Income from House Property Part-I (Sec 22 and 24 IT Act)

As your wealth grows, so is your tax liability. Hence, understanding of tax laws can play a critical role in paying the correct taxes. Income Tax laws can be sometimes very complex but if we understand the intent behind the specific law, it becomes all the more easier to interpret, understand and follow these laws.

"Income from House Property" is one of the most often misunderstood laws in Indian Income Tax Laws. Very often, we confuse it with the rental income, loan interest and many other such misconstrued notions. We are going to deal with this specific section of the IT act under a series of posts starting today.

Today, we deal with Part-I which is understanding the fundamental meaning of this Income Tax law under Section 22 of the IT Act, which deals with understanding the meaning of "Income from House Property".

As per Sec 22, just like you, as a human, are a source of income and attract income tax on the income that you actually earn, your House property is another source of income which must be assessed for the income it has generated for you / or is capable of generating for you. Once you understand this concept and treat your house as another entity capable of generating income, then understanding the tax laws under Sec 22 and Sec 24 become so much easier.

Let us understand, what kind of house and what kind of income from house property is liable to taxes.

Sec-22 defines the basis of charge of such taxes. 

Here are the salient features of Sec 22 "Income from House Property" law:

The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from house property’. However, if a house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head.

Conditions for House Property to be taxable

Three(3) conditions are to be satisfied for property income to be taxable under this head.

1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. 

Let us now understand the salient features of these 3 conditions

Salient Features:

1. The term ‘building’ includes residential houses, bungalows, office buildings, warehouses, docks, factory buildings, music halls, lecture halls, auditorium etc.

2. Rental income from a vacant plot of land (not appurtenant to a building) is not chargeable to tax under the head ‘Income from house property’, but is taxable either under the head ‘Profits and gains of business or profession’ or under the head ‘Income from other sources’, as the case may be. 

3. However, if there is land appurtenant to a house property, and it is let out along with the house property, the income arising from it is taxable under this head. 

4. It is only the owner (or deemed owner) of house property who is liable to tax on income under this head. Owner may be an individual, firm, company, cooperative society or association of persons. The property may be let out to a third party either for residential purposes or for business purposes. 

5. Annual value of property is assessed to tax in the hands of the owner even if he is not in receipt of the income. This is very important to note. We will cover this in detail in Part-II and Part-III of this series of posts also. This essentially means that if your house property is capable of generating income (and actually it is not), you are liable to pay taxes on the deemed income.

6. Income from subletting is not taxable under section 22. For example, A owns a house property. He lets it out to be B. B further lets it (or a portion of it) out to C. Rental income of A is taxable under the head ‘Income from house property’. However, since B is not the owner of the house, his income is not taxable as income from house property, but as income from other sources under section 56. 

Now, we have understood the conditions under which an income generated from a house property is taxable in the hands of the assessee. 

In our upcoming posts, we will talk about calculation of this income (and tax liability thereof) under two different scenarios.

Part II of this series would cover a scenario when you have let out this house property. Part-III of this series will cover when the property is self occupied.

Cheers

Manoj Arora