How To Calculate Income From House Property?

Table of Contents hide

4) STEPS TO CALCULATE INCOME FROM HOUSE PROPERTY[11] [12]

Income tax is a tax on income the assessee earns and receives in India. Every individual is liable to pay income tax on the Income exceeding Rs.2,50,000/- Per annum. The Income can be received from different sources. Of these, one source is income from house property. The taxability may occur in a taxpayer’s hands for the property that he owns, whether the same is used for the purpose of his own home, or if the property has been let out on rent, or even in cases where it is left vacant. This paper aims at examining what constitutes the property to which Section 22 of the Income Tax Act applies.

Section 4 of the Income Tax Act 1961 provides for changeability of income tax. However, it should be noted that the provision does not in itself create any liability whatsoever.

As SC has observed in CIT vs. K. Srinivasan[1] although Section 4 of the Act provides for charge for income tax, income tax is only charged if the central law, which is usually the Finance Act, provides that income tax is charged for any year of assessment at the rate or rates specified therein.[2] It is indeed noticeable that any sum of money received by an person is not taxable; rather, it is Section 14 of the Act which explicitly provides for the five heads of income on which tax may be levied under the Income Tax Act: [3]

Salaries
Income from house property

Profits and gains of business or profession

Capital gains
Income from other sources

WHAT IS HOUSE PROPERTY?

The ‘Income from House Property’ is one of five heads of income that is taken into account during the year while measuring an assessee’s gross total income (GTI).

As per Section 22 of the Income Tax Act, 1961[4]

The income calculation process under the heading “Income from house property” begins with the determination of the property’s annual value. Section 23 sets forth the definition of an annual value and the process of determination.
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”. Nevertheless, if the property is occupied for any business or career that it carries out, the income of which is taxable as profits or gains from business or profession, the annual value of such property will not be taxable under the heading ‘Income from household property

Basis of Charge, Section 22

Income from household property shall be taxable under this heading provided that the following conditions are met:

The house property should consist of any building or land appurtenant thereto.
The taxpayer should be the owner of the property.
The house property should not be used for the purpose of business or profession carried on by the taxpayer.

Pre-conditions[5] [6]

1. There must be a building or land appurtenant thereto: Means if there is only one piece of open plot of land, i.e. no building on it, would not be taxable under that head. But if a building forming part of a building and is attached to the land, it is taxable within this heading.

Example: Mr. A’s got a big farmhouse. It includes vast outdoor spaces within its boundaries. The farm house has been let out at the rent of Rs. 5,00,000 p/m., out of which rent of Rs. 1,25,000 p.m. is attributable to the open land. In this case, the total rental income of Rs. 5.00000 p.m. is taxable on the property of the head house.

2. Person must be owner of property: Owner may be individual or a Company incorporated for the purposes of buying and development of land. Property will be taxable under this head even if the property is his stock in trade or letting out of property is the business of assessee.

Example: Under a lease agreement, if a superstructure is built on a leased land, the lessee shall be taxable under that head, irrespective of the fact that he or she has to hand over the possession of the superstructure after the lease term gets expired. Ownership includes both free-hold and lease rights and also involves deemed ownership rights.

CATEGORIES OF HOUSE PROPERTY

There are three categories of house property as described below:[7]

Self occupied house property: A self-occupied house is used for a residential function of its own. This can be taken up by the family of the taxpayer-parents and/or spouse and children. For income tax purposes a vacant house property is considered as self-occupied.

Before FY 2019-20, if the taxpayer owns more than one self-occupied house property, then only one is considered and treated as self-occupied property, and it is assumed that the remaining property is left out. The preference of which property is up to taxpayer to choose as self-occupied.

The benefit of considering the homes as self-occupied has been extended to 2 houses for FY 2019-20 and beyond. Now a homeowner can claim his two properties as self-occupied and remaining house for tax purposes.

Section 27 of the Income Tax Act talks about deemed ownership for levying tax:[8]

Transfer of the house property ownership to either the spouse or a minor child.
Impartible estate holder; meaning, the property which cannot be divided legally (for example; dividing a single storey house with 4 rooms amongst 7 heirs).
A property which is held by the member of a co-operative society.
Any property acquired through Power of Attorney transaction.

In the 2010 decision of Mangla Homes (P) Ltd. vs. Income-Tax Officer,[9] the assessee company was a private limited company and had been incorporated with the main object to carry on business of dealing with and that of investment in properties, flats, warehouses, shops, commercial and residential houses, etc. The assessee company as such used to purchase certain flats for the purposes of trading. But due to recession in the market, such flats were not sold. Therefore, it let out the said flats for temporary period on license basis and earned monthly income in the form of license fees. The assessee claimed that this rental income would be income from business but the rental authorities instead claimed that such income should be treated as income from house property. The Income-tax Appellate Tribunal had relying upon the decision in East India Housing & Land Development Trust Ltd. vs. CIT[10], held that the rental income could not be treated as income from business and it treated it to be “income from house property” under Section 22 of the Income-Tax Act.

STEPS TO CALCULATE INCOME FROM HOUSE PROPERTY[11] [12]

Here’s how you determine income from house property:

Determine Gross Annual Value (GAV) of the property, 23(1): A self-occupied house has a gross annual value of nil. For a let out property, it is the rent collected for a house on the rent.
Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of property.
Determine Net Annual Value(NAV): Net Annual Value = Gross Annual Value – Property Tax
Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No additional expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap beneath this section.
Reduce home loan interest: Deduction under the Section 24 is also available for interest paid during the year on housing loan availed.
Determine Income from house property: The resulting value is your income from house property. This is taxed at the slab rate applicable to you.
Loss from house property: Unless you own a self-occupied property, as its GAV is Zero, claiming home loan interest deduction would result in a loss from building income. This loss can be adjusted for other heads against revenue.