Income Tax - Income from House Property

What income will be considered 'Income from House Property'?

The annual value of property, consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income tax, shall be chargeable to income tax under the head "Income from House Property".

Is income from any property covered under this section?

No. Only the income from buildings or part of a building, held by the assessee as the owner and the income from land appurtenant to the buildings is covered under this section. Income from other property such as open land is out of the purview of this section. Income from such land will be taxed under the head, 'income from other sources.'

When the property is used by the owner for his business or profession, the income of which business or profession is chargeable to income tax, the income of that property is not charged in the hands of the owner. Similarly, when a firm carries on business or profession in a building owned by a partner, no income from such property is added to the income of the partner, unless the firm pays the partner any rent for the same. If the assessee is not the owner of the building but is a lessee and he sublets the property, he would be taxed under the head 'Income from other sources'.

What is included in the term 'buildings' for the purpose of this section?

The term 'buildings' includes any building (whether occupied or intended for self-occupation), office building, godown, storehouse, warehouse, factory, halls, shops, stalls, platforms, cinema halls, auditorium etc. Income arising out of the building or a part of the building is covered under this section.

What is meant by the term "land appurtenant"?

Land appurtenant includes land adjoining to or forming a part of the building. It would depend on the nature of the land, whether it is appurtenant to the residential building, factory building, hotel building, club house, theatre etc. and will include courtyards, compound, garages, car parking spaces, cattle shed, stable, drying grounds, playgrounds and gymkhana.

Is the income arising from vacant land covered under this section?

Any income, arising out of vacant land, is not covered under this section even though it may be received as rent, ground rent or lease rent. Such income would be assessable as income from other sources. Even rent, arising out of open spaces, or quarry rent, is taxed as income from other sources.

If a company is formed with the sole object of acquiring and letting out immovable properties, what head would the rental income be taxable under?

Even if a company is formed for the sole object of acquiring and letting out immovable properties, the rental income would be taxable as "Income from House property" and not as "business income."

If a building is used as a market and the owner/landlord provides certain other services as required by the municipal license, what head would the income fall under?

The income from letting out shops would be considered income from house property.

When is the income from house property wholly exempt from tax?

In the following cases, income from house property is completely exempt from any tax liability:

Income from any farmhouse forming part of agricultural income;
Annual value of any one palace in the occupation of an ex-ruler;
Property Income of a local authority;
Property Income of an authority, constituted for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.);
Property income of any registered trade union;
Property income of a member of a Scheduled Tribe;
Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group;
Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities;
Property income of an institution for the development of Khadi and village Industries;'
Self-occupied house property of an assessee, which has not been rented throughout the previous year;
Income form house property held for any charitable purposes;
Property Income of any political party.

How is the annual value of the property determined?

Under S 23 (1) of the Income tax Act, annual value of property shall be deemed to be the following:

The sum for which the property might reasonably be expected to be let out from year to year;
Where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable;
Where the property or part of 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 by the owner in respect thereof is less than the sum referred to clause (a) the amount so received or receivable.

The taxes levied by any local authority in respect of the property shall be deducted while determining the annual value of the property of that previous year in which such taxes are actually paid by him. Further, the amount of actual rent received or receivable by the owner shall not include the amount of rent, which the owner cannot realize.

Sub-section 2: The annual value of a house or part of a house shall be taken as nil if the property consists of such house or part of the house and is occupied by the owner himself for the purpose of his own residence or, if such house or part thereof cannot be occupied by him because his employment, business or profession is carried on at any other place and, he has to reside at that other place in a building that does not belong to him.

Nevertheless, the above provision would not apply if the house or part thereof is actually let during the whole or any part of the previous year; or if any benefit therefrom is derived by the owner.

If the property consists of more than one house, the provisions of the sub-section (2) shall apply in respect of only one of such houses, which the assessee may at his option specify. The annual value of the house(s), other than the house in which the assessee has exercised an option, shall be determined under sub-section (1) as if the house (s) had been let out

What are the deductions permitted to be made from Income from house property"?

S 24 lays down that 'income chargeable under the head 'Income from house property' shall be computed after making the following deductions:

A sum equal to 30% of the annual value;
If the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. Where such property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, on or after 1st April 2003, the amount of deduction under this clause shall not exceed Rs 1, 50,000.

The amount of deduction shall not exceed Rs 30,000 where the property consists of a house or part of a house, which the owner occupies for his own residence or which cannot be occupied by him because his employment, business or profession is carried on at any other place and he has to reside at that other place in a building which is not his own.

Can rental income be treated as business income?

The main criteria for deciding whether the rent is assessable as income from property or as business income depends upon the assets are exploited commercially or whether the same are let out for enjoying the rent.