Income From House Property - Short Notes

[Short Notes. Exempted House Property Income, Deemed Ownership, Unrealised Rent, Deduction of Municipal Tax, Different Types of Rental Value] 

Write Short Notes on:

1.       Exempted House Property Income

2.       Deemed Ownership

3.       Unrealised rent and its Treatment

4.       Property owned by co-owners

5.       Dispute about ownership

6.       Deduction of Municipal tax

7.       Different types of rental value

Exempted House Property Income (Sec. 10)

Ans: Under Sec. 10 of the Income Tax Act’ 1961, the following incomes from house property are exempted from tax:

1) Property held by the following institutions is exempted from tax:

a) Registered trade union

b) Property income of a political party

c) Local authority

d) Educational institution and University working for spreading education and not to earn profit.

e) Approved scientific research association

f) Hospital and Medical institutions working for the spreading of medical services to people and not meant for earning profit.

2) Income from an agricultural house property.

3) Annual value of one palace in the occupation of an ex-ruler.

4) Income from property held for charitable purposes.

5) Income from property used for own business or profession.

6) Annual value of two self-occupied properties.

7) Income from house property held as stock-in-trade and not let out during the previous year.

8) Self-occupied house property but vacant due to employment or profession in a place different from the place of his residence.

9) Income from house property of a co-operative society is exempted if:

a) GTI of a non-housing co-operative society is less than Rs. 20,000.

b) Property is let out for storage, processing or facilitating the marketing of commodities.

Deemed Ownership

Under Section 27 of the Income Tax Act, the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property:-

(a)   If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes.

(b)   The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.

(c)    A member of a co-operative society, company or association of persons, to whom property or a part thereof is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property.

(d)   A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year.

Treatment of unrealized rent

To determine the Annual value, the actual rent shall not include the rent which cannot be realized by the owner. However, the following conditions need to be satisfied with this:

(a) The tenancy is bona fide;

(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.

(c) The defaulting tenant is not in occupation of any other property of the assessee;

(d) The assessee has taken all reasonable steps for the recovery of the unpaid rent or satisfied the assessing Officer that legal proceedings would be useless.

(e) Unrealised rent of earlier years is not deductible.

Treatment of unrealized rent recovered

Where any rent cannot be realized, and subsequently if such amount is realized, such an amount will be deemed to be the income from house property of that year in which it is received. However, in the cases where unrealized rent is subsequently realized, it is not necessary that the assessee continues to be the owner of the property in the year of receipt also.

Sec. 26: Property owned by co-owners

If the share of co-owners if determinate, the income of such house property is calculated as one house and income is divided amongst co-owners. They shall be entitled to relief u/s 23(2) as if they are individual owners of such property.

Dispute about ownership:

Ø  In case of dispute, a receiver of rent liable to pay tax.

Ø  If a long time lease is taken, then the person who takes the lease is the owner

Ø  In the case of a mortgage loan, mortgager is the owner.

Ø  Property in the name of the partnership, the firm is the owner.

Ø  A person whose property is vested in the custodian to evacuee property is not the owner.

Ø  Subletting rent is treated as income from other sources.

Deduction of Municipal Taxes from Annual Value

From the annual value municipal taxes are to be deducted if the following conditions are fulfilled:-

(a)    The property is let out during the whole or any part of the previous year,

(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.

(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.

Different Types of Rental Values

1. Municipal Rental Value (MRV): To levy local taxes the local authority i.e. Municipal Corporation/Committee etc. conducts a periodical survey of the house properties in their local limits fixes the rental value which serves as the basis for levying a tax. The rental value so fixed is called Municipal Rental Value (M.R.V.).

2. Fair Rental Value (FRV): It is the rental value a house property can fetch. It is based on the rent prevailing for a similar type of accommodation in a same or similar type of locality. It is based on the principle that rent prevailing in the same locality for a similar sized property is almost the same. Such rental value is called the Fair Rental Value (F.R.V.).

3. Standard Rent [S.RENT]: The rent fixed under the Rent Control Act, where so ever applicable, is called Standard Rent.

4. Actual Rent: It is the rent actually received by the owner of the house property from the tenant. In case tenant pays composite rent i.e. rent of building, plant and machinery, furniture etc. and rent is separable, actual rent is reduced by the amount of rent of plant and machinery, furniture. Etc. Balance is actual rent of house property. Any amount of local taxes paid by the tenant, cost of repairs borne by the tenant or any interest on advance deposit are not to be added.

5. Real Rental Value [RRV]: In case cost of common facilities such as lift and pump maintenance, salary of common gardener and watchman, lighting of common stairs and corridors and water and electricity bills (if included in rent) are borne by the owner and rent includes the cost of these items. Such cost is reduced out of actual rent received and balance is called Real Rental Value (R.R.V.). In case cost of following facilities is borne by the owner it shall be deducted out of actual rent before comparing it with other rental values.

a)      Lift and pump maintenance charges,

b)      Swimming pool maintenance charges,

c)       Salary of common gardener and watchman,

d)      Lighting of common stairs and corridors

e)      Water and electricity charges (only if it is mentioned that rent includes them).

In case the cost of facilities is charged separately by owner i.e., over and above the rent, it is treated as a separate source of income. The expenses incurred on such facilities are deducted out of amount so collected and balance (Income/Loss) is taxable under the head, “Income from Other Sources.”

6. Expected Rental Value (ERV): The expected rental value shall be determined as under:

a) In case standard rent has not been fixed - Municipal Rental Value or Fair Rental Value or Actual Rent Received whichever higher shall be treated as expected rental value.

b) In case standard rent has been fixed - Municipal Rental Value or Fair Rental Value whichever is higher but limited up to Standard Rent is ERV.

Important Points while calculating Income From House Property:

1. It is the annual value of the property (not the actual rent received or receivable) considered for income from house property.

2. Rent from vacant land does not attract under the head.

3. House property used for OWN BUSINESS is not considered under this head.

4. He/she should be the OWNER of the property. (Need not be the owner of the land) e.g. Owner of the apartment.

5. House property either rented to someone for commercial (including business) or for residential or for self-occupation.

6. There must be a building. Building includes a large stadium with or without a roof, rent from swimming pool, rent from godown, music hall, dance hall lecture hall, other public auditorium

7. Residential building normally has a roof. Non-residential building need not have a roof.

8. Building area includes adjacent area like approach roads, garage, garden, cattle shed etc.

9. If the property is transferred for inadequate consideration either to a spouse or minor children the income from house property is calculated in the hands of the transferee (wife or minor children) but will be included in the hands of the transferor under section 64(1).

10. If part payment is made after making a contract for sale for immovable property, and such house is occupied by the buyer it amounts to transfer even though the property is not registered (section 53A of the Transfer of property act).

 11. If house property is rented to own employees where renting is not their business such income is under business, not under house property.

12. If house property is rented to non-employees or activity which is not subservient and incidental to one’s own business then such income is from house property.

13. Rent from the bank, post office, police station, central excise office, railway staff quarters which is for carrying on its business efficiently and smoothly, such income comes under income from the business.

14. If house property is a foreign country, the annual property will be computed as if the property is situated in India. Therefore municipal tax paid during the previous year in a foreign country is also deductible.

15. Municipal taxes paid in the previous year and interest payable is deductible.

 16. Interest payable outside India without deducting tax at source is not deductible.

17. Pre-construction period means interest payable up to 31st March proceeding to the year of completion.

18. Pre-construction period interest is deductible only in the first five installments starting from 1st April of the year of completion.

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