Rent earned from house property (whether commercial or residential) by the assessee is defined as the income from house property. House property consists of any building, apartment or land which is owned by an individual. House property includes any infrastructure in the form of the house, go down, office building, factory, hall, auditorium, shop etc. or any facility which is attached to the building (car parking space, playground, gymkhana, compound, garden etc.).
Sometimes, an assessee must pay rent even though the property is not let out. The rent payable on such property is called “Deemed Rent”. This rent is calculated on the potential income which the property yields.
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There are various terms which are used while calculating income from house property, such as:
- Municipal value: It is the value determined by municipal authority upon which municipal tax is calculated. Authorities conduct a periodical survey of all buildings for charging this tax.
- Annual value: Annual value refers to the income that is earned from a property in one financial year. If the property is not let out, then the rent should have been receivable if rented-out will be taxable as its annual value.
- Fair rental value: A specified rent paid in all similar building, within the same locality, that has similar features is called the fair rental value.
- Standard rent: As per the Rent Control Act, 1958 standard rent is the fixed rent, which specifies that owner cannot charge rent from tenant above that. This act was framed to protect the tenants from unlawful eviction by the owners.
- Actual rent received: This is the actual amount payable by the tenant to the owner of the building.
Gross annual value: In case the property is self-occupied, then its annual value is taken as nil. But when the property is rented out, the expected rent will be the highest amongst either the municipal value and fair rental value.
If Rent Control Act is applicable to the property, then the expected rent cannot exceed the standard rent which is fixed under the Act and the standard rent will be the gross annual value. But in case, the expected rent is less than the standard rent, then the expected rent will be the gross annual value.
When expected rent is less than standard rent.
- If fair rent = Rs. 2,40,000
- Municipal value = Rs. 1,20,000
- Standard rent = Rs. 2,64,000
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Expected rent will be the highest from fair rent and municipal value i.e. Rs. 2, 40,000.Now expected rent i.e. Rs. 2, 40,000 is less than the standard rent, Rs. 2, 64,000. So, expected rent will be the gross annual value.
When expected rent is greater than standard rent
- Fair rent = Rs. 2,40,000
- Municipal value = Rs. 1,20,000
- Standard rent = Rs. 2,20,000
Expected rent will be Rs. 2, 40,000 and standard rent will be less than the expected rent. As per the Rent Control Act, standard rent will be considered as the gross annual value.
Net Annual Value: Net annual value is calculated by deducting municipal taxes from gross annual value.
Net annual value = Gross Annual Value – Municipal Taxes Paid.
Deductions: To arrive at the actual taxable income from house property, two deductions are done from the net annual value.
These two deductions are:
- Statutory Deduction: 30% statutory deduction is allowed from the Net Annual Value (NAV) to every taxpayer. A taxpayer should keep in mind that this deduction is allowed from Net Annual Value (NAV) but not from Gross Annual Value (GAV). This deduction is not applicable when the Net Annual Value is nil.
- Interest on Borrowed Capital: If the taxpayer has borrowed capital for acquiring, constructing, renewing, repairing or reconstructing any property then the deduction is applicable on the interest payable upon the amount. If the construction of a building is completed within 3 years since the loan was procured, then the deduction will be allowed for actual interest amount and Rs. 1, 50,000 (whichever is less). If the construction could not have completed within 3 years then the deduction will be allowed for the actual interest amount and Rs. 30,000 (whichever is less).
Calculation of Income from House Property
The calculation of the annual value of the property is different in different cases.
House properties are classified into three categories:
- When the house property is let out throughout the previous year: When the house is let out throughout the previous year, then the gross value is calculated in the same manner as discussed above. Further, Net Value is calculated after deducting municipal taxes from the gross annual value. Now statutory deduction and interest on borrowed capital will be deducted from the Net Annual value to arrive at Income from house property.
If house property is partly let-out and partly vacant during the year: In such cases, two factors will be the determinants;
If the actual rent received is more than the expected rent, irrespective of it being vacant for a few months. Then in such case, Gross Annual Value is taken as the actual rent received, as it is greater than the expected rent.
- Municipal value of the house = Rs. 1,00,000
- Fair Rent = Rs. 1,20,000
- Standard Rent = Rs. 1, 10,000.
If the house property has been let out for Rs. 12,000 per month and was vacant for one month. Municipal taxes paid during the year was Rs. 50,000.
Compute the Net Annual Value for the assessment year.
Solution: Fair rent is greater than Municipal value and standard rent. So, the expected rent will be Rs. 1, 10,000 (lesser one of fair rent or standard rent). Actual rent received = Rs. 1, 32,000.
Gross Annual Value will be higher of expected rent and actual rent received = Rs. 1, 32,000. Deduct municipal taxes of Rs. 50,000 from the gross annual value of Rs. 1, 32,000.
Hence, the net annual value will be Rs. 82,000.
When actual rent received is less than expected rent due to the vacancy of the property, the gross annual value will be the actual rent received or receivable.
For Example: If the property was vacant for 3 months, then the actual rent received would be Rs. 84,000.
The gross annual value will be Rs. 84,000.
Net annual value will be gross annual value minus municipal taxes paid (Rs. 84,000 – 50,000 = 34,000).
House property let out for a part of the year and for rest, it was self-occupied: In this case, the expected rent will be calculated for the whole year.
The gross annual value will be highest of both:
- Expected rent for letting out the property for the whole year.
- Actual rent received or receivable for the period the property was let out.
Example: Aman has a house property in Mumbai whose Municipal value is Rs. 1, 00,000 and fair rental value is Rs. 1, 40,000.
It was self-occupied by Aman from 1st April 2015 to 31st Sep 2015. With effect from 1st October 2015, it was let out at Rs. 8,000 per month.
What will be the annual of the house if the municipal taxes paid during the year was Rs. 50,000?
Solution: Expected rent will be higher from the Municipal value and Fair rental value (Rs. 1, 40,000).
Actual rent received from 1st October = Rs. 8,000 x 8 = Rs. 64,000. From the Expected rent and Actual rent received, whichever is higher will be the gross annual value i.e. Rs. 1, 40,000.
Now for calculating Net Annual Value, deduct municipal taxes paid from the Gross annual value which will be Rs. 90,000 (Rs. 1, 40,000 – Rs. 50,000).
Rules for Unrealized Rent
It is the rent which is not paid by the Tenant for the property for a particular Financial Year.
The rent paid by the tenant is considered to be a loss or irrevocable if:
- The Tenancy is bonafide.
- The defaulting tenant has vacated the property, and all steps have been taken to compel him/her to vacate the property.
- The defaulting tenant is not staying in any other property of the assessee.