Income from House Property

Section 22 is the charging section for the head "Income from House Property". It provides for charge to income tax of certain incomes from a property under the head Income from House Property.

Income from House Property Terms & Definitions

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Charging Section

As per the charging section: -

  1. The Annual Value of

  2. Property consisting of any buildings or lands appurtenant thereto (hereinafter "House Property") other than such portion which is occupied for the purpose of any business or profession carried on by him the profits of which are chargeable to income-tax

  3. Of which the assessee is the owner

  4. Shall be charged to income tax under the head "Income from House Property"

Owner [Section 27]

The person in whose name the House Property is registered is the Owner.

However, in cases, where the substantial right in the property has been transferred, including right to receive rent in his own name, the non-existence of registered document does not affect the transferee from being called as "Owner" - CIT vs. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC).

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Persons Deemed to be Owners

Moreover, the act itself deems certain persons as owners ("Deemed Owners") [Section 27]: -

Section Deemed Owner Nature of the Property
27(i) Individual House Property transferred to spouse otherwise than for adequate consideration or otherwise under an agreement to live apart.
27(i) Individual House Property transferred otherwise than for adequate consideration to minor child, not being a minor married daughter.
27(ii) Holder of an Impartible Estate All properties comprised in the Impartible estate.
27(iii) Member of a Co-operative Society, Company or AOP Building or part thereof allotted/leased under a house-building scheme of such Society, Company or AOP, as the case may be.
27(iiia) Any person Allowed to take/retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882.
27(iiib) Any person Acquiring any rights (excluding any rights by way of lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in section 269UA(f) of this Act.

The rent is chargeable under the head "Income from House Property" only in the hands of the owner.

Where the house is sub-let by a tenant, the sub-lease rent is chargeable in his hands as "Income from Other Sources".

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Co-ownership

Where two or more persons own a property jointly and the share of each co-owner is definite and ascertainable, then the share of each co-owner shall be included in their hands individually and they need not be assessed to income tax as an AOP (Section 26).

However, where co-ownership of a house property in the case of Dayabhaga School of HUF, shall be assessable only in the hands of the HUF and not as co-owned property - Circular No.28 dated 20.08.1969.

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Income from House Property

As per the charging section, the house property is intended to refer to "Property consisting of any buildings or lands appurtenant thereto".

Consequently, the term building can refer a residential or commercial building, though the head of income is titled "Income from House Property".

For the purpose of charge to income tax under the head "Income from House Property", building is essential.

Letting out of land appurtenant to such building is chargeable under the head "Income from House Property".

Even if the land is not owned but the structure alone is owned, the rent is still chargeable under the head "Income from House Property".

However, letting out land alone is chargeable under the head "Profit and Gains of Business or Profession" or "Income from Other Sources".

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Usage Of The House Property:

No end-use criterion has been mentioned in the charging section 22, except that properties "other than such portion which is occupied for the purpose of any business or profession carried on by him the profits of which are chargeable to income-tax" alone are chargeable under this head.

Therefore, the letting out of the property for commercial purposes is also chargeable under this head.

Conflicting decisions are available on the question, "whether the charging section excludes the property owned by the partner, used by him for the purposes of the business of the firm?"

The Karnataka High Court - CIT vs. K.N.Guruswamy (1984) 146 ITR 34 (Kar) has stated `No. It is not excluded', as firm and partners are distinct for the purposes of the Act. Whereas the Gujarat High Court - CIT vs. Rasiklal Balabhai (1979) 119 ITR 303 (Guj) and the Madras High Court - CIT vs. K.M.Jaganathan (1989) 180 ITR 191 (Mad) have stated `Yes.

It can be excluded', as the firm and partners are not distinct and usage by the partner for the firm would be suffice to be used for himself.

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Annual Value [Section 23]

The charge to income tax under the head "Income from House Property" is based on the "Annual Value" of the property. Annual Value is to be determined taking into account the nature of usage of the House Property.

Determination of Annual Value involves two steps.

  1. First step is determination of "Gross Annual Value" (refer Table below).

  2. Thereafter, the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him - Proviso to Section 23(1).

    Taxes levied by a local authority in respect of any property shall be deemed to include service taxes levied by the local authority in respect of the property - section 26(vi).

From assessment year 2002-2003, Gross Annual Value is to be determined as under: -

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Gross Annual Value

Whole Property or Part of the Property Let-Out throughout the Previous Year Deemed-Let Out (i.e., More than one house self-occupied by the Owner) One House or Part of a House - Self Occupied by Owner for his Residential use or could not be occupied by Owner for reasons of his employment
Sections 23(1)(a) & 23(1)(b) Sections 23(4) & 23(1)(a) Section 23(2)

Higher of the following: -

  1. Expected Rent
  2. Actual Rent
Expected Rent Nil

Whole Property or Part of the Property was let and was vacant for whole or part of the Previous Year and
the Actual Rent is lesser than Expected Rent owing to Vacancy in Property the Actual Rent is lesser than Expected Rent not owing to Vacancy in Property the Actual Rent is more than Expected Rent
Sections 23(1)(a) & 23(1)(c) Sections 23(1)(a) & 23(1)(c) Sections 23(1)(a) & 23(1)(b)
Actual Rent Expected Rent Actual Rent

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Note:

  1. Expected Rent is the sum for which the property might reasonably be expected to be let from year to year.

    It is determined as the higher value of the Municipal Rent, i.e., amount of rent determined by the Local Authority, or the Fair Rent, i.e., the rent, which a similar property would be expected to earn in the same or similar locality.

  2. However, if Standard Rent, i.e., the rent fixed by the Rent Control Act for that locality, is lower than the sum so arrived from Municipal Rent or Fair Rent, then the Standard Rent would be taken as the Expected Rent.

  3. Actual Rent denotes the rent received or receivable by the owner for the portion let-out and period for which such portion is let out, as reduced by the Unrealised Rent.

    Unrealised rent, i.e., the amount of rent which the owner cannot realise, shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable, under rule 4, where: -

    1. The tenancy is bonafide.

    2. The defaulting tenant has vacated the property or reasonable steps have been taken to compel him to vacate the property.

    3. The defaulting tenant is not in occupation of any other property of the assessee.

    4. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceeding would be useless.

It is to be noted that from Assessment Year 2002-03, rent for vacant period and unrealised rent cannot form part of Actual Rent.

Up to Assessment Year 2001-02, Actual Rent was being computed including rent for vacant period and the unrealised rent and later deductions were allowed under section 24 for these purposes.

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Scope Of Chargeability

Rent earned by a Resident for property let-out in or outside India are both taxable (whether received in India or not).

In the case of a non-resident or a not ordinarily resident, rent received in India, whether for properties in India or outside India, is taxable in India.

Besides, the rent through or from a house property in India (whether received in India or not), is taxable in their hands in India, since it is deemed to accrue or arise in India.

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