Rental income earned from immovable property is passive income to a person, as generally, he does not put any effort to earn it. There is a separate chapter namely “Income from house property” under the Indian Income Tax Act, 1961 which deals with the taxation of such income. The peculiarity of this chapter is that it intends to tax notional income. You may end up paying tax on the income which you have never earned. Let us try to decipher the nitty gritties in this article.
Typical computation of income from house property is depicted in the table below :
|A. Gross Annual Value i.e. expected rent/ actual rent received or receivable whichever is higher||xxxx|
|However, in case of vacancy, expected rent or actual rent received or receivable whichever is lower|
|B. The amount of rent which could not be realized||xxxx|
|C. Taxes actually paid and borne by owner to local authority||xxxx|
|D. Net Annual Value (NAV) ( A – [B+C] )||xxxx|
|E. Deduction allowed under section 24||xxxx|
|F. Standard Deduction @30% of NAV||xxxx|
|G. Interest on borrowed Capital||xxxx|
|Income Chargeable under the Head “Income from house property” ( D – [E+F+G] )||xxxx|
Basics of Taxation of Income from House Property
In this article, I will try to give a broad overview of various provisions under “Income from House Property”. Based on the response from the readers, I will try to explore finer details in the coming days.
Although the heading states “Income from house property”, the provision is extended to income from any building whether residential or commercial and/or Land appurtenant (adjoining) thereto. The other two conditions for an income to fall under this head are as follows:
i. Assessee has to be the owner of such property
ii. Property must be used for any purpose other than for the purpose of his own business/ profession.
Computation of Gross annual value
Gross Annual value is computed by considering the following four factors:
1. Actual rent received or receivable
2. Municipal value (Available only in few states)
3. Fair rent of property which it is expected to fetch depending on its location and area.
4. Standard rent (Available only in few states)
Unrealised rent & other deductions
In order to deduct the unrealised rent amount, the following rules have to be satisfied:
(a) Tenancy is bonafide
(b) Defaulting tenant has vacated, or steps have been taken to compel him to vacate the property
(c) Defaulting tenant is not in occupation of any other property of the assessee.
(d) Assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.
In order to claim the deduction of municipal tax, it should have been paid by the assessee to the local body. It is only on payment basis, irrespective of the year for which it is paid, it is allowed as deduction.
Deduction of 30% of the Net Annual Value will be allowed as Standard Deduction. This is irrespective of any spending by the assessee as such.
Interest on Borrowed Capital:
When the property has been acquired, constructed, repaired, renewed, or reconditioned with borrowed funds, the amount of interest payable on such borrowings is allowed as deduction.
Here it should be noted that Interest payable for the year is deductible, irrespective of whether it is actually paid or not.
Interest payable till the completion of construction is allowed as a deduction in five equal yearly installments from the year in which the construction of the property is completed.
- In case of self-occupied property, net annual value will be taken as NIL and only interest on housing loan can be claimed from it, subject to a maximum of Rs. 2,00,000/-.
- Benefit of self-occupation can be claimed only in respect of two properties.
- Interest on borrowed funds from outside India cannot be deducted unless such interest is subject to withholding tax in India.
In the unprecedented situation of COVID-19, there are many instances of tenants refusing to pay rent taking shelter under force majeure. However, since the Income Tax statute actually taxes annual value, owners of properties may end up paying taxes on the rent which they are never going to realize. Keeping in view many extraordinary situations the taxpayer is facing, the Government may have to consider the genuine hardship of the rare breed of the tax-paying population ( less than 10%) of India and come out with some relaxations and clarifications.
The views expressed are based on the statutory provisions as it stands on the date of this article and is intended for general understanding. We suggest the readers to consult their CAs for detailed tax planning.