Income From House Property (Sections 22-27): Detailed Guide to Taxing Rental Income & Owned Houses in India

📜Section 22: The Charge of Income from House Property

Section 22 is the charging section that brings income from house property into the tax net. It specifies the fundamental condition for taxability under this head, establishing the base for taxing rental income.

Key Terms Explained

• Annual Value: This is the potential rent-earning capacity of the property, not necessarily the actual rent received. It is the base figure on which tax is calculated under this head, and its determination is detailed in Section 23. The Annual Value calculation is the starting point for house property tax computation.
• Property consisting of any buildings or lands appurtenant thereto: This includes any type of building (residential house, office building, factory, shop, godown, etc.) and the land attached to it (like a compound, garden, or garage) which is necessary for the enjoyment of the building.
• Assessee is the Owner: The person who owns the property. The Act, however, has specific provisions (Section 27) for 'deemed owners' who are treated as owners for tax purposes even if they are not the legal owners. Understanding deemed ownership rules is important.
• Assessee: A person by whom any tax or any other sum of money is payable under the Act.

Conditions for Chargeability under Section 22

For income to be taxed under this head, two conditions must be met:

1. The property must consist of a building or land appurtenant to it.
2. The assessee must be the owner (legal or deemed) of the property.

🏠Section 23: Determining the Annual Value (AV)

Section 23 is arguably the most critical section under this head as it provides the rules for calculating the Annual Value, which is the starting point for the tax computation. The method depends on whether the property is let out property (LOP), self-occupied property (SOP), or deemed to be let out.

For Let Out Property (LOP)

The Annual Value of a property that is let out is the higher of the following two:

1. Expected Rent

The rent that the property is expected to fetch. This is calculated as the higher of:

• Municipal Value (MV): Value determined by the municipal authorities for levying municipal taxes.
• Fair Rent (FR): Rent that a similar property in the same or similar locality would fetch.

However, if the property is covered by the Rent Control Act, the Expected Rent cannot exceed the Standard Rent (SR) fixed under that Act.

2. Actual Rent Received or Receivable

The rent actually collected or due for the previous year.

Comparison Rules (Section 23(1)(a), (b), (c))

• If Actual Rent > Expected Rent: Annual Value = Actual Rent.
• If Actual Rent < Expected Rent solely because the property was vacant for a part of the year: Annual Value = Actual Rent (if Actual Rent covers rent for the period the property was let out). If the Actual Rent is zero because the property was vacant for the entire year, the Annual Value is NIL. This is often referred to as the Vacancy Allowance rule under Income Tax on House Property.
• If Actual Rent < Expected Rent for any other reason (e.g., let out at a lower rent): Annual Value = Expected Rent.

For Self-Occupied Property (SOP)

Section 23(2): If a property is used throughout the previous year for the assessee's own residence, and is not actually let out during any part of the year, the Annual Value is NIL. This benefit is available for up to two self-occupied properties. Tax on self-occupied property with NIL AV is a key feature.

Section 23(3): If a self-owned property could not be occupied by the owner due to their employment, business, or profession carried on at another place, and they reside at that other place in a property not owned by them, the Annual Value is still NIL, provided the property is not let out during the year.

For Deemed to be Let Out Property

Section 23(4): If an assessee owns more than two properties that are used as self-occupied residences, they must choose any two properties to be treated as Self-Occupied Property (SOP) with NIL Annual Value.

The remaining self-occupied properties are treated as 'deemed to be let out'.

For these deemed let-out properties, the Annual Value is computed as if they were let out, i.e., the Expected Rent is considered as the Annual Value (following the higher of MV/FR, restricted by SR rule). Understanding tax on deemed let out property is important for multiple property owners.

📊Quick Comparison: LOP vs SOP vs Deemed LOP

💰Section 24: Permitted Deductions from Annual Value

Once the Annual Value is computed, certain deductions are allowed from it to arrive at the income chargeable under the head "Income from House Property". These are crucial for reducing the taxable rental income.

Net Annual Value (NAV)

Net Annual Value (NAV) = Annual Value minus Municipal Taxes Paid during the previous year.

The following deductions are allowed from the Net Annual Value:

Section 24(a): Standard Deduction

• A flat deduction of 30% of the Net Annual Value (NAV).
• This deduction is allowed irrespective of the actual expenditure incurred by the owner on repairs, maintenance, collection of rent, etc.
• It's a fixed percentage allowed for all let out property and deemed let out property.
• For SOPs where AV is NIL, the NAV is also NIL, so the Standard Deduction is NIL.

Section 24(b): Deduction for Interest on Borrowed Capital

Interest paid or payable on a loan taken for the purpose of acquiring, constructing, repairing, renewing, or reconstructing the property is deductible. This is the popular interest on housing loan deduction.

For Let Out Property (LOP) and Deemed to be Let Out Property:

• The entire interest paid or payable during the previous year is allowed as a deduction.
• No upper limit on the deduction amount.

For Self-Occupied Property (SOP):

The deduction for interest is restricted:

• The maximum deduction is ₹ 2,00,000 if:
  • The loan was taken on or after 1st April 1999
  • For acquisition or construction of the property
  • The acquisition/construction is completed within 5 years from the end of the financial year in which the loan was taken
• The maximum deduction is ₹ 30,000 in all other cases:
  • Loan taken before 1st April 1999 for acquisition/construction
  • Loan taken for repair/renewal/reconstruction (regardless of date)
  • Construction not completed within 5 years
• This ₹ 2,00,000 or ₹ 30,000 limit applies to the aggregate interest deduction for all self-occupied properties claimed by the assessee in a year.

Pre-construction Period Interest

Interest payable for the period from the date of borrowing up to the end of the financial year immediately prior to the year of completion of construction/acquisition is called pre-construction interest.

Impact of New Tax Regime (Section 115BAC) on Section 24 Deductions

Proof of Interest Paid

🧮Calculation of Income/Loss from House Property

The calculation flow is straightforward:

For Let Out Property (LOP) / Deemed Let Out Property:

For Self-Occupied Property (SOP – up to two):

Complete Calculation Examples

👤Section 27: Deemed Owner

Section 27 expands the definition of 'owner' for the purpose of taxing house property income, ensuring that tax avoidance by transferring property without transferring full rights is prevented. A person is treated as the 'deemed owner' in the following cases:

Cases of Deemed Ownership

1. Transfer to Spouse/Minor Child: If an individual transfers a house property to their spouse (other than for adequate consideration) or to a minor child (other than a minor married daughter) without adequate consideration. The transferor is deemed owner. This prevents avoiding tax on rental income by transferring property to family members.
2. Holder of Impartible Estate: The holder of an impartible estate (property that cannot be divided).
3. Member of Co-operative Society/Company/Association: A member of a co-operative society, company, or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme.
4. Person with Power to Enjoy Property: A person who has acquired a right in the property (other than by way of lease) for a period not less than 12 years, or holds power of attorney from the owner, enabling them to enjoy the property. This covers situations where effective control and enjoyment are transferred.

📑Other Relevant Sections

Briefly, some other sections provide specific rules under the head "Income from House Property":

Section 25: Interest Payable Outside India

Deals with certain interest payable outside India that is not deductible unless tax has been paid/deducted at source in India.

Sections 25A, 25AA, 25B: Unrealised Rent and Arrears of Rent

Unrealised Rent (Sections 25A & 25AA)

Unrealised Rent: Rent for the previous year which the owner could not recover.

• It is deducted from Actual Rent while computing Annual Value (under Section 23) subject to prescribed rules (Rule 4 of Income Tax Rules, 1962).
• When this unrealised rent is subsequently recovered, it is taxed under the head "Income from House Property" in the year of receipt, after allowing a Standard Deduction of 30% on the recovered amount (Section 25A).

Arrears of Rent (Section 25B)

Arrears of Rent: Rent due for a past period which has not been charged to tax earlier.

• When received, it is taxed under "Income from House Property" in the year of receipt, after allowing a Standard Deduction of 30% on the received amount (Section 25B).

Section 26: Co-ownership

When property is owned by two or more persons (Joint Ownership), their respective shares in the income from that property are computed separately and taxed in their individual assessments. This is important for tax on jointly owned property.

📉Treatment of Loss from House Property

If the deductions (Standard Deduction + Interest) exceed the Net Annual Value, the result is a Loss from House Property.

Set-off Rules

Carry Forward Rules

❓Frequently Asked Questions

✅Conclusion