INCOME FROM HOUSE PROPERTY

House property is the second source of income for income tax purpose. Rental income from a property
is charged to tax under this head.
CHARGEABILITY [Sec. 22]
As per sec. 22, the annual value of property consisting of any building or land appurtenant thereto of
which assessee is the owner, other than such portion of such property as he may occupy for the
purposes of any business or profession carried on by him shall be chargeable to income tax under the
head “ Income from house property.”
Condition 1: Building or land appurtenant thereto
The term ‘house property’ is not defined in Income tax Act. However, various judicial interpretation has
construed the term house property as –
▪ any land surrounded by wall having roof or not; and
▪ any land appurtenant to a building.
Notes:
a) Building includes an enclosure of bricks, stone work or even mud walls
b) Building includes residential as well as commercial houses.
c) Vacant land is not a house property. Hence, income from letting of vacant land is not taxable
under this head but taxed as business income or as income from other sources.
d) Roof is not necessary for a non-residential house property. A large stadium or a open air
swimming pool is also considered as building
e) It should be a permanent structure meant for a useful purpose.
f) If a building consists of several flats, then each flat is considered as a separate house property.
g) An incomplete, a ruined or demolished house cannot be termed as house property.
h) Land appurtenant to a building includes car parking area, approach roads, backyards, courtyards,
etc. attached to such building.
Condition 2: Owner
Annual value of a property is assessed to tax only in the hands of the owner even if he is not in receipt
of any income. Any person other than the owner, even though he is in receipt of rent shall not be liable
to tax under this head. That is why, income from sub-letting is not taxable under this head but under
the head ‘Income from other sources’
Owner include legal owner, beneficial owner and deemed owner.
Fictional owner or Deemed owner [Sec. 27]
U/s 27, in the following cases, a person shall be treated as deemed owner of the property and liable to
tax (in such case legal owner or beneficial owner shall not be further liable to tax)
 1. Transfer to spouse or minor child [Sec. 27(i)]:
When an individual transfer a house property to -
• his or her spouse (not being a transfer in connection with an agreement to live apart); or
• a minor child (not being a married daughter)
- without adequate consideration, then transferor shall be treated as deemed owner of such property.
2. The holder of an impartible estate [Sec. 27(ii)]:
The holder of an impartible estate (property which is not legally divisible) is treated as deemed owner
of house property. Impartible estate is an estate to which the assessee has succeeded by grant or
covenant.
3. Property held by a member of a company, society or any other association [Sec. 27(iii)]:
Property held by a member of a company, co-operative society or other association of persons to
whom a building or a part thereof is allotted or leased under House Building Scheme of the company or
association, is treated as deemed owner of that building or a part thereof.
4. A person who acquired a property u/s 53A of the Transfer of Property Act [Sec. 27(iiia)]:
A person who is allowed to take or retain possession of any building (or part thereof) in part
performance of a contract u/s 53A of the Transfer of Property Act, 1882, is deemed as the owner of
that building (or part thereof).
5. Lessee of a building u/s 269UA(f) [Sec. 27(iiib)]:
A person who acquires any right u/s 269UA(f) in or with respect to any building or part thereof, by way
of lease agreement for a period not less than 12 years is deemed as the owner of that building (or part
thereof).
In short;
➢ Registration of the sale deed → Not necessary. [& thus, includes also a beneficial owner]
➢ Ownership includes both free-hold & lease-hold rights.
➢ Ownership includes deemed ownership (Section 27).
➢ Ownership of land on which the building stands is not necessary. [Land may be on lease].
➢ Ownership in PY is relevant & not in AY.
Condition 3: Property is not used for business or profession carried on by the assessee
When a person carries on business or profession in his own house property, annual value thereof is not
taxable u/s 22 provided income of such business is chargeable to tax.
SOME SPECIAL CASES
Foreign property
If house property is situated abroad, then annual value of such property shall be taxable as:
Assessee Condition for taxability
Ordinarily resident Always taxable
Not ordinarily resident or Non resident Income must be received in India

COMPOSITE RENT

➢ Meaning: The owner of a property may sometimes receive rent in respect of building as well as
i. Other assets [Ex: Furniture, plant and machinery] or
ii. for different services provided in the building [Ex: Lifts; Security; Power backup].

➢ Tax Treatment
Two lettings are separable
▪ Rent from HP → Taxable u/h HP.
▪ Rent from Use of other services → Taxable u/h PGBP or IFOS.
Two lettings are not separable
▪ Taxable u/h PGBP or IFOS.
Ex: Hotel business/paying guest accommodation or warehousing or auditorium
Co-ownership [Sec. 26]
If two or more persons own a house property jointly, then they are known as co-owners. If individual
share of each co-owner is definite and ascertainable then the share of each such person shall be taxable
as his income from house property.
Tax treatment
▪ Share of each co-owner in the income from the property as computed in accordance with sec. 22
to 25 shall be included in his total income.
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.
EXEMPTED HOUSE PROPERTY INCOME
Income from the following house properties are exempted from tax:
1) Any one palace or part thereof of an ex-ruler, provided the same is not let out [Sec. 10(19A)].
2) House property of a local authority [Sec. 10(20)].
3) House property of an approved scientific research association [Sec. 10(21)].
4) House property of an educational institution [Sec. 10(23C)].
5) House property of a hospital [Sec. 10(23C)].
6) House property of a political party [Sec. 13A]
7) House property of a trade union [Sec. 10(24)]
8) A farm house [Sec. 10(1)]
9) House property held for charitable purpose [Sec. 11]
10) House property used for own business or profession [Sec. 22].
COMPUTATION OF INCOME FROM HOUSE PROPERTY
The chapter is divided into the following categories for the purpose of computation:
▪ Let out property [Sec. 23(1)]
▪ Self-occupied property [Sec. 23(2)(a)]
▪ Property not actually occupied by the owner (unoccupied) [Sec. 23(2)(b)]
▪ Partly let out and partly self occupied property [Sec. 23(3)]
▪ Deemed to be let out property [Sec. 23(4)]
▪ Recovery of arrears of rent and unrealized rent [Sec. 25A]
LET OUT PROPERTY [Sec. 23(1)]
Computation at a glance
Computation of Income from house property of …………. for the Assessment Year ……….
Particulars Details Amount
Gross Annual Value (GAV) ****
Less: Municipal tax (****)
Net Annual Value (NAV) ****
Less: Deductions u/s
24(a) Standard deduction [30% of NAV] ****
24(b) Interest on borrowed capital **** (****)
Income from house property ****
Gross Annual Value (GAV)
Normally, income tax is charged on income, but under the head ‘Income from house property’, tax is
not charged on the rent earned from house property but on the inherent earning capacity of the house
property. Such earning capacity is termed as Annual Value. Annual value is determined considering the
following factors:
 a) Gross Municipal Value
It means the annual value of the property decided by municipality on which they charge municipal tax.
Such valuation may also be taken as evidence of earning capacity of a property.
b) Fair or Notional rent of the property
Fair or notional rent of a property means rent fetched by a similar property in the same or similar
locality.
c) Standard rent under the Rent Control Act
Standard rent is the maximum rent, which a person can legally recover from his tenant under the Rent
Control Act prevailing in the State in which the property is situated. A landlord cannot reasonably
expect to receive from a tenant any amount more than Standard Rent.
Taxpoint: Reasonable Expected Rent cannot exceed Standard Rent but can be lower than Standard Rent
d) Actual Rent Receivable [ARR]
Actual rent receivable is to be computed on accrual basis. However, where tenant pays rent, which is
influenced by benefits provided by the owner of the property, such rent must be disintegrated to
determine actual rent i.e. De-facto rent of the property.
De facto rent = ARR – Cost of amenities.
Taxpoint: While computing actual rent receivable, outstanding rent shall be considered but advance
rent received during the financial year is not to be considered.

Computation of Gross Annual Value

Step 1: Calculate reasonable expected rent (RER) of the property:
a) Gross Municipal Value (MV).
b) Fair Rent of the property (FRV).
c) SELECT (a or b) whichever is higher
d) Standard Rent (SRV)
e) SELECT (c or d) whichever is LESS, is Expected Rent [ER]
Note: RER cannot exceed Standard Rent.
Step 2: Calculate Actual Rent Received or Receivable (ARR) for the year less current year unrealised rent
(UR) subject to certain conditions#.
#Unrealised Rent [Rule 4]:
Unrealised Rent of current year shall be deducted in full from Actual Rent Receivable, provided the
following conditions are satisfied:
(i) The tenancy is bona fide;
(ii) The defaulting tenant has vacated the property or steps have been taken to compel him to
vacate the property;
(iii) The defaulting tenant is not in occupation of any other property of the assessee;
 (iv) The assessee has taken all reasonable steps to institute legal proceeding for the recovery of
the unpaid rent or has satisfied the Assessing Officer that legal proceedings would be
worthless.
Step 3: Compare the values calculated in step 1 and step 2 and take the higher one.
Step 4: Where there is vacancy and owing to such vacancy the ‘ARR – UR’ is less than the RER, then
‘ARR - UR’ computed in step 2 will be treated as GAV.
In nutshell, GAV shall be computed as under
Steps Particulars Amount
1st Compute Reasonable Expected Rent [RER]
Gross Municipal Value (a) ****
Fair Rent (b) ****
SELECT Higher of the (a) and (b) [A] ****
Standard Rent [B] ****
Reasonable Expected Rent [ SELECT Lower of (A and B)] ****
[C]
2nd Actual Rent Received or Receivable (ARR) – Unrealised ****
Rent of the current year (UR) [D]
3rd Gross Annual Value (GAV) ****
Higher of C and D shall be considered as GAV
4th However, where ‘ARR – UR’ is lower due to vacancy, ****
then ‘ARR - UR’ computed in step 2 will be treated as
GAV.

NET ANNUAL VALUE (NAV)

GAV - Municipal tax paid by the owner during the previous year = NAV
MUNICIPAL TAX (TAXES LEVIED BY LOCAL AUTHORITY)[Proviso to Sec. 23(1)]
Tax levied by the municipality or local authority is deductible from Gross Annual Value (GAV). As per
sec. 27(vi), taxes levied by a local authority in respect of any property shall include service taxes levied
by such local authority in respect of such property. Municipal tax includes Service taxes like fire tax,
water tax, etc. levied by a local authority.
Such taxes shall be computed as a % of Net Municipal Value and allowed as deduction subject to the
following conditions:
1. It should be actually paid during the previous year.
2. It must be paid by the assessee.
Taxpoint: Unpaid municipal tax or municipal tax paid by tenant shall not be allowed as deduction.
3. It must be related to the previous year or any year preceding the previous year.
NOTE:
▪ Refund of tax - Refund of Municipal tax paid for a property is not taxable u/s 22.
▪ Advance Municipal Tax paid by the assessee - Municipal tax paid in advance is not allowed as
deduction.
▪ Tax exceeds GAV (Negative NAV) - In case municipal tax paid includes tax paid for several past
years and the total amount of tax so paid by the owner exceeds GAV, then Net Annual Value
(NAV) can be negative.
DEDUCTIONS u/s 24
To compute income from from house property the following deductions are to be made from Annual
value
1. Standard deduction u/s 24(a)
30% of the net annual value is allowed as standard deduction in respect of all expenditures
(other than interest on borrowed capital) irrespective of the actual expenditure incurred.
Note: Where NAV is negative or zero, standard deduction u/s 24(a) is not available.
2. Interest on loan or borrowed capital u/s 24(b)
Interest payable on amount borrowed for the purpose of purchase, construction, renovation,
repairing, extension, renewal or reconstruction of house property can be claimed as deduction
on accrual basis.
For the purpose of calculation, interest on loan is divided into two parts:
a) Pre-construction period interest
Pre-construction period means the period starting from the day of commencement of construction
or the day of borrowing whichever is later and ending on March 31 immediately prior to the year of
completion of construction or the date of repayment of loan, whichever is earlier.
Example: X has taken a loan on 1/4/1998 for construction of house property. Construction started
on 1/6/2000 and completed on 17/8/2011. In such case, pre-construction period will be a period
starting from 1/6/2000 and ending on 31/3/2011.
Treatment: Interest for pre-construction period (to the extent it is allowed as deduction under any
other provisions of the Act) will be accumulated and claimed as deduction over a period of 5
continuous years in equal installments commencing from the year of completion of construction.
b) Post-construction period interest
Post-construction period means the period starting from the beginning of the year in which
construction is completed and continues until the loan is repaid.
Treatment: It can be fully claimed as deduction in the respective year(s).
In the given example, post-construction period will start from 01/04/2011.
Other Points
a) Interest on borrowed capital is allowed on accrual basis even if the books of account are kept
on cash basis.
b) Interest paid on fresh loan, which is taken to repay the original loan (being taken for above-
mentioned purpose) shall be allowed as deduction.
c) Interest on new loan, taken for paying outstanding interest on old loan, is not deductible
d) Amount paid as brokerage or commission, for arrangement of the loan, is not deductible.
e) Interest on loan taken for payment of municipal tax, etc. is not allowed as deduction.
SELF-OCCUPIED PROPERTY [Sec. 23(2)(a)] Amended
As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or
part thereof:
▪ is in the occupation of the owner for the purposes of his own residence;
▪ is not actually let out during the whole or any part of the previous year; and
▪ no other benefit there from is derived by the owner.
Treatment: The annual value of such house or part of the house shall be taken to be nil.
If an assessee occupies more than two house property as self-occupied, he is allowed to treat only two
house as self-occupied at his option. The remaining self-occupied house properties shall be treated as
‘Deemed to be let out’.
Taxpoint: In the light of the above provision –
Combination Treated as
Fully self occupied Self occupied property
Partly self occupied & partly vacant Self occupied property
Partly self occupied & partly let out Partly self occupied & partly let out (discussed later)
Partly self occupied & partly use for business Self occupied to the extent used for self occupation
purpose
Computation of taxable income of self-occupied property
Net annual value of self-occupied property shall be taken as nil. As a consequence, deduction u/s 24(a)
(standard deduction) shall also be nil. Interest on loan u/s 24(b) shall be allowed, subject to certain
ceiling.
Computation at a glance
Particulars Amount
Net Annual Value Nil
Less: Interest on borrowed capital u/s 24(b) ***
Income from house property (***)
*Standard deduction u/s 24(a) is not available
Net Annual value
Net Annual value of two self-occupied house property, at the choice of the assessee, is taken as nil. He
can choose those house properties as self-occupied through which tax liability can be reduced.
Normally (but not always) house property with higher gross annual value is treated as self-occupied
property but it is advised to calculate total income under the head ‘Income from house property’ by
applying each option separately and then choose the option which reduces total income.
Interest on loan u/s 24(b)
Interest on loan taken for construction, acquisition, repair, renovation or extension is allowed according
to the following table:
Conditions Maximum
Interest allowed
in aggregate
Where loan is taken on or after 1/4/1999 and following conditions are satisfied -
1. Loan is utilized for construction or acquisition of house property on or after 1-
4-1999;
2. Such construction or acquisition is completed within 5 years from the end of ` 2,00,000
the financial year in which the capital was borrowed; and
3. The lender certifies that such interest is payable in respect of the loan used
for the acquisition or construction of the house or as refinance of the earlier
loan outstanding (principal amount) taken for the acquisition or construction of
the house.

In any other case `30,000

Taxpoint: In any case, deduction in respect of interest on loan on self-occupied properties cannot
exceed `2,00,000 in a year.

Notes:
(a) Calculation and deduction of interest for the period of pre and post construction, acquisition, etc. is
same as discussed in the case of let out house property.
(b) Assessee shall always have nil income or loss upto `2,00,000 from properties u/s 23(2)(a).

UNOCCUPIED PROPERTY [Sec. 23(2)(b)]

Where an assessee has a residential house (kept for self-occupation) and it cannot actually be occupied
by the owner owing to his employment, business or profession carried on at any other place and hence
he has to reside at that place in a building not belonging to him, such house shall be termed as
unoccupied property.
Taxpoint:
▪ Assessee has a residential house kept for self-occupation.
▪ The house cannot be occupied by the owner owing to his employment and no other benefit is
derived from such house. In case house remains unoccupied by the owner owing to his personal
convenience, then no benefit under this section shall be allowed
▪ He has to reside in a house not belonging to him, whether rent is paid for that house or not.
Treatment: Same as self occupied property.
Computation at a glance
Particulars Amount
Net Annual Value Nil
Less: Interest on borrowed capital u/s 24(b) ***
Income from house property (***)

Notes:
(a) An assessee cannot claim benefit u/s 23(2)(a) as well as 23(2)(b) in the same previous year.
(b) An assessee can claim benefit u/s 23(2)(b) even though he has other house properties.
DEEMED TO BE LET-OUT HOUSE PROPERTY [Sec. 23(4)]
Where the assessee occupies more than one house property as self-occupied or has more than one
unoccupied property, then for any one of them, benefit u/s 23(2) can be claimed (at the choice of the
assessee) and remaining property or properties shall be treated as ‘deemed to be let out’.
Treatment:
1. Gross Annual value: Since assessee does not let out such property & do not receive rent,
therefore GAV will be determined from Step 1 only. Step 2, 3 & 4 of calculation GAV are
irrelevant.
Taxpoint: GAV of deemed to be let out property will be the ‘Reasonable expected rent (RER)’of
the property.
2. Municipal taxes and deduction u/s 24(a) and 24(b) shall be available as in the case of let out
house property.

PARTLY SELF-OCCUPIED AND PARTLY LET-OUT [Sec. 23(3)]

Where a house or part of the house, which is self-occupied, is let out during any part of the previous
year, such property is termed as ‘Partly self-occupied and partly let out’. Further, such division may be
made in the following ways:
 1) Area wise division
2) Time wise division
3) Area as well as Time wise division
Case (1) Area wise Division
In this case, a house property consists of two or more independent units and one or more of which are
selfoccupied and remaining units are let out.
Treatment
▪ Self-occupied portion & let out portion shall be treated as two separate house (i.e. Unit A & Unit
B);
▪ Common value like municipal value, fair rent, standard rent, municipal tax and interest shall be
proportionately divided;
▪ Income of both units shall be computed separately.
Case (2) Time wise division
In such case, the house property is self occupied by the assessee for a part of the year and let out for
remaining part of the year.
Treatment
In such case, assessee will not get deduction for the self-occupied period and income will be computed
as if the property is let out throughout the year. In this regard, it is to be noted that the reasonable
expected rent (RER) shall be taken for the full year but the actual rent receivable (ARR) shall be taken
only for the let-out period.
Case (3) Area as well as Time wise Division
Merger of Case 1 and Case 2

RECOVERY OF UNREALISED RENT AND ARREARS RENT [Sec. 25A]

Applicability
The assessee has received arrears of rent received from a tenant or the unrealised rent realised
subsequently from a tenant
Tax Treatment
The amount so received shall be taxable under the head ‘Income from house property’ in the year of
receipt after deducting standard deduction @ 30% of such amount.
Arithmetically, taxable amount shall be -
70% × [Recovery of Arrear Rent or Unrealised Rent]
Taxpoint
▪ No other deduction shall be allowed from such income except standard deduction i.e. 30% of such
receipt. (even legal expenditure shall not be allowed as deduction)
▪ The income is taxable on cash basis.
Note: Such receipt shall be chargeable as income from house property although the assessee is not the
owner of such property in the year of receipt.