Income tax is computed with different heads, including estimating the annual value of house property. It is essential to understand this concept thoroughly before filing income tax. Here is what you need to know.
The Indian Income Tax Act has five heads of income, one of which is “Income from House Property”. To calculate income from house property, you need to discover the annual value of the property, which is the factor for calculating income under this head. So it is crucial to comprehend the annual value, how it gets calculated, and what it means.
Section 23 (1a) of the Income Tax Act incorporates the definition of the annual value of the real estate, and the annual value is the amount the property will earn if it is rented yearly.
The annual value of the house property may not be the actual rent received but is a notional value that could be derived if the property got rented out. The annual value is the actual rent received over and above the reasonable rent, which must be calculated after deducting all taxes assessed by the local authorities and paid by the owner.
Explanation of the annual value of the house property
Section 23 – Income from real estate is taxed based on the annual value of the house property. Even if the property is not rented during the year or only leased for part of the year, the notional rent receivable is taxable as its annual value.
The annual value of the house property is based on the following factors:-
- Actual rent received or receivable – The actual rent received/receivable by the property owner when the property gets leased.
- Municipal value – The value the municipal authorities determine for collecting municipal taxes from the house’s property. Municipal authorities usually collect house tax/council taxes based on the annual rental value of such house property.
- Fair Rent – The rent that a similar property can fetch in the same or similar location if it gets let for a year.
- Standard rent – The Rent Control Act sets the standard rent. Where a standard rent has been fixed for any property under the Rent Control Act, the owner cannot expect to receive higher rent than the standard rent fixed under the Rent Control Act.
- Expected Rent – The expected rent is greater than the municipal value, and the fair rent is subject to a maximum of the standard rent.
Calculation of the gross annual value
According to Section 23(1), the annual value of the house property is:
- The amount for which the annual rental of the property can reasonably get expected, i.e. the expected rent; or
- If the immovable property or any part of it is rented and the actual rent received or receivable for it by the owner is greater than the amount referred to in (a), the amount so received or payable, i.e. the actual rent; or
- If the property or its any part is rented and has been vacant during the whole of the preceding year or any part of the prior year; and as a result of such vacancy, the actual rent received or to be claimed by the owner in respect thereof is smaller than the quantity determined in clause (a), the amount so received or claimed, i.e. actual rent, if any:
There can be three instances in regards to renting the property:
Case 1 – When the property gets let for the entire previous year.
Case 2 – When the property is rented and was vacant for all or part of the last year.
Case 3 – When the property is let for part of the year and occupied for own living for part of the year.
DEDUCTIONS under income from house property (Section 24) for calculating “Income from house property”
Net Annual Value (NAV) deductions are allowed when calculating the annual value of the house property. These deductions are as follows.
Income Tax Act (Section 24) Deductions for calculating “Income from house property.”
Net Annual Value (NAV) deductions are allowed when calculating the annual value of the house property. These deductions are as follows:
Standard deduction [section 24 (a)]
It is a deduction allowed from the Net Annual Value of the property. It is given to the property owner for expenses related to rental income like debt collection fees, home insurance, repairs etc.
30% of the net annual value of the house property is deductible regardless of any expenses incurred by the taxpayer.
- Actual expenses incurred by the property owner in the house are not considered. The standard deduction is available even if the proprietor has incurred no cost of rental income.
- No standard deduction is permitted in respect of a self-occupied house as the net annual value of a self-occupied house is deemed to be NIL. Thus,
Interest from a “housing loan” or borrowed capital [section 24 (b)]
If the property was acquired, built, repaired, restored or reconstructed with borrowed capital, the amount of any interest payable on that capital is allowed as a deduction.
The interest payable annually should be calculated separately and claimed as a deduction each year. It is immaterial whether the interest got paid during the year or not.
The following points should also be assessed: —
- If the capital is borrowed for land purchase, the interest liability is deductible, even if the construction gets financed from its funds.
- Interest on borrowed capital is deductible on an “accrual” basis, and it can be claimed as a deduction annually even if the interest is not paid during the year.
- The deduction is available even if the principal or interest is not a burden on the property.
- Interest on unpaid interest is not allowed for deduction.
- No amount is deductible for any brokerage or loan brokerage commission.
- Interest on a new loan received to repay the original loan granted for the above purposes is allowable as a deduction – Circular No. 28, dated August 20, 1969. This rule applies even if the first loan was an interest-free loan.
- Any interest chargeable by law in the hands of the recipient and payable from India on which tax has been deducted at source or not been paid and in regard of which no person can be supposed to be an agent is not deductible.
- Interest in borrowed capital (according to the rules specified in this paragraph and paragraph 68.3-2a) is fully deductible without any maximum ceiling (in the case of let-out property).
- The transaction of allotment of immovable property to the man nan an assessee on an instalment basis gives rise to the relationship of debtor and creditor between the assessee and the estate officer. As such, interest paid by the assessee in instalments constitutes interest on borrowed capital.
The money may be borrowed earlier, and the acquisition or completion of the building takes place in any following year. Meanwhile, interest becomes due. In this case, the interest for the period before construction is deductible in 5 equal instalments.
The first instalment is deductible in the year the property construction was completed or purchased.
For this intent, “Pre-Construction Period” means the period beginning on the borrowing date and ending on March 31, immediately before the construction completion date/acquisition date or loan repayment date, whichever is earlier.
Interest will accrue from the date of borrowing until the end of the previous year before the previous year in which the house gets completed and not until the construction completion date.
Suppose a new loan was used to repay the original loan, and the second loan was taken to cover the first loan. This fact is proved to the gratification of the ITO, then the interest paid on the following loan would also be authorised as a deduction under Section 24(1)(vi).
Interest on interest is not allowed as a deduction. The assessee is allowed to deduct only the interest to be paid from the borrowed capital and not the additional interest deemed part of the loan due to non-payment of interest on the due date.
Any amount paid for brokerage or loan arrangement commission will not be allowed as a deduction.
No other amount is deductible to the assessee for any expenditure concerning such house property.
Maximum ceiling if borrowed the capital on or after 1st April 1999 –
On fulfilling the following three conditions, interest on borrowed capital is deductible up to Rs. 2,00,000 —
Condition-1: Borrowed the capital on or after April 1, 1999, for the acquisition or construction of the real estate
Condition-2: The acquisition or construction is completed within five years from the end of the financial year in which borrowed the capital.
Condition-3: The Lender confirms that such interest is payable in respect of the advance amount for the acquisition or construction of the house or as refinancing of the distinguished principal under a previous loan for such accession or construction.
The following are crucial points:
- If the capital is borrowed for any other purpose (reconstruction, repairs or restoration of house property), the maximum deduction on interest is Rs. 30,000 (and not Rs. 2,00,000).
- No surety for the construction start date- Consequently, the construction of the residential unit could have been started before 1st April 1999. But, a higher deduction of Rs. 2,00,000 would be available to fulfil the above three conditions.
There is no condition regarding the construction/acquisition of a housing unit to get fully financed by a loan taken on or after April 1, 1999, and it may be partially so.
A loan taken before 1st April 1999 will have an interest deduction of up to Rs. 30,000 (as mentioned in the paragraph below).
The maximum limit in another case
On failing to meet the above three conditions [i.e. conditions (1), (2) and (3) (above)], the interest on borrowed capital is deductible up to a max of Rs. 30,000. On the other side, in the following two cases, interest on borrowed capital is deductible up to Rs. 30,000/
Case-1: If borrowed the capital before April 1, 1999, for purchase, construction, reconstruction, repair or renovation of immovable property.
Case-2: If the capital gets borrowed on or after 1st April 1999 for the property’s reconstruction, repair or renovation.
The annual value of the house property would be its reasonable rent. But if the actual rent is higher, it would be considered an annual value.
The calculation of annual value is not calculated only from the actual or reasonable rent, and the yearly value may not exceed the rent determined by the rent administrator. If the actual rent is higher than the rent determined by the administrator, then the annual value will be the actual rent.
Sometimes the landlord also fulfils the tenant’s other obligations, such as water and electricity bills.
The de facto rent (what it should be) will get calculated by deducting the value of these liabilities. If the tenant pays for these services, their price must be added to the rent, and council taxes and repairs paid by the tenant should not be added.
What is the annual value of the house property?
According to section 23 (1)(a) of the Income Tax Act, the annual value of the property means the amount for which it can reasonably be assumed to get rented from year to year.
What are the rules regarding the annual value as determined?
A detailed discussion of the provisions and regulations relating to annual value as determined. Chapter IV (Sections 14 to 59) of the Income-tax Act, 1961 deals with conditions relating to the computation of total income.
What are the deductions from the annual value of the house property?
No deduction is available from the net annual value of a self-occupied home as the net annual value of a self-occupied home is ‘nil’.
What is the net annual income from the property?
The value achieved after deducting any council taxes may be referred to as the net annual value (according to the Income Tax Act).
Can the commission be deducted from real estate income?
The rent received in the case of the assessee for the entire year is the annual rental value. Considering that the commission is not eligible as a deduction according to section 24 is not allowed as an expenditure under income from house property.