Smt. K.S.N.
KANSAGARA MAHILA COLLEGE,
RAJKOT
Sub: Income tax law and Practices (S.Y.B.com)
Dr. Devdatt. J. Vyas
CHAPTER: 3 INCOME FROM HOUSE
PROPERTY (U/S 22 TO 27)
According to section 22, the annual value of a property, consisting of any
buildings or lands appurtenant thereto, of which the assessee is the owner, is
chargeable to tax under the head ‘Income from house property’. However, if a
house property, or any portion thereof, is occupied by the assessee, for the
purpose of any business or profession, carried on by him, the profits of which
are chargeable to income-tax, the value of such property is not chargeable to tax
under this head. Thus, four conditions are to be satisfied for property income to
be taxable under this head:
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.
4. Income- tax is assessed on “Annual Value” and not on actual rent.
Meaning of Annual Value
The basis of charge of income from House property is the Annual Value and
not the actual rent received. “Annual value of any property is deemed to be
the sum for which property might reasonably be expected to let from year
to year.” Annual of House property is calculated by following steps:
Step: 1 Calculation of Reasonably Expected value
OR
Calculation of Expected value
OR
Calculation of Expected Rent (E.R.)
It is calculated by following way;
Fair Rent = .............. Higher value is
Municipal rent/records/assessment = ............... taken.
Higher value=.................. Lower value is
Standard rent =.................. taken.
Lower Value= Expected Rent.
Step: 2 Calculation of Actual Rent Receivable/Received (A.R.R)
Actual Rent denotes the rent receivables or received from the tenant for
the property let-out. Actual rent received is calculated by following way
A.R.R= monthly rent receivable* No. of months
If the owner of the house property has incurred the certain
expenses to earn rent i.e. Cost of Amenities. Such cost of amenities is deducted
from Actual Rent received. Cost of Amenities like Liftman’s salary, gardener’s
salary, expenses of providing water etc.
A.R.R= Rent Received- Cost of Amenities.
Vacancy Period Rent : When property or part of the property is let out
to tenant and if such property remains vacant during the current previous year,
then such vacancy period rent must deducted to calculate Annual value. It is
deducted from Expected rent and Actual Rent Received.
Expected Rent - Vacancy period rent=..............
Actual Rent Received - Vacancy period rent=............
Unrealised Rent/Irrecoverable Rent: The amount of rent which an
assessee cannot realise or recover from the tenant due to his insolvency or
any other financial problems is known as Unrealised rent or Irrecoverable
rent. Such Unrealised rent must be deducted from Actual rent receivable
only to calculate Annual value.
Expected Rent= ......................
Actual Rent Receivable – Unrealised Rent=................
There are mainly two types of Annual Values.
(1) Gross Annual Value (GAV)
(2) Net Annual Value (NAV)
Computation of Gross Annual Value u/s 23(1) for Let-out
Properties.
When House property When House property or When House Property
or part of the House part of the House or part of the House
Property is let out property is let out during property is let out
throughout the the previous year and during the previous
previous year. remained vacant. year and there is an
unrealised rent
Calculate, Calculate,
Expected Rent= .......... Expected Rent- vacancy Calculate,
Actual Rent Period rent=............... Expected Rent=...........
Received= ........... Actual Rent received- Actual Rent Received-
Higher value is taken. vacancy period rent=........ unrealised rent=............
Higher Value= Gross Higher Value is taken. Higher value is taken.
Annual Value (GAV) Higher Value= Gross Higher Value= Gross
Annual Value (GAV) Annual Value (GAV)
Summary for Calculation of Gross Annual Value for Let-out Properties.
(1) When House Property is Let-out and there are no vacancy and
unrealised rent.
Expected Rent = ..........
Actual Rent Received= ........... Higher value is taken.
Higher Value= Gross Annual Value (GAV).
(2) When House Property is Let-out and there is vacancy period
rent.
Expected Rent –Vacancy rent = ..........
Actual Rent Received- Vacancy rent = .......... Higher value is taken.
Higher Value= Gross Annual Value (GAV).
(3) When House Property is Let-out and there is an unrealised rent.
Expected Rent = ..........
Actual Rent Received- unrealised rent = .......... Higher value is
taken.
Higher Value= Gross Annual Value (GAV).
(4) When House Property is Let-out and there are Vacancy rent and
unrealised rent.
Expected Rent- Vacancy rent = ..........
Higher value
Actual Rent Received - Vacancy rent - unrealised rent = ..........
Higher Value= Gross Annual Value (GAV)
Example : From the following particulars for the previous year 2018-’19,
find out the Gross Annual value of different let-out properties.
Particulars House House House House House
1 2 3 4 5
1. Annual value as per
municipal records 24,000 27,000 30,000 24,000 27,000
2. Fair rental value 30,000 24,000 27,000 27,000 30,000
3. Standard rent 27,000 30,000 24,000 30,000 36,000
4. Actual rent
receivables as per
agreement 36,000 24,000 36,000 36,000 27,000
5. Loss of rent of
vacancy period
6. Irrecoverable rent - - 6,000 12,000 9,000
- 6,000 - - 4,500
Computation of Gross Annual Value
Particulars House 1 House 2 House 3 House 4 House 5
Step:1 Calculation
of Expected Rent
(E.R)
Fair Rental Value 30,000 24,000 27,000 27,000 30,000
Municipal records 24,000 27,000 30,000 24,000 27,000
Higher Value is 30,000 27,000 30,000 27,000 30,000
taken
Standard rent 27,000 30,000 24,000 30,000 36,000
Lower Value= E.R. 27,000 27,000 24,000 27,000 30,000
Less: Vacancy rent - - 6,000 12,000 9,000
Expected Rent 27,000 27,000 18,000 15,000 21,000
Step: 2 Actual Rent 36,000 24,000 36,000 36,000 27,000
Received
Less: Vacancy rent - - 6,000 12,000 9,000
Less: Unrealised rent - 6,000 - - 4,500
Actual Rent
Received 36,000 18,000 30,000 24,000 13,500
Gross Annual Value 36,000 27,000 30,000 24,000 21,000
* Computation of Net Annual Value u/s 23(2)
First Calculate Gross Annual Value and out of it deduct Local
Tax/Municipal tax then resultant figure is Net Annual Value.
Gross Annual Value = ..................
Less: Local tax/ Municipal tax = ..................
Net Annual Value =...................
* Meaning of Local tax/Municipal tax:
Local tax or Municipal tax means a tax which is paid to any local
authority or municipality. Local Tax includes property tax, general tax, water
and sewage tax, municipal education cess etc.
Following points must be remembered in regard to Local tax/Municipal
tax.
(1) Only paid Local tax/Municipal tax is deductible. Any unpaid or
payable local tax/municipal tax is not deductible.
(2) Local tax/Municipal tax paid by an Owner is only deductible. Local
tax/Municipal tax paid by tenant is not deductible.
(3) Only Current Previous year Local tax/ Municipal tax is deductible.
But if any earlier previous years’ Local tax/Municipal tax paid during
current previous year, then such Local tax/Municipal tax is also
deductible.
e.g. Previous Year 2019-’20.
Local tax paid during 2019-‘20= 5,000 (deductible)
Local tax paid during 2019-’20.
For 2018-19= 5,000
For 2019-‘20= 5,000 10,000 (deductible)
Local tax paid for 2019-‘20= 5,000 (deductible)
Local tax paid for 2018-‘19= 5,000 (Not deductible)
Computation of Annual Value for Self-occupied House
When When Two House When When Part When Part of
House Properties are self- House of the House the time
Property is occupied for Residence. Properties Property is House
Self- are Self – Self- Property is
occupied occupied occupied Self-
for for own and occupied and
Residence. Business or remaining remaining
Profession. part of the part of the
House time House
Property is Property is
Let-out. Let-out.
Net Two Houses would It is not Self- In such
Annual be treated as Actually taxable occupied case,
Value u/s Self-occupied, so Net under the House Assume
23(2)= NIL Annual Value u/s head Property House
23(2)= NIL “Income Part, u/s Property is
from House 23(2) Let-out
And more than two Property”. Net Annual throughout
houses are self occupied, value= NIL the current
then such houses are Previous
treated as “Deemed to Let-out year, and so
be let-out”. House Gross
Property Annual
Part, Gross Value is
Annual calculated.
Value is
calculated.
* Deduction Allowed : (U/S 24)
Following deductions are allowed while computing taxable income from
House Property.
(1) Standard Deduction:
Standard deduction is allowed @ 30% from Net Annual Value, is
deductible.
(2) Interest on Borrowed Capital or Loan:
Interest on Borrowed capital or Loan taken on House Property is
deductible from Net Annual Value. But Loan or Capital must be borrowed for
the following objectives.
(a) Construction of House Property.
(b) Purchase of House Property.
(c) Repairs of House Property.
(d) Reconstruction of House Property.
(e) Renovation of House Property.
For deduction of Interest on Loan taken for House Property, following
conditions must be satisfied.
(a) As the deduction is granted on accrual basis, it should be claimed on
yearly basis, whether paid or not.
(ii) Interest on Fresh loan, taken to repay the old loan is also allowed as a
deduction.
(iii) Any unpaid interest on Loan of earlier previous year is not deductible,
but any unpaid interest on Loan of current previous year is deductible.
(3) Pre-construction Loan Interest/ Capitalised Interest/ Total Interest
during construction:
Such Pre-construction Loan Interest/Capitalised Interest/Total Interest
during the construction period is deductible in Five equal annual instalments
beginning from the previous year in which construction of property is
completed.
Pre-construction period means the period commencing on the date
of taking loan and ending on 31st March immediately preceding the year
of completion of construction or date of repayment of loan, whichever is
earlier.
e.g. If Construction completed: 2014-15
and Current Previous year: 2018-‘19
Pre-construction Interest= 30,000, then first calculate 5 years beginning
from Construction year
1. 1st year= 2014-’15.
2. 2nd year= 2015-‘16
3. 3rd year= 2016-‘17
4. 4th year= 2017-‘18
5. 5th year= 2018-’19.
And if current previous year comes in 5 years, then 1/5th Pre-
construction interest is deductible, then
Pre-construction interest= 30,000*1/5= 6,000
Note: And if current previous year does not come in 5 years, then 1/5th Pre-
construction interest is not deductible.
* Interest on Borrowed capital or Loan for Self-occupied house.
(A) If Such Loan is taken before 1-4-1999.
(a) Construction of House Property.
(b) Purchase of House Property.
(c) Repairs of House Property. Maximum Interest of Rs.
(d) Reconstruction of House Property. 30,000 are deductible.
(e) Renovation of House Property.
(B) If Such Loan is taken after 1-4-1999.
For Repairs of House Property. Maximum Interest of Rs.
For Reconstruction of House Property. 30,000 are deductible.
For Renovation of House Property
For Purchase of House Property Maximum Interest of Rs.
For Construction of House Property 2,00,000 is deductible.
Note: Any other expenses like Land revenue, Insurance Premium, Ground
rent, Commission, Brokerage etc are not deductible from Net Annual Value.
