Tax On Income From House Property: Conditions For Taxability Of Income From House Property
Are you planning to rent out a vacant house of yours? Did you know that the rent you will receive will be taxable? The part of income a taxpayer attains by owning a property, like a building, house or land attached to the building, for example, a parking lot, is what the Income Tax Act has defined as ‘Income from House Property.’
For simplification of this process of tax computation, the Income Tax Department subdivides the income attained by a taxpayer into different heads. Keep reading if you want to know more about the income that is taxed under the head ‘Income from House Property.’
Classification of House Property
To make the taxation of house properties easier, the Income Tax Act has further classified house properties into three subheads:
Let-out Property
A property given on rent for a certain period during any financial year falls under this category.
Self-occupied Property
A property utilised by the taxpayer or his/her family members for their own residential purposes falls under this category. It also includes taxpayers’ vacant houses. Since FY 2020-2021, if a taxpayer has more than two self-occupied properties, then only two can fall under this category. The Income Tax Act considers any other property as a let-out property.
Inherited Property
Depending on its usage, a property that a taxpayer inherits from parents or grandparents gets treated as either of the above two classifications.
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Conditions for Taxability of Income from House Property
According to the Income Tax Act, while filing taxes, a taxpayer should compute his/her income received from house property on an annual basis. Excluding the inherent value of a property that is being used for business purposes, the annual value is the money that any property realises in one fiscal year.
Considering factors like fair rent, actual rent, standard rent and municipal valuation of the property, we calculate its annual value. Depending on this, the annual value of only certain properties falls under house property income. The conditions are as follows:
Building or land appurtenant thereto
Income from a property that is getting used as a building or land that is connected to a forming part of a building is taxed under “Income from House Property”. Taxation under this head does not include income from any other type of property.
Ownership
A building and land appurtenant thereto that generated the income has to be owned by the taxpayer. If rent from a property is part of the income of someone who is not its owner, then the annual value qualifies as business income and not house property income.
Use of Property
If the owner of a house is using his/her property to conduct a business, and the income generated from this said business is taxed, then its annual value is not taxable under the heading “Income from House Property”.
What is the Annual Value of a Property?
The annual value of a property is basically the sum or amount for which the property could be let out on a year-on-year basis. To be precise, it’s the rent you could expect (on a yearly basis) if you decide to put your property up for rent.
Factors that Determine Annual Value of a Property
The annual value of a property could be decided based on the following factors:
- Market rent value: A market rent value is the current rate of similar properties rented out in the same locality.
- Municipal value of a property: The municipal body or authority of a specific locality takes several factors into consideration before deciding on the municipal value of a property. Municipal taxes are levied based on this value.
- Rent received: The yearly rent received from the tenant also plays a major role while determining the annual value of a property.
- Rent Control Act: The Rent Control Act was introduced to maintain transparency between landlords and tenants. The Act ensures that landlords get a fair price while tenants are protected from eviction. Also, Rent Control Act refrains lenders from charging exorbitant rent.
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How to Calculate Taxable Income from House Property?
Step 1
Compute the Gross Annual Value (GAV) of the property. GAV includes fair value, rent and municipal charges for the property. An actual rental value deemed fit by the assessee should be higher than its standard rent determined by the municipality.
Step 2
Calculate the Net Annual Value (NAV) of the property. For this, subtract municipal taxes paid by the owner from GAV. (GAV – Municipal Taxes).
Step 3
Under Section 24 of the Income Tax Act, two deductions can be made from NAV.
Standard deduction @ 30%: Section 24(a) of the Income Tax Act allows a deduction of 30% of NAV, but this does not include extra costs like repair or remodelling.
Interest on borrowed capital: Section 24(b) of the Income Tax Act allows deduction of any interest paid on a home loan. But this section only allows tax relief ranging from Rs. 30,000 to Rs. 2 lakhs.
Step 4
Taxable Income from House Property is the value attained after making all the above-mentioned deductions from GAV.
Tax Exemption for House Property Income
The Income Tax Act allows for certain exemptions and provides tax relief for income received from the following house properties:
Section 2(1A)(c) of the Income Tax Act: Farm Building
Farmland, situated in India that is being used to generate agricultural income, is exempted from tax. The land in its immediate vicinity can be used as a storehouse or dwelling-house. Furthermore, agriculture income also includes any type of rent generated from farmland.
Section 11(1) of the Income Tax Act: Income from property held for charitable or religious purposes
Income derived from house property held by a trust and getting used for wholly charitable or religious purposes cannot be taxed. That being said, this income generated can only be utilised for the mentioned purpose and nothing else.
Section 10(19A) of the Income Tax Act: Palace of an ex-ruler
The annual value of only one palace in the occupation of an ex-ruler is exempt from income tax.
Income generated by local authorities, like Panchayat, Municipality, District Board, and Cantonment Board, which is chargeable under the head “Income from house property”, is exempt from taxes.
Section 10(23C) of the Income Tax Act: Income of educational institutions and hospitals
Tax relief is applicable if the income generated by educational institutions is used for educational purposes and not for profit. Similarly, for hospitals, this income has to be used to treat individuals suffering from illness or mental defectiveness.
Section 10(24) of the Income Tax Act: Property of registered trade union
Exemption to pay tax on income chargeable under the head “Income from House Property” applies to only trade unions registered under the Trade Unions Act, 1926.
Section 13A of the Income Tax Act: Property of a political party
The annual income of a political party does not include income that falls under the head “Income from House Property”. Thus, it is not taxable.
Section 23(2) of the Income Tax Act: Self-occupied house property
If two or fewer self-occupied properties of the owner remain vacant, there is no annual value of them.
Note that tax exemption applies to property held by any member of a Scheduled Tribe or by government corporations set up in the interests of members of a minority group.
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Final Word
While assessing your income, it is important to know the type of property you own and the tax benefits. Understanding where you can attain tax exemptions and the kind of tax deductions that apply to your property will be beneficial in reducing your tax liability.
FAQs
Ans: From the fiscal year 2020-2021, exemption from taxes only applies to two of your self-occupied properties. The Income Tax Act considers that if there is a property, then there is income. So, taxation under the head “Income from House Property” applies to all vacant properties, except for two.
Ans: Income generated from business qualifies as business income and not as income from house property. Thus, it is taxed accordingly. For the self-occupied area, if the taxpayer has 1-2 properties, then it will not be taxed. But if the owner already has two other self-occupied properties, then only the non-business related area will be taxed.
Ans: No, only the actual owner of a house can pay taxes on behalf of the property. According to the Income Tax Act, if the rent is not part of the owner’s income, it is not part of the house property income. But the person subletting this property will be taxed under ‘Income from other sources.’
Ans: According to High Court rulings, house property income does not include any income received by renting a property to one’s employee for residence. Instead, this income qualifies as business income, and the building owner pays taxes accordingly.
Ans: No, while calculating tax payable on income from self-occupied houses, we consider the GAV and NAV to be nil. But for let out properties, if the owner paid a higher municipal tax than GAV, then NAV can be negative.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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