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Income from House Property [How to Calculate?]

Rental incomes from any building are taxed under the head “Income from house property”.

Under this head of income, Tax is not on actual rent rather it is on the rent which can be earned from the building.

But the tax is not charged for the period the building remains vacant.

During the calculation of income from house property, One thing you should always remember,  no tax is charged for only one building self-occupied for residence. 

income from house property

What is Annual Value? [Section 23]

The annual value of any property shall be deemed to be –

(a) the sum for which the property might be reasonably be expected to leet from year to year; or

Note: 1 [Expected rent = Municipal value or fair rental  value whichever is higher but it can’t exceed standard rent.]

Note: 2 [ Expected rent is always computed for 12 months except when construction is completed or house is bought in the middle of the years.]

(b) the actual rent received or receivable is in excess of the sum referred to in clause (a), the amount so received or receivable, or

(c) where the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause (a), the amount so received or receivable.

Provided that the taxes levied by any local authority in respect of the property shall be deducted in determining the annual value of the property of that previous year in which such taxes are actually paid by him(irrespective of the previous year in which the liability to pay such taxes were incurred).

Note the following;

  1. NAV (Annual value) can be negative if municipal taxes actually paid during the year are more than GAV.
  2. Any municipal taxes paid outside India is also allowed as a deduction.
  3. Even if GAV is taken at FRV or any other value, Municipal taxes are always computed on Municipal value.

Explanation:

For the purposes of clause (b) or clause (c) of this sub-section, subject to following conditions, actual rent received or receivable shall not include the rent which the owner cannot realize-

  1.  Defaulting” tenant has vacated the property or steps have been taken to compel him to vacate the property and
  2. the defaulting tenant is not in occupation” of any other property of the assessee and
  3. 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 proceedings would be useless.

Question 1: Calculate Gross Annual Value (GAV) in the following conditions:

Conditions I II III
Municipal value
20000
22000
36000
Fair rental value
24000
23000
40000
Standard rent
NA
24000
50000
Actual rent
18000
36000
48000

Solution:

Gross Annual Value  = Expected Rent or Actual Rent whichever is higher

If actual rent is lower than expected rent due to vacancy;

Gross Annual Value  = Expected Rent or Actual Rent whichever is lower

Expected Rent = Municipal value or fair rental  value whichever is higher but it can’t exceed standard rent

In the first condition;

Municipal value = 20000

Fair rental value = 24000

Standard rent = NA

So, Expected Rent = 24000

Actual Rent = 18000

So, Gross Annual Value = 24000

In the second condition;

Municipal value = 22000

Fair rental value = 23000

Standard rent = 24000

So, Expected Rent = 23000

Actual Rent = 36000

Hence, Gross Annual Value = 36000

In the third condition;

Municipal value = 36000

Fair rental value = 40000

Standard rent = 50000

So, Expected Rent = 40000

Actual Rent = 48000

Hence, Gross Annual Value = 48000

Self-Occupied House

Section 23(2): Where the house or part of a house-

  1. is in the occupation of the owner for his own residence, or
  2. cannot actually be occupied by the owner by reason of his employment, business or profession carried on at any other place, he has fo reside that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.
  3. The annual value shall not be nil if the house or part of the house actually let during any part of the previous year.
  4. Where the assessee has more than one self-occupied house-

    (a) the annual value shall be nil only in respect of one house. assessee may at his option specify;

    (b)  the annual value of other houses shall be determined under s section (1) as if such house or houses had been let.

Deductions from Income from house property [Section 24]

Income chargeable under the head “Income from house property” shall be computed after making the following deductions:

(a) a sum equal to 30%of the annual value
(b) where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any
interest payable on such capital:

Provided that in respect of property referred to in section 23(2) the deduction shall not exceed 30,000 rupees:

Provided further that where the property referred in the first proviso

    1. is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and
    2. such acquisition or construction is completed within five years from the end of the financial year in which capital was borrowed, amount of deduction under this clause shall not exceed 2,00,000.

Provided that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable.

Explanation:

The interest for the period prior to the previous year in which the property has been acquired or constructed shall be deducted in equal installments for the said previous year and for each of four immediately succeeding previous years.

Note:-

  1. No deduction is allowed for any brokerage or commission for arranging the loan.
  2. Interest on fresh loan taken to repay the original loan is allowed as a deduction
  3. Interest on unpaid interest is not deductible
  4. Interest on principal amount shall be allowed deduction even if unpaid

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