What is Income?
Income is the monetary value of an entity’s consumption and saving opportunities during a specific period. Income is difficult to conceptualize, and different disciplines may have distinct definitions. A person’s income in an economic sense, for example, may differ from their income as defined by legislation. Haig–Simons income, which represents income as Consumption + Change in Net Worth and is commonly used in economics, is a critical definition of income.
Income is defined by tax law as an amount that includes any wage, salary, profit, interest payment, rent, or other type of earnings received in a calendar year for families and individuals in the United States. Gross income minus taxes is a standard definition of discretionary income and other deductions (such as compulsory pension contributions), and it’s often used to measure taxpayers’ well-being.
In public economics, the term refers to the accumulation of monetary and non-monetary consumption capacity, with the former (economic) serving as a proxy for total income.
Gross income can be defined as the sum of all revenue less the cost of items sold for a company. Net income subtracts expenses: payment minus cost of goods sold, fees, depreciation, interest, and taxes = net income.
Income tax is a type of tax levied by governments on income made by enterprises and persons within their jurisdiction.
And as defined by the Income Tax Department of India, house tax is Rental income from a building or land attached to it. The taxpayer is the owner and is subject to taxation under “Income from house property.”
Income from House property
Property is used in a broad sense in everyday language. It is taken to signify ‘dominion’ or right of ownership, or even partial ownership, in addition to the thing that is the subject of the request. Lord Longdale regarded it as the most extensive of all the expressions employed in John v. Skinner (1836) 5Lg 67-90 (Ch) because it indicates and describes every potential interest that a person can have. However, such a broader definition of property is irrelevant for taxation under Sections 22 to 27 of the Act. “Income from House Property” should be the taxable income.
Income from House Property in India: ‘Income from house property’ refers to the revenue generated by a house property, either as a rental income or due to its sale.
‘Income from house property’ refers to any income derived from home property, whether in the form of rental income or from its sale. The Income Tax Act treats any property, such as a house, a building, an office, or a warehouse, as ‘house property.’ The Income from House Property is one of the five types of income included when determining an assessor’s gross total income (GTI) for the year. However, several deductions can be taken before the income from a rental property is taxed. Are you wondering if there are several sorts of house property to consider? Keep in mind that a residence might be self-occupied, rented, or inherited; depending on the circumstances, the taxation will differ.
The three given requirements must be satisfied for the income to be taxed as Income from House Property. These are-
- To begin, the house should be a structure, land, or apartment.
- Second, the assessor must be the property’s owner,
- Third, the dwelling must not be used for business or professional activities.
Definition under Section 22 of IT Act, 1961
Under the heading “income from House Property,” Section 22 taxes the ‘annual value’ of a property comprising of any buildings or lands appurtenant to it, of which the assessee is the owner. The tax levied by Section 22 is a tax on the “year value” of home property, not on “House Property.” However, suppose a taxpayer occupies a house property to carry on a business or profession (the earnings of which are subject to income tax). In that case, the yearly value of such property is not subject to tax under the heading ‘Income from House Property.’
Vacant plots of land with no adjacent structure will not be taxed under this heading (but taxed as income from other sources). As a result, the presence of a system is a necessary condition. Residential houses (whether rented or owned), office buildings, factory buildings, godowns, flats, and other structures will all be considered buildings as long as they are not used for business or profession by the owner. The reason for which the renter uses the form is also irrelevant. As a result, renting out godowns will be counted as income from a house. It does not make a difference in a partnership that owns the property.
The previous discussion also used the word ‘lands appurtenant to it. In this context, income from Under this heading, the rental of vacant pieces of land with no contiguous construction, will not be taxed (but will be taxed as income from other sources). As a result, the presence of a structure is a necessary condition. Residential houses (whether rented or owned), office buildings, factory buildings, godowns, flats, and other facilities will all be considered buildings as long as they are not used for business or profession by the owner. The reason for which the renter uses the design is also irrelevant. As a result, renting out godowns will be counted as income from a house. It makes no difference whether a corporation or a partnership owns the property. The income from the buildings or lands appurtenant to that is taxed: residential buildings, rented out for business or profession, and amusement auditoriums.
The Requirements for taxing income from house property
- The property should include any buildings or land that are attached to it.
- The owner of the property should be the assessee.
- The property should not be utilized for any business or profession that the owner engages in and whose profits are taxable.
Basis of house property tax
House properties include your home, an office, a store, a building, or property that belongs to the building, such as a parking lot. The Income Tax Act makes no difference between a business and a residential property. Under the law, all forms of properties are taxed heading ‘income from’ on the income tax return house property.’ For income tax purposes, an owner is its legal owner, someone who can exercise the owner’s rights in his own right rather than on behalf of someone else.
When a property is utilized for a business or profession or freelance labor, it is taxed under the ‘income from business and profession’ heading. Repair and maintenance costs are deductible as company expenses.
1. Property with a Self-Occupied House
A self-occupied residence is utilized for personal purposes. This could be the home of the taxpayer’s family, including parents, spouses, and children. For income tax purposes, a vacant dwelling property is considered self-occupied. Before FY 2019-20, if a taxpayer owns more than one self-occupied residential property, only one is considered and handled as a self-occupied property, with the others believed to be rented out. It is up to the taxpayer to decide which property to declare as self-occupied.
The benefit of treating the dwellings as self-occupied has been expanded to two houses for FY 2019-2020 and beyond. A homeowner can now declare his two homes as self-occupied and the remaining house rented for income tax purposes.
2. House Property for Rent
For income tax reasons, a house property rented for the entire or part of the year is referred to as a let-out house property.
3. Inherited Assets
Based on the usage stated above, an inherited property, such as one left by parents, grandparents, or others, can be either self-occupied or rented out.
Calculation of Income from House Property
Here’s how to figure out how much money you’ll make from a rental property:
1. Calculate the property’s Gross Annual Value (GAV): A self-occupied residence has no gross annual value. The rent earned for a place on rent for a rented out property is made.
2. Reduce Property Tax: When property tax is paid, it can be deducted from the GAV of the property.
3. Calculate the Annual Net Value (NAV): Net Yearly Value = Total Yearly Value – Property Tax
4. Reduce the NAV by 30% for standard deduction: Section 24 of the Income Tax Act allows the removal of 30% from NAV. Other expenses, like painting and repairs, are not eligible for tax relief beyond 30 percent.
5. Reduce home loan interest: Interest paid on a housing loan taken out throughout the year is also deductible under Section 24.
6. Calculate the income from your home: Your income from house property is the result of this calculation. This is taxed at the applicable slab rate.
7. Loss from house property: Because the GAV of a self-occupied house is zero, claiming the home loan interest deduction will result in a loss from house property. This loss can be offset by revenue from other sources.
Calculation of Self-Occupied Property’s Annual Value
The annual value is taken as ‘zero’ in the case of a single self-occupied house property that has never been let out. If a person owns more than one house property and uses all of them for self-occupation, he can exercise an option under which the value of one house property that he specifies is set to zero. The annual value of the remaining self-occupied dwelling properties will be calculated on a theoretical basis as if they had been rented out.
The Annual Value of A Home Located Far From One’s Place of Employment
A person may possess a house in Delhi, for instance, that he used as his primary home. He is transferred to Mumbai, where he lives in a rented apartment because he does not own a home. In this scenario, the residential property in Delhi cannot be utilized for self-occupation. So notional income would typically have been charged, even though he receives no benefit from it. To save the taxpayer from suffering in such cases, the annual value of such property has been mainly provided to be $0, subject to the following conditions.
- The assessee must own only one home property.
- The person cannot occupy the house property due to his employment, business, and other obligations that need him to be away from the location where the property is located.
- The house should not have been rented in the first place.
- He must live in a building that does not belong to him at his place of employment [Section 23(2)(b)].
- He receives no additional advantage from the unoccupied property.
The government generally imposes income tax, and the income tax levied on the income generated from house property is covered under the Income Tax Act, 1961, and the income which is taxable under this head of Income is –
- Rental income from a rented property.
- For income tax purposes, the yearly value of a property that is ‘deemed’ to be rented out.
- There annual value of a self-occupied property is zero.
Under this head of Income Tax Act, 1961, no differentiation is made between residential and non-residential commercial properties, and all are taxed under it only.
This Article has been written by Tushar Tyagi, 1st Year B.A.LL.B Student at National Law University, Sonipat.