Income from House Property (Section. 22-27)26th October 2020
Sections 22 to 27 of the Act deal with the subject of taxation of “Income from house property”.
Section 22: Annual value of property is taxable under the head “Income from House property”.
Section 23: Determination of ‘Annual value’
Section 24: Allowable deductions from “Income from House property”
Section 25: Amounts not deductable from “Income from House property”
Section 25A: Special Provision for arrears of rent and unrealised rent received subsequently.
Section 26: Property owned by co-owners
Section 27: Situations where the ownership shall be deemed, for taxing income from house property
Section 22 provides for taxation of ‘annual value’ of a property consisting of any buildings or lands appurtenant thereto. The term ‘buildings’ includes any building- office building, godown, storehouse, warehouse, factory, halls, shops, stalls, platforms, cinema halls, auditorium etc. as long as they are not used for business or profession by owner. Land appurtenant includes land adjoining to or forming a part of the building. It would depend on the nature of the land, whether it is appurtenant to the residential building, factory building, hotel building, club house, theatre etc. and will include courtyards, compound, garages, car parking spaces, cattle shed, stable, drying grounds, playgrounds and gymkhana.
Determination of ‘annual value’ of the property [Sec. 23]
‘Annual Value’ is inherent capacity of property to yield income. The inherent capacity has been defined as the sum for which the property might reasonably be expected to be let from year to-year. It is not necessary, that the property should be actually let. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out. Under Section 23 (1) of the Income tax Act, annual value of property shall be deemed to be the following:
- The sum for which the property might reasonably be expected to be let out from year to year;
- Where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable
iii. Where the property or part of the property is let and was vacant during the whole or any part of the previous year and, owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the sum referred to clause (a) the amount so received or receivable.
4.1 Annual value to be calculated as under:
- Where RC Act applicable
(i) Standard rent under the Rent Control Act; or
(ii) Actual rent received Whichever is higher
- Where RC Act is not applicable:
(i) Municipal Value or
(ii) Fair Rent or
(iii) Rent Received whichever is higher
Sub-section 2: The annual value of a house or part of a house shall be taken as nil if the property
- is occupied by the owner himself for the purpose of his own residence or,
- if such house or part thereof cannot be occupied by him because his employment, business or profession is carried on at any other place and, he has to reside at that other place in a building that does not belong to him.
Deductions permitted from Income from house property [Sec. 24]
Amount left after deduction of municipal taxes is net annual value. Following permissible deductions are allowed from Annual Value in cases of let out properties (Section 24).
(1) Deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the taxpayer (s.24(a)). No other allowance for depreciation, repairs, maintenance etc. would be allowable.
(2) Interest on borrowed capital (s.24(b)). Interest on borrowed capital is allowable as deduction on accrual basis (even if account books are kept on cash basis) if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.
As per section 25, interest chargeable under the Income tax Act, which is payable outside India on which tax has not been paid or deducted (and in respect of which there is no person in India, who may be treated as an agent under section 163) shall not be deducted in computing the income chargeable under the head “Income from house property”.
Income from house property is wholly exempt from tax in following situations
- Income from any farmhouse forming part of agricultural income;
- Annual value of any one palace in the occupation of an ex-ruler; Section 10(19A)
- Property Income of a local authority; Section 10(20)
- Property income of any registered trade union; Section 10(24)
- Property income of a member of a Scheduled Tribe;
- Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
- Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group;
- Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
- Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities;
- Property income of an institution for the development of Khadi and village Industries;’
- Self-occupied house property of an assessee, which has not been rented throughout the previous year;
- Income from house property held for any charitable purposes;
- Property Income of any political party. Section 13A
Co-ownership: In case where property is owned jointly by two or more persons, and where shares of such joint owners are definite and ascertainable, the income of such house property will be assessed in the hands of each co-owner separately. For the purpose of computing income from house property the rent/ annual value will be taken in proportion to his share in the property. In such an eventuality, the relief admissible under section 23(2) shall also be separately allowable to each such person [Explanation to Section 26]. However, where the share is not definite, the income of the property shall be assessed as that of an Association of persons.
Deemed ownership (Section 27)
In the following situations the ownership shall be deemed for taxing income from house property in view of Section 27 of the Act:
- When house property is transferred to spouse (otherwise than in connection with an agreement to live apart) or minor child (not being a married daughter) without adequate consideration (Section 2 7(i))
- In the case of holder of an impartible estate (Section 27(ii))
iii. A member of a cooperative society, company etc. to whom a building or part thereof has been allotted or leased under a house building scheme (Section 27(iii)). Thus, when a flat is allotted by a cooperative society or a company to its members/shareholders who enjoy the flat, technically the co-operative society/company may be the owner. However, in such situations the allottees are deemed to be owners and it is the allottees who will be taxed under this head.
iii a. A person who is allowed to take or retain 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, 1882, is deemed as the owner of that building (or part thereof) [Sec. 27 (iiia)].
- A person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building (or part thereof) by virtue of any such transaction as is referred to in section 269UA(f) [i.e. if a person takes a house on lease for a period of 12 months or more, is deemed as the owner of that building or part thereof] [Sec. 27 (iiib)].
(v) taxes levied by a local authority in respect of any property shall be deemed to include service taxes levied by the local authority in respect of the property.[Sec. 27 (vi)].