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Under Indian Income Tax Law, income from house property is one of the categories where even notional incomes are determined and liable to tax.  Every individual who owns more than two self-occupied properties has to treat the remaining as deemed let out and offer notional rental income.  A property is treated as self-occupied property if the same is used by an individual for his residential usage.  Also, no other benefit should be derived from such property.  Till FY 2018-19, only one house could be treated as self-occupied, and from FY 2019-20, two properties are allowed.  However, it is important to note that the total housing loan interest allowed as a deduction from both the properties together is capped at INR 2 Lakhs. 

The Income Tax provisions treat a property as ‘self‑occupied’ if it satisfies any one of the following conditions:

  1. The owner of the property is using it for his residential usage; or
  2. The property is vacant due to an individual’s employment, business, or profession in another place, where he has to reside in a property not belonging to him.

Let us understand the law with few illustrations. 

Arun, an individual living in Bangalore owns 2 houses and both are utilized for his own usage.  Arun uses Bangalore house for his self-occupation and the other one is situated in his native place outside Bangalore used by Arun himself during his visits to native place.  As per law, Arun can treat both as self occupied properties as both are used for self usage.

Varun, an individual living in Bangalore, owns 2 houses one in Bangalore used for his family and another one in his native place kept vacant.  Varun would need to treat the house situated in a native place as ‘deemed let-out’ property and offer notional rental income.  The house situated in native is not self-occupied, hence the condition (1) mentioned above is not satisfied. The house situated in native, not satisfying condition (2) as Varun stays in his own house in Bangalore.

It is important to note that condition (2) has two parts.  One part states that the house should be vacant due to an individual’s employment or business in another place and hence this property is vacant.  The second part states that the property being used in place of employment or business should not be an individual’s own property.  In Varun’s case, the native property though vacant due to employment in Bangalore, the second part, i.e. individual’s stay in place of employment should be at a property not owned by him is not satisfied. Hence, the native place property though vacant and even if not intended for let-out, still needs to be treated as deemed let-out property offering notional rental income.

From the above illustrations, it is clear that if a property needs to be treated as self-occupied for income tax purposes, then it should satisfy one of the conditions mentioned above.  Also, the income tax provisions have not defined what instances would be treated as own usage.  

Generally, the individual’s personal occupation alone is treated as self-occupied.  The property occupied by parents or any other family members and which is not used by an individual for his personal stay is not treated as self-occupied.  This principle has been upheld in a few Income Tax rulings also.

In case of individuals who qualify as ‘resident & ordinarily resident’ in India are liable to offer global income to tax in India.  They need to apply the above-said principles/ conditions even to the properties they own abroad in addition to properties owned within India.  Suppose an individual who has come to India on employment, owns one house in India (used for self‑occupation) & another one abroad in USA (kept vacant & not used for letting out or self-usage), then he has to offer the house in USA under ‘deemed let-out’ basis as he does not satisfy either of the conditions discussed above.  Similar issue arises even for non-residents who stay in own house abroad and have vacant house within India which is neither used for the self purpose or letting out purpose.

Based on the above points, each individual needs to analyze his case though he may own only two properties, whether both can be claimed as self-occupied for income tax purposes.

Also, read Taxation of Income from House Property – First guide to basics

The above information of Income from house Property is for general understanding and awareness purposes only.  It is highly suggested that the readers discuss their facts specifically with their respective tax consultants to determine the appropriate compliances applicable for their specific case.  

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 :

ParticularsAmount
A. Gross Annual Value i.e. expected rent/ actual rent received or receivable whichever is higherxxxx
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 realizedxxxx
C. Taxes actually paid and borne by owner to local authorityxxxx
D. Net Annual Value (NAV) ( A – [B+C] )xxxx
E. Deduction allowed under section 24xxxx
F. Standard Deduction @30% of NAVxxxx
G. Interest on borrowed Capitalxxxx
Income Chargeable under the Head “Income from house property” ( D – [E+F+G] )xxxx
Template to calculate income under income from house property

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)

Computation of Gross annual value
Arriving at Gross annual value

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.

Municipal Tax:

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.

Standard 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.

More basics…

  • 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.