of completion of construction/acquisition i.e. 31/01/2021

b) Date of repayment of loan, whichever is earlier.

The Loan has not been repaid yet so we should ignore it.

Pre-construction period interest = Rs. 20,00,000 x 15% x 7/12= 1,75,000.00 

(7 month= 01/09/2020 to 31/03/2021)

Interest allowable u/s 24 for the AY 2022-23

Pre-construction period interest (1,75,000/5) =    35,000.00

Current year interest (20 Lacs x 15%)            =    3,00,000.00

Total Interest                                                 =     3,35,000.00

Maximum deduction for interest on borrowed capital u/s 24

Type of Property	Loan taken	Purpose	Maximum Deduction
Let Out	--	--	--
Self-Occupied	On or after 01/04/1999	Purchase or construction of house	2,00,000.00
	On or after 01/04/1999	Repair, renewal or construction of house	30,000.00
	Before 01/04/1999	Purchase, construction, repair, renewal or reconstruction of house

TAX TREATMENT IN DIFFERENT SITUATIONS
Let out for certain period & self- occupied for remaining period	---	Property is to be treated as let out & actual rent for let out period is compared.
Let out for certain portion & self- occupied for remaining portion	---	Annual value of property will be computed seperately for let out portion & self-occupied portion
Assessee owns two or more houses & all are self occupied	---	One house at the option of assessee shall be treated as self-occupied & remaining houses will be deemed as let out
Arrear rent or unreaslied rent received	---	Deemed to be income from house property in respect of the financial year in which such rent is received subject to standard deduction @ 30%
Composite Rent	---	Amount received for use of property- Taxable under Income from House Property Amount received for other services- Taxable under PGPB/ Income from other sources

Now let see an example which will give an overall explanation of the this topic

Mr. Mangesh Bhujbal is the owner of three houses particulars of which are under as-

		Houce A	Houce B	Houce C
Sr.No.	Particulars	(self occupied)	(self occupied)	(let out)
1	Fair Rent	37,500.00	25,500.00	31,500.00
2	Muncipal Valuation	31,500.00	23,500.00	26,500.00
3	Municipal Taxes	4,500.00	3,700.00	4,000.00

House A was constructed on loan of Rs 3,00,000.00 raised from the DHFL at an interest of 5% p.a. and House C was constructed on the mortgage of House B for Rs. 1,00,000.00 at an interest of 9% p.a.

Solution

	Houce A	Houce B	Houce C
Particulars	(self occupied)	(self occupied)	(let out)
Gross Annual Value	37,500.00	25,500.00	31,500.00
Less:-
Municipal Taxes	4,000.00	3,500.00	4,000.00
Net Annual Value	33,500.00	22,000.00	27,500.00
Less:-
Standard Deduction
(30% of NAV)	10,050.00	6,600.00	8,250.00
Annual Value before
deduction for interest	23,450.00	15,400.00	19,250.00
		(Chosen as self Oc.)	(Deemed as let out)
Annual Value	Nil	15,400.00	19,250.00
Less:-
Interest on Loan	15,000.00	Nil	9,000.00
Taxable Income	-15,000.00	15,400.00	10,250.00

Taxable Income From House Property for the AY is (-15000 +15400 +10250)= 10,650

Out of the two self-occupied houses, only one is to be allowed as exemption and the other will be deemed to be let out. 

With these article I hope you might have got at-least a small idea of how to calculate Income from House Property. 

Click below link for article on that topic.

Income Tax on Salary

Five Heads of Income

ROC Compliance for Private Limited Companies.