The annual value of property consisting of any building or land appurtenant thereto of which assessee is the owner, other than such portion of such property as he may occupy for the purposes of any business or profession carried on by him shall be chargeable to income tax under the head “Income from house property” – [Sec. 22]
It is an exceptional feature of this head that rather than actual income from house property, earning capacity of house property is taxable. As stated u/s 22 that “annual value” of the property is taxable rather than actual income of the property.
Chargeability [Sec. 22]
Annual value of the property shall be taxable under the head “Income from house property” subject to the following:
There must be a property consisting of any building or land appurtenant thereto. The term ‘house property’ is not defined in Income tax Act. However, various judicial interpretation have construed the term house property as –
- any land surrounded by wall having roof or not; and
- any land appurtenant to a building.
- Building includes an enclosure of bricks, stone work or even mud walls
- Building includes residential as well as commercial houses.
- Vacant land is not a house property. Hence, income from letting of vacant land is not taxable under this head but taxed as business income or as income from other sources.
- Roof is not necessary for a non-residential house property. A large stadium or a open air swimming pool is also considered as building
- It should be a permanent structure meant for a useful purpose.
- If a building consists of several flats, then each flat is considered as a separate house property.
- An incomplete, a ruined or demolished house cannot be termed as house property.
- Land appurtenant to a building includes car parking area, approach roads, backyards, courtyards, etc. attached to such building.
Assessee is the owner (including deemed owner) of that property. Annual value of a property is assessed to tax only in the hands of the owner even if he is not in receipt of any income. Any person other than the owner, even though he is in receipt of rent shall not be liable to tax under this head. That is why, income from sub-letting is not taxable under this head but under the head ‘Income from other sources’. Owner includes legal owner, beneficial owner and deemed owner.
Deemed Owner [Sec. 27]
Transfer to spouse or minor child [Sec. 27(i)]
When an individual transfers a house property to –
- his or her spouse (not being a transfer in connection with an agreement to live apart); or
- a minor child (not being a married daughter)
– without adequate consideration, then transferor shall be treated as deemed owner of such property.
In case of transfer to spouse, marriage should subsist on both the days i.e., on the day of transfer as well as on the day when income arises.
The holder of an impartible estate [Sec. 27(ii)]
The holder of an impartible estate (property which is not legally divisible) is treated as deemed owner of house property. Impartible estate is an estate to which the assessee has succeeded by grant or covenant.
Property held by a member of a company, society or any other association [Sec. 27(iii)]
Property held by a member of a company, co-operative society or other association of persons to whom a building or a part thereof is allotted or leased under House Building Scheme of the company or association, is treated as deemed owner of that building or a part thereof.
A person who acquired a property u/s 53A of the Transfer of Property Act [Sec. 27(iiia)]
A person who is allowed to take or retain possession of any building (or part thereof) in part performance of a contract u/s 53A of the Transfer of Property Act, 1882, is deemed as the owner of that building (or part thereof).
Lessee of a building u/s 269UA(f) [Sec. 27(iiib)]
A person who acquires any right u/s 269UA(f) in or with respect to any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed as the owner of that building (or part thereof).
- Lease period should not be less than 12 years [as per sec. 269UA(f)] including extension period.
- Above provision does not include any right by way of lease from month to month or for a period not exceeding 1 year.
Not used in Business or Profession of the owner
Such property is not used for the purpose of taxable business or profession carried on by the owner. When a person carries on business or profession in his own house property, annual value thereof is not taxable u/s 22 provided income of such business is chargeable to tax.
Letting out to employees
If an assessee lets out the property to his employee, where such letting out supports smooth flow of his business, then such letting out shall be deemed to be incidental to business and such rent shall be chargeable under the head “Profits & gains of business or profession”.
Letting out to Government Agencies
Where an assessee let out his property to any Government agency for locating branch of a nationalized bank, police station, post office, excise office, railway staff quarters, etc. for the purpose of running the business of assessee more efficiently, such letting out shall be deemed to be incidental to business and such rent shall be chargeable under the head “Profits & gains of business or profession”.
Letting out to ancillary units
Where an assessee lets out its property to ancillary units, which manufactures components required by the assessee. Income from such letting out shall be taxable under the head “Profits & gains of business or profession”.
Business of letting out of the property
If an assessee is running a business with main object of buying & developing house properties either to let out or to sell such properties, then annual value of such house properties shall be taxable under the head “Income from house property”. However, profit on sale of house shall be taxable under the head Profits & gains of business or profession
Letting out property for promotion of own business
If an assessee carries on business or profession in his own house property or lets out the property for smooth running of his business or profession, income from such property is taxable under the head “Profits & gains of business or profession”.
Some Special Cases
If house property is situated abroad, then annual value of such property is taxable as per the following table:
|Assessee||Condition for taxability|
|Ordinarily resident||Always Taxable|
|Not ordinarily resident or Non resident||Income must be received in India|
Merely, due to dispute regarding the title of property, assessment cannot be postponed. In such case, person who is in receipt of income or who enjoys the possession of the property is assessable to tax.
Together with rent of the building, if the owner gets charges for other services or rent of other assets provided in the building (e.g. furniture, machinery, etc.), amount so received is termed as ‘composite rent’.
Composite Rent = Rent for building + Rent for assets and / or Charges for various services
Tax treatment of composite rent is as follows:
Rent including charges for amenities or services like garden facility, food, lighting, etc. or other separable assets (like machinery, plant, furniture)
If the owner of house property gets composite rent for both property as well as for services rendered or other separable asset, such composite rent shall be treated as under:
Particulars Taxable under the head Sum received for the use of building ‘Income from house property’. Sum received for other amenities or other separable assets. ‘Profits & gains of business or profession’; or ‘Income from other sources’
However, if segregation of composite rent is not possible, then the whole amount will be taxed either under the head ‘Profits & gains of business or profession’ or ‘Income from other sources’.
Rent from paying guest is, generally, taxable under the head ‘Income from other sources’.
Letting of building with other inseparable assets (like machinery, plant, furniture)
If letting of only building is not possible or not acceptable to the other party, then sum received as rent from the properties is chargeable as business income or income from other sources even if the composite rent is segregable. E.g., letting out of hotel rooms, auditoriums, etc.
Co-ownership [Sec. 26]
If two or more persons own a house property jointly, then they are known as co-owners. If individual share of each co-owner is definite and ascertainable then the share of each such person shall be taxable as his income from house property.
- Share of each co-owner in the income from the property as computed in accordance with sec. 22 to 25 shall be included in his total income.
- Where the house property is owned by co-owners and is occupied by each of the co-owner then all of them can claim benefit u/s 23(2)(a) and interest on loan shall be allowed to all the co-owners to the extent of Rs.30,000 / ₹ 200,000 as the case may be.
Partner’s property used by the firm
The business carried on by the firm should be regarded as carried on by all the partners. Thus, annual letting value of a property belonging to the assessee which is in occupation of the firm in which assessee is the partner, is not includible in income of the assessee-partner u/s 22
Property held as stock-in-trade [Sec. 23(5)]
Where house property is held as stock-in-trade & not let out during any part of the previous year, then annual value of such property shall be computed as under:
|Up to 1 year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority||Annual value of such property shall be taken to be nil.|
|After the completion of aforesaid period||Annual value of such property shall be computed as per other provisions.|
Doctrine of mutuality
Sec. 22 levies tax on annual value of house-property and not on actual income from house property. In case of a club, which provides recreational facilities exclusively to its member and their guest and not to any non-members, it is considered as a non-profit seeking person and run on no-profit no-loss basis. Such club is running on the principle of mutuality and its members are not entitled to any share of profit. In the case of such a mutual concern, not only the surplus of the organisation but also the annual value of the club house shall be exempted from tax.
- Any one palace or part thereof of an ex-ruler, provided the same is not let out – Sec. 10(19A)
- House property of a local authority – Sec. 10(20)
- House property of an approved scientific research association – Sec. 10(21)
- House property of an educational institution – Sec. 10(23C)
- House property of a hospital – Sec. 10(23C)
- House property of a person being resident of Ladakh – Sec. 10(26A)
- House property of a political party – Sec. 13A
- House property of a trade union – Sec. 10(24)
- A farm house – Sec. 10(1)
- House property held for charitable purpose – Sec. 11
- House property used for own business or profession – Sec. 22
This is the first part of 2 part series of post on computation under the head “Income from House Property”. In next part, we will discuss about computation method of various type of house properties.