In the last post(Income from House Property Part-I (Sec 22 and 24 IT Act)), we studied essentially about Sec -22 of Income Tax Act which talks about what is considered a house property and what kind of taxes are applicable on the same.

Today, in Part-2 of this series of posts on "Income from House Property", we would study Sec-24 of IT Act. Once you have a taxable house property which is worthy of generating income for you, we must understand the applicability of Sec-24.

The applicability of Sec-24 is covered under two sections (and hence Part-2 and Part-3 of this series of posts)

This series of posts:

Part-2 : Sec-24 : Income from Let House Property (current post)

Part-3 : Sec-24 : Income from Self Occupied Property (next post)

So, lets read on the Computation of Income from Let House Property

**(A) Gross Annual Value**

The basis of calculating Income from House property is the ‘Annual Value’. This is the inherent capacity of the property to earn income and it has been defined as the amount for which the property may reasonably be expected to be let out from year to year.

A-1 It is not necessary that the property should actually be let out.

A-2 It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent (e.g., in case where the tenancy is affected by fraud, emergency, close relationship or such other consideration), the latter will be the

annual value.

annual value.

A-3 The municipal value of the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same locality, are all pointers to the determination of annual value.

A-4 Actual Rent: It is the most important factor in determining the annual value of a let out house property. It does not include rent for the period during which the property remains vacant. Moreover, it does not include the rent that the tax payer is unable to realize, if certain conditions are satisfied.

A-5 Sometimes a tenant pays a composite rent for the property as well as certain benefits provided by the landlord. Such composite rent is to be disintegrated and only that part of it which is attributable to the letting out of the house property is to be considered in the determination of the annual value.

A-6 If the property is let out but remains vacant during any part or whole of the year and due to such vacancy, the rent received is less than the reasonable expected rent, such lesser amount shall be the Annual value.

From the annual value as determined above municipal taxes are to be deducted if the following conditions are fulfilled:

**(B) Less Municipal Taxes**From the annual value as determined above municipal taxes are to be deducted if the following conditions are fulfilled:

B-1 The property is let out during the whole or any part of the previous year

B-2 The Municipal taxes must be borne by the landlord (If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed).

B-3 The Municipal taxes must be paid during the year

**(C) Net Annual Value**
C = (A)-(B) gives us the Net Annual Value

Two deductions will be allowed from the net annual value (which is gross annual value less municipal taxes) to arrive at the taxable income under the head ‘income from house property’. It has to be borne in mind that the deductions mentioned here (section 24) are exhaustive and no other deductions are allowed.

**(D) Deductions under Sec 24**Two deductions will be allowed from the net annual value (which is gross annual value less municipal taxes) to arrive at the taxable income under the head ‘income from house property’. It has to be borne in mind that the deductions mentioned here (section 24) are exhaustive and no other deductions are allowed.

*D.1 Statutory deduction*

30 per cent of the net annual value will be allowed as a standard fixed deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.

*D.2 Interest on borrowed capital*

The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. Amount of interest payable for the relevant year should be calculated and claimed as deduction.It is immaterial whether the interest has actually been paid during the year or not.

The following points are to be kept in mind while claiming deduction on account of interest on borrowed capital:

D.2.1 In case the property is let out, the entire amount of interest accrued during the year is deductible. The borrowed amount may be for construction/acquisition or repairs/renewals.

D.2.2 A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction etc., of the property. In such a case also, the interest on the fresh loan will be allowable.

D.2.3 Interest payable on interest will not be allowed.

D.2.4 Brokerage or commission paid to arrange a loan for house construction will not be allowed.

D.2.5 Money may be borrowed prior to the acquisition or construction of the property.The interest paid/payable for the pre-construction period is to be aggregated and claimed as deduction in five equal installments during five successive financial years starting with the year in which the acquisition or construction is completed.

Total Deductions

Total Deductions

D = D.1 + D.2

**(E) Income from House Property**
So, the net income that your house has been able to generate in the entire year is essentially the nest annual value of the house minus the total deductions

(E) = C-D

This completes the calculation of net income from a let house property. In the next post, which will be the last in this series, we will cover the calculation of income from a self occupied property.

Cheers

Manoj Arora

Finally I understand the concept and context behind this taxation / legislation. Thanks for your post on Income from house property.

ReplyDeleteThanks

Deletehow would you determine the annual value of a house which remained vacant for part of the previous year.

ReplyDeleteMr. Manoj Arora could you please elaborate this question in detail.

Hi Vishal

DeleteWhere the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent (e.g. in case where the tenancy is affected by manipulation, emergency, close relationship or such other consideration), the latter will be annual value.

As an example, In case of a house, whose municipal valuation is Rs. 24,000/- and the actual rent recieved is Rs. 36,000/-, the annual lettable value will be taken at Rs.36,000/- (the higher of the two). If the actual rent received is Rs. 18,000/- and the municipal valuation is Rs.24,000/-, the annual value would be Rs. 24,000/- (again, higher of the two) for the purpose of the Income-tax Act.

However, if a property is let and was vacant during any part or whole of the year and due to such vacancy, the rent received is less than the notional rent, such lesser amount shall be the Annual Value. So, in the above example where the municipal valuation was Rs. 24,000/- and if the property was vacant for six months and the rent received is Rs. 20,000/- for six months, then the Annual Value shall be Rs. 20,000/- only. The govt does not want to tax you on municipal valuation for the entire year if your house could not be rented for the entire year.

Hope this clarifies.