How to Calculate Income from House Property for Income Tax Purpose

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Business Mantra: Faridabad


As we all know Rental Income is considered an easy, persistent and respectable source of income in India. Lot of people have doubts about taxation provisions of Rental/House Property income. Various provisions regarding Computation of Tax & Taxable House Property/Rental Income are being explained

First of all it is necessary to know the meaning of House Property:

It means building & land appurtenant thereto.

From this definition it is cleared that

  1. Plot of land would not be covered in House Property.
  2. There should be a building; it may be with or without roof.
  3. Therefore, open air theaters, auditoriums, swimming pools, farm houses are all covered, under the definition of House Property.
  4. Land may or may not be attached to the Building

A person is said to have income from House Property, if following conditions are satisfied:

  • Immovable property should be in the form of building or building and land appurtenant thereto.
  • The person should be owner of that House Property.
  • This House Property may have been used for any purpose.

If above conditions are satisfied then to calculating tax and taxable income from House Property,

Assessment of Annual Value of House Property:

  1. Municipal Value: Annual rental value of a property as decided by Municipal Corporation of that area.
  2. Fair Rental Value: Annual rental value of similar properties in same or similar areas.
  3. Standard Rent: – Rent decide for an area locality under standard rent central act.

The greater of (1) & (2) is to be compared with (3) and whichever is less is to be considered.

Now this figure as calculated under (iii) (national rent) is to be compared with Actual Rent Received/ Receivable and higher of these two, will be the Gross Annual Value (GAV) of that House Property.

Municipal Taxes are deducted from Gross Annual Value (GAV) to arrive at Net Annual Value (NAV).

It is very important to note that Municipal Taxes, is deducted if paid in actual, not on due basis)

Gross Annual Value (GAV) of House Property: XXX

Less Municipal Taxes: YYY

&  Less Standard Deduction: ZZZ

Net Annual Value (NAV) of House Property [ (XXX-YYY)- 30% of (XXX-YYY)]: AAA                                                                                  

Calculation of Net Annual Value (NAV) in some special cases:-

Special Case I: Where the House Property was let out but remained vacant for part of the year, then considering the NAV, calculated above the period for which the House Property remained vacant is to be deducted to arrive at the final NAV of the House Property.

Special Case II:  House Property let out for part of the year and for remaining part of the year it is self-occupied, for residential purpose – In such case, net annual value of House Property will be calculated as usual, but the actual rent received during the let out period will be taken as if it was actual rent of the whole year.

Provisions relating to Self Occupied House:

  1. If the person has only one house, if it is self-occupied than NAV shall be considered as Nil,
  2. Whether or not he is residing in it due to his outstation job/occupation/business, then also NAV shall be Nil
  3. If the house is on rent then NAV shall not be Nil and shall be calculated as mentioned above.

Provisions, if a person has more than one house:

In that case NAV of one house will be nil and even if other house/houses are not given on rent, there will be treated as deemed to be let out. He/she has a choice to keep or show any one of his/her house as self-occupied and as a result its NAV will be nil. NAV of rest of the house will be calculated as per expected rent of those respective House Properties.

Unrealized Rent:

If a person has given his House Property on rent and some part or whole rent is unrealized i.e. the tenant does not pay the rent then his unrealized rent is deducted from Gross Annual Value (GAV)of the property, then the  following conditions are to be satisfied:-

  1. Tenancy should be bona-fide.
  2. The defaulting tenant has either vacated the House Property or all the efforts have been taken to get the House Property vacated from such defaulting tenant.
  3. The defaulting tenant does not have any other property of same landlord on rent.
  4. Either the person has taken all steps related to legal proceedings against such defaulting tenant or should satisfy the Income Tax Department that legal proceedings would be useless.

In case the House Property has more than one residential unit in it:

  • If one house with many units:- NAV of whole house will be nil
  • If House Property – one unit self-occupied, 2nd unit on rent, then NAV of self-occupied part will be nil. NAV of rented part of the unit will be calculated as discussed above. Expected rent/Fair rent/Municipal Value/Municipal Tax will be calculated in ratio of area of rented unit to area of house.

CALCULATION OF INCOME FROM HOUSE PROPERTY:

In calculating taxable income of House Property following deductions are allowed:

  • Municipal Taxes may be allowed to be deducted to arrive at taxable NAV but these taxes are deductible after their actual payment to related corporations.
  • Standard Deduction of 30% of NAV of House Property is allowed

Interest on Borrowed Capital:

If the person has taken loan for purchase/construction/repair etc. of the House Property, then interest on borrowed capital is deductible from gross annual value (GAV) subject to conditions of the act. This deduction of interest is allowed on full interest during the year, whether paid in actual or not, even if the House Property is not mortgaged for the loan.

  • Interest of pre-construction period is added for all pre-construction years and 20% or 1/5th of this is deductible every year up-to 5 year from the year in which construction of House Property gets completed.
  • For Fully self-occupied House Property for A.Y 2016-17 show interests is deductible Upto a maximum limit of Rs.2.00 Lakhs (subject to change from time to time as announced by the Government of India)
  • For Partly self occupied house & partly let out House Property, for self occupied portion a deduction on account of interest is allowed for Rs.2.00 Lakhs only and in addition for let out part of the property deduction of interest of the remaining in full shall be allowed.

For any query or clarification you may contact the author through info@businessmantranews.com

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