Income from House Property [Amended by Finance, Act 2023]
Income from house property is the income earned by an individual (mainly rent) through the ownership of a property which may consist of a residential building, flat, shop or land attached to it.
This act is mainly governed by Section 22-27 of Income Tax Act, 1961.
|Section 22||Taxable Elements in Income from House Property|
|Section 23||Calculation of Annual Property Value|
|Section 24||Permissible Deductions for Income from House Property|
|Section 25||Non-Deductible Factors or Amounts in Income from House Property|
|Section 25A And 25AA||Realized Unrealized Rent|
|Section 25B||Receipt of Outstanding Rent Arrears|
|Section 26||Ownership of Property Among Co-Owners|
|Section 27||Instances of Deemed Ownership for Taxation of Income from House Property|
This Article Would be Broken Down in Two Major Parts..
- Part A: Basic Understanding and Calculation: This will provide a brief explanation of Income that could be taxed from house property and calculations with examples. This would be majorly beneficial for filing your income tax returns and calculation taxes. It will exclude rare cases and complex issues that most people don’t need.
- Part B: Bare Law [Section 22-27] with explanation: This will cover the act and laws necessary for legal and rare cases of Income from House property.
Income From House Property: Explanation and Calculation
We will discuss what is considered Income from house property and what is not considered income from house property. Then, we can go into determining the actual income from house property and taxable income from house property.
It’s important to determine whether an income is considered income from house property, income from other sources or income from Business and profession because of different deductions, exemptions, set offs and chargeability rules for each head of income.
Income Chargeable to Tax Under the Head House Property
- Rental income from a property owned (includes co-owner and deemed owner*) by the taxpayer. The property may be residential, commercial (shop, office) or land.
- Lease amount received from leasing the property.
- Income received from a leased property (as a lessee) for 12 years or more.
Income Not Chargeable to Tax under Head Income from House property
- Rental income received by any other entity other than individual is charged under PGBP.
- Rental Income earned by anyone other than the owner, co-owner or deemed owner (section 27), would be either charged as income from other sources or PGBP.
- Rental income from sub-letting is taxable under "Income from other sources" or business/profession income.
- Income from selling the house/property is chargeable under Capital Gains
- If other assets are rented out along with the property (example: furniture, Generator) that are inseparable, the income is charged under head “Profit under Head Business and Profession (PGBP) “or Income from other sources.”
- Income from Carrying out business or profession in a House / Shop / Property is charged under head business or profession.
As per section 27 of the Income Tax Act, 1961, Income from house property is taxable in the hands of deemed owner as well.
A deemed owner is the individual who doesn’t have the ownership/transfer rights of the property but has control over the property.
However, even if a person isn't the official owner, they are treated as the owner for tax purposes and the rental income is taxed in their hands. These situations include:
- 1. When an individual transfers their property to their spouse or minor child without adequate consideration, the transferor is deemed as the owner.
- 2. In the cases of impartible estates, the holder is treated as the owner of the estate's property.
- 3. A member of a co-operative society, company, or other association getting a building under a housing scheme is deemed the owner.
- 4. If someone satisfies the conditions of Section 53A of the Transfer of Property Act when acquiring property (with a written agreement, payment, and possession).
- 5. Leasing a property for 12 years or more makes the lessee the deemed owner. Shorter leases are exempt from this.
Taxability of Income form House Property
The income from the house property depends on the status of the house. According to the Income Tax act, any property or house property could be one of the following 3 types.
A self-occupied property is owned by the taxpayer and serves as their primary residence throughout the year, not being rented out.
An exception applies: if certain criteria are met, even if the owner doesn't reside there all year:
- The taxpayer owns the property.
- They are unable to live there due to work or business elsewhere.
- The property is unleased all year.
- No other benefits are gained from it.
The annual value of self-occupied property is considered nil. Therefore, a self-occupied house is supposed to be non-revenue generating, hence not taxable.
How many self-occupied properties can you have?
A taxpayer can claim a maximum of two properties as self-occupied from FY 2019-20 and onwards. Previously assessee could claim only one property as self-occupied and needed to pay taxes on all other let out and deemed let out properties.
Pro Tip: If you hold multiple properties, you can claim the highest revenue bringing house/property as your self-occupied property as Income Tax act does not specify which property you can claim as self-owned.
Partly Self-occupied and partly let out property: In this case the rental income or benefits derived from the let-out property is taxed normally as Let out property. You can claim the standard deduction and municipal taxes, as incurred.
When the property is let out, the actual rent received, or receivable is considered as the annual value of the property.
Deemed to be Let-Out Property
If an individual owns more than one property and all except two are self-occupied, the one which is not self-occupied is deemed to be let-out. In such cases, a notional rent (rent that could be received) is considered as the annual value of the property.
Yes, even if one of your houses is vacant and you receive no income from it, you need to pay taxes on it.
Calculation of Taxable Income Under House Property
The calculation of taxable income under the head house property is majorly done in 3 parts.
- 1. Determine the GAV of Property*
- 2. Determine the Net Annual Value (NAV) = GAV – Municipal Taxes / property Tax
- 3. Value after Standard Deduction = NAV -30% of NAV
- 4. Deduct Interest on Home Loan: Less Interest Paid on Home Loan (Up to 2 Lakh for Self-Occupied and no capping for let out property)
*Step 1: Determination of Gross Annual Value (GAV)
This is the toughest part of the entire calculations process. GAV should be calculated for both let out Property and deemed let out property.
GAV for Let out Property:
The Gross Annual Value for a Let-out Property will be Higher of the following.
- 1. Reasonable Expected Rent of the Property
- 2. Actual Rent of the Property
Reasonable Expected Rent of the property:
The reasonable expected rent of the property will also be higher of the following.
- a. Municipal Rental Value: It is the value as determined by municipality in the survey.
- b. Fair Rent of similar property in similar locality
Note: If the property is covered under Rent Control Act, then the reasonable expected rent Can not exceed the maximum recoverable rent from tenant (also called Standard Rent).
|Rental Income||Property A||Property B||Property C|
|Municipal Value||Rs. 8,00,000||Rs. 2,00,000||Rs. 8,00,000|
|Fair Rent||Rs. 2,50,000||Rs. 2,50,000||Rs. 2,50,000|
|Standard Rent||Not Applicable||Rs. 80,000||Rs. 9,50,000|
|Reasonable Expected Rent||Rs. 8,00,000 (Municipal Value is highest)||Rs. 80,000 (FV is higher, but it can’t exceed Standard Rent)||Rs. 800,000 (Municipal value is higher, and below standard rent ceiling)|
Actual Rent of the Property
Actual rent means the rent for the property during the year, including rent during vacancy periods. If certain conditions are met, unpaid rent is subtracted from actual rent.
Unpaid rent is rent the owner couldn't collect, if.
- The rental agreement is real.
- The tenant who didn't pay has left or efforts are made to make them leave.
- The tenant doesn't have another property of the owner.
- The owner tried to get the rent, even legally, or can prove legal action won't work.
Explanation: If you are receiving rent of Rs 10,000 pm for your house property, which I vacant for 2 months during the financial year. The actual rent for the year from the house property would still be Rs 1,20,000.
Example of Calculation of a Let-out Property
Extending the Example 1
|Rental Income||Property A||Property B||Property C|
|Reasonable Expected Rent||Rs. 8,00,000||Rs. 80,000||Rs. 8,00,000|
|Actual Rent of Property||Rs. 7,20,000||Rs. 6,40,000||Rs 8,50,000 (1,00,000 unrealized)|
|GAV||Rs. 8,00,000||Rs. 6,40,000||Rs. 800,000 (as 1 lakh is unrealized)|
GAV is a deemed Let out Property
If you have more than one property, you can claim a maximum of two as self-occupied. For all other properties, you need to pay taxes even if it has been vacant. As the property can generate revenue, it would be taxable on the reasonable expected rent.
For Deemed Let out property, Gross Annual Value is Reasonable Expected Rent as the actual rent received is nil.
Not the entire amount that is received from house property is taxable, there are a few deductions allowed.
- 1. Municipal Taxes: There are the annual taxes that are paid to local authority/municipality.
- 2. Standard Deductions: A standard deduction of 30% on Net annual value is allowed to cover the expenses related to repairs, maintenance, painting, etc. This could be claimed irrespective of the actual amount spent to a maximum limit of 30%.
- 3. Interest on Loan: An amount of interest paid on home loan is deductible on the NAV of the house property. The amount of allowed deduction varies according to the category of the house- whether let out or self-occupied, construction period and date on which loan is availed.
- Any property loan taken before 1999.
- Construction of the house took more than 5 years.
- Loan is taken for repair or renewal purpose.
- 4. Deductions on Income Tax: Besides the direct deductions, there are few deductions allowed under section 80C, 80E and 80 EEA. These are majorly the deduction allowed on total income irrespective of the income from house property.
|Max Deduction Allowed||Entire Interest||Rs 2,00,000||Rs 30,000|
|Conditions||If the property is let out property||If the property is Self-Occupied or Deemed let out property||
House Property Income Calculation Chart
|Gross annual value||XXXX|
|Less: - Municipal taxes paid during the year||XXXX|
|Net Annual Value (NAV)||XXXX|
|Less: - Deduction|
|- Deduction under section 24(a) @ 30% of NAV||XXXX|
|- Deduction under section 24(b) on interest||(XXXX)|
|Income from house property||XXXX|
Example of Calculation of Income for House Property
Let's consider a property with the following details:
- Gross annual value: Rs. 5,00,000
- Municipal taxes paid during the year: Rs. 20,000
- Interest on loan borrowed for the year: Rs. 1,00,000
|Net Annual Value (NAV)||₹4,80,000.00|
Less: - Deduction under section 24
|Income from house property||₹2,36,000.00|
Aggregate Income and Setting off – Loss from House Property
Here are a few things you should know:
- Even house property can make losses: For example, if you have loan on self-occupied property, although the GAV of the house would be Nil, after subtracting the allowed interest deduction would make loss on a house property.
- Aggregating Income/ loss from all properties: The income from house property is not calculated on an individual basis but aggregate of all houses. In short, if you have a loss on one property and income from another, you can combine both to reduce your taxable income.
- Setting of Loss from house property with other income: Incase the income from house property is negative or in other words if you have incurred loss from house property, you can set it off against other head of income subject to condition.
- The maximum loss that could be set off against other House Property is 2 Lakh in a year.
- If the loss exceeds 2 lakhs in a year, it could be carried forwarded for 8 years. However, in the subsequent years it could be only set off under the same head “Income Under Head House property.”
Up to this section we have covered everything that an individual would need to calculate Income under head House property. Now we will discuss the Bare Act.
The bare act will discuss most of the sections discussed above deeply.
Part B: Income from House Property (Bare Act - Section 23)
As per Section 22 of the Income Tax Act, 1961
(1) The process of computation of income under the head “Income from house property” starts with the determination of annual value of the property. The concept of annual value and the method of determination is laid down in section 23.
(2) The annual value of any property comprising of building or land appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head “Income from house property”. However, where the property is occupied for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax as profits or gains from business or profession, the annual value of such property would not be chargeable to tax under the head “Income from house property”.
Conditions for chargeability
- The property should consist of any building (residential, factory buildings, offices, shops, godowns and other commercial premises) or land appurtenant thereto.
- Assessee must be the owner of the property
- The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax.
- Property held as stock-in-trade etc. - Annual value of house property will be charged under the head “Income from house property”, where it is held by the assessee as stock-in-trade of a business also.
Income from residential property situated outside india
(1) In case of a resident in India (resident and ordinarily resident in case of individuals and HUF), income from property situated outside India is taxable, whether such income is brought into India or not.
(2) In case of a non-resident or resident but not ordinarily resident in India, income from a property situated outside India is taxable only if it is received in India.
Determination of annual value [section 23]
Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]
Where the property is let out for the whole year, then the GAV would be higher of the –
(a) Expected Rent (ER) and
(b) Actual rent received or receivable during the year
- The Expected Rent (ER) is higher of fair rent (FR) and municipal value (MV), but restricted to standard rent (SR).
- Municipal value is the value determined by the municipal authorities for levying municipal taxes on residential property.
- Fair rent means rent which similar property in the same locality would fetch
- The standard rent (SR) is fixed by the Rent Control Act.
Where let out property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year, loss due to vacancy is deductible from the higher of Expected Rent and actual rent received or receivable and remaining amount will be the GAV of the property.
In the case of self-occupied property or unoccupied property [Section 23(2)]
(a) If the property is self-occupied for own residence or was unoccupied throughout the previous year, its Annual Value will be Nil, as no benefit is derived by the owner from such property.
The expression “Unoccupied property” refers to a property which cannot be occupied by the owner by the reason of his employment, business or profession at a different place and he/she resides at such other place in a building that does not belonging to him/her.
(b) The benefit of exemption of one self-occupied house (two self-occupied properties - from A.Y 2020-21) is available only to an individual/HUF.
(c) No deduction for municipal taxes is allowed in respect with such property
Where a house property is let-out for part of the year and self-occupied for part of the year [Section 23(3)]
(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining part of the year, then the ER for the whole year shall be taken into account for determining the GAV.
(b) The ER for the whole year shall be compared with the actual rent for the let out period and whichever is higher shall be adopted as the GAV.
(c) However, municipal tax for the whole year is allowed as deduction, provided it is paid by the owner during the previous year.
In case of deemed to be let out property [Section 23(4)]
(a) Where the assessee owns more than one Residential property for self-occupation, then the income from any one such property (two such properties - from A.Y 2020-21), at the option of the assessee, shall be computed under the self-occupied property category and its annual value will be nil..
(b) The other self-occupied/unoccupied properties shall be treated as “deemed let out properties”.
(c) This option can be changed year after year in a manner beneficial to the assessee.
(d) In case of deemed let-out property, the ER shall be taken as the GAV.
(e) The question of considering actual rent received/receivable does not arise. Consequently, no adjustment is necessary on account of property remaining vacant or unrealized rent.
(f) Municipal taxes actually paid by the owner during the previous year, in respect of the deemed let out properties, can be claimed as deduction.
In case of a house property held as stock-in-trade [Section 23(5)]
(a) In some cases, property consisting of any building or land appurtenant thereto may be held as stock-in-trade, and the whole or any part of the property may not be let out during the whole or any part of the previous year.
(b) In such cases, the annual value of such property or part of the property shall be NIL.
(c) This benefit would be available for the period up to one year (up to two year - from A.Y 2020-21) from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.
In case of a house property, a portion let out and a portion self-occupied
(a) Income from any portion or part of a property which is let out shall be computed separately under the “let out property” category and the other portion or part which is self-occupied shall be computed under the “self-occupied property” category.
(b) There is no need to treat the whole property as a single unit for computation of income from house property.
(c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such other reasonable basis.
(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion or floor or on a reasonable basis.
- The Actual rent received/receivable should not include any amount of rent which is not capable of being realized.
- However, the conditions prescribed in Rule 4 should be satisfied. They are –
(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 satisfies the Assessing Officer that legal proceedings would be useless.
House Property taxes(Municipal taxes)
- House property taxes are allowed to be deducted from the GAV subject to the following two conditions: (a) It should be borne by the assessee (owner); and (b) It should be actually paid during the previous year.
- If property taxes levied by a local authority for a particular previous year is not paid during that year, no deduction shall be allowed in the computation of income from house property for that year.
- However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed as deduction in computation of income from house property for that year.
- Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise according to the method of accounting regularly employed by the owner, the deduction in respect of such taxes will be allowed only in the year of actual payment.
- If the property is situated outside India, House property taxes levied by local authority of the country in which the property is situated is deductible.
Deductions from annual value [section 24]
There are two deductions from annual value. They are –
(a) 30% of NAV; and
(b) Interest on borrowed capital
(a) 30% of NAV is allowed as deduction under section 24(a):
(a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
(b) The assessee will not be entitled to deduction of 30%, in the following cases, as the annual value itself is nil.
(i) In case of self-occupied property or
(ii) In case of property held as stock-in-trade and the whole or any part of the property is not let out during the whole or any part of the previous year, up to 1 year (2 years - from A.Y 2020-21) from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority.
(b) Interest on borrowed capital is allowed as deduction under section 24(b):
Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of house property can be claimed as deduction.
Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction.
Deduction in respect of self-occupied house property where annual value is nil
In this case, the assessee will be allowed a deduction on account of interest (including 1/5th of the accumulated interest of pre-construction period) as under –
|S No.||Conditions||Amount of Deduction|
|(A)||Loan borrowed before 1.4.99:
Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital before 1.4.99.
|Actual interest payable subject to maximum of ₹ 30,000.|
|(B)||Loan borrowed on or after 1.4.99: (i) Where the property is acquired or constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is completed within 5 years from the end of the financial year in which the capital was borrowed.||Actual interest payable subject to maximum of ₹ 2,00,000|
|(ii) Where the property is acquired or constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is not completed within 5 years from the end of the financial year in which the capital was borrowed.||Actual interest payable subject to a maximum of ₹ 30,000.|
|(iii) Where the property is repaired, renewed or reconstructed with capital borrowed on or after 1.4.99.||Actual interest payable subject to a maximum of ₹ 30,000.|
(a) The ceiling limit would not apply to let-out/deemed let-out property: The ceiling prescribed for one self-occupied property as above in respect of interest on loan borrowed does not apply to a deemed let-out property.
(b) Interest allowable on accrual basis: Deduction under section 24(b) for interest is available on accrual basis. Therefore interest accrued but not paid during the year can also be claimed as deduction.
(c) Unpaid purchase price would be considered as capital borrowed: Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with interest due thereon, the seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the borrower. In such a case, unpaid purchase price can be treated as capital borrowed for acquiring property and interest paid thereon can be allowed as deduction under section 24.
(d) Interest on unpaid interest is not deductible.
Provision for arrears of rent and unrealized rent received subsequently [section 25a]
Arrears of Rent / Unrealized Rent
- Taxable in the year of receipt/realization
- Deduction of 30% of rent received/realised is available
- Taxable even if assessee is not the owner of the property in the financial year of receipt/realization.
Treatment of income from co-owned property [section 26]
(1) Where property is owned by two or more persons, whose shares are definite and ascertainable, then the income from such property cannot be taxed as income of an AOP.
(2) The share income of each co-owner should be determined in accordance with sections 22 to 25 and included in his individual assessment.
(3) Where the house property owned by co-owners is self-occupied by each of the co-owners, the annual value of the property of each co-owner will be Nil and each co-owner shall be entitled to a deduction of ` 30,000 / ` 2,00,000, as the case may be, under section 24(b) on account of interest on borrowed capital.
(4) Where the house property owned by co-owners is let out, the income from such property shall be computed as if the property is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their specific share.
Deemed ownership [section 27]
As per section 27, the following persons, though not legal owners of a property, are deemed to be the owners for the purposes of section 22 to 26.
- Transfer to a spouse – In case of transfer of house property by an individual to his or her spouse otherwise than for adequate consideration, the transferor is deemed to be the owner of the transferred property. Exception– In case of transfer to spouse in connection with an agreement to live apart, the transferor will not be deemed to be the owner. The transferee will be the owner of the house property.
- Transfer to a minor child– In case of transfer of house property by an individual to his or her minor child otherwise than for adequate consideration, the transferor would be deemed to be the owner of the house property transferred. Exception– In case of transfer to a minor married daughter, the transferor is not deemed to be the owner.
- Holder of an impartible estate– The impartible estate is a property which is not legally divisible. The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate.
- Member of a co-operative society etc.– A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him although the co-operative society/company/ association is the legal owner of that building.
- Person in possession of a property– A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be the deemed owner of that house property.
- Person having right in a property for a period not less than 12 years– A person who acquires any rights in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that building or part thereof. Exception – In case the person acquiring any rights by way of lease from month to month or for a period not exceeding one year, such person will not be deemed to be the owner.
Cases where house property income is exempt from tax
- Section 10(1) - Income from any farm house forming part of agricultural income.
- Section 10(19A) - Annual value of any palace in the occupation of an ex-ruler.
- Section 10(20) - Income from house property of a local authority.
- Section 10(21) - Income from house property of an approved scientific research association.
- Section 10(23C) - Property income of universities, educational institutions, etc.
- Section 10(24) - Property income of a registered trade union.
- Section 11 - Income from house property held for charitable or religious purpose.
- Section 13A - Property income of any political party.