STUDY NOTE : 8

INCOME FROM HOUSE PROPERTY

THIS STUDY NOTE INCLUDES:

8.1 Basis of charge [Section 22]
8.2 Essential Conditions
8.3 Deemed Owner
8.4 House Property let out for purposes which is incidental to business
8.5 Property held in as stock-in-trade
8.6 House Property situated abroad
8.7 Composite Rent
8.8 Annual Value of house property
8.9 Annual Value how determined [Section 23]
8.10 Deductions from annual value [Section 24]
8.11 Recovery of arrears of rent and unrealized rent [Section 25A]
8.12 Treatment of Loss

8.1 BASIS OF CHARGE [SECTION 22]

The charge under this head arises from the provisions contained in section 22, which provides that the
annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee
is the owner and which is not used by the assessee for the purpose of any business or profession carried
on by the assessee, shall be chargeable to income-tax under the head ―Income from house property.‖
Thus, although rental income from properties is brought to tax under the head ―Income from house
property,‖ the basis of charge under Section 22 is not the rent itself, but the annual value of the
property.

8.2 ESSENTIAL CONDITIONS

The charge under section 22 is subject to the following essential conditions and propositions:
(a) The property should consist of buildings and lands appurtenant thereto. Income from vacant land
(where there is no building upon it) shall be charged as Income from other sources or as Profits and
gains of business or profession.
(b) The assessee should be the owner of such property. Ownership here means ownership of the
superstructure, and not necessarily ownership of the land.
(c) The property is not used by the owner for the purpose of any business or profession carried on by
him, the income of which is chargeable to tax.

8.3 DEEMED OWNER

In the following cases, the assessee, though not the legal owner of the property, is deemed to be the
owner under Section 27 of the Act:
(a) An individual who transfers otherwise than for adequate considerations any house property to his or
her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child,
not being a married daughter, shall be deemed to be the owner of the house property.
(b) The holder of an imparitable estate shall be deemed to be the individual owner of the house
property so transferred.
(c) A member of a co-operative society, company or other association of persons to whom a building
or part thereof is allotted or leased under a house building scheme of the society, company or
association, as the case may be, shall be deemed to be the owner of that building or part thereof.

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(d) A person who is allowed to take or retain possession of any building or part thereof in part
performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act,
1882, shall be deemed to be the owner of that building or part thereof.
(e) A person who acquires any rights by way of long-term lease of the property shall be deemed to be
the owner of the property. Under section 269UA(f), long-term lease means a lease for a period of
not less than 12 years.

8.4 HOUSE PROPERTY LET OUT FOR PURPOSES WHICH IS INCIDENTAL TO BUSINESS

As already mentioned, house property used for the purposes of the business of the owner is not taxable
under this head; it is altogether exempt. However, income from property let out by the assessee for
purposes which are incidental to or beneficial to the business, shall be charged under the head Profits
and gains of business or profession. Some instances of this type of letting are: residential quarters
constructed by the assessee for, and let out to, his employees; industrial sheds let out to manufacturers
components required for the assessee‘s business or premises let out to Government authorities for
providing accommodation for a branch of a nationalised bank, post office, police station, etc.

8.5 PROPERTY HELD IN AS STOCK-IN-TRADE

House owning, however profitable, is not a business within the meaning of the Income-tax act.
Therefore, even if a company is incorporated with the sole object of promoting and developing
markets, it‘s income will be assessable under the head Income from house property. Some examples
where business endeavour leading to ownership of house property has been charged to tax under
section 22 are:
(i) business of acquiring property and letting the further;
(ii) Income from property acquired in the course of money lending business;
(iii) Rental income of unsold apartments of a builder;
(iv) Income from a commercial complex let out for business.

8.6 HOUSE PROPERTY SITUATED ABROAD

Income from house property situated in a foreign country is taxable in the hands of a resident and
ordinarily resident in India. In the case of not ordinarily residents and non-residents, income from such
house property is taxable only if the income is received in India during the previous year. If income from
any such property becomes taxable in India, its annual value shall be computed as if the property is
situated in India.

8.7 COMPOSITE RENT

When the owner of a house property derives rent for use of the property as well as for other assets and
services made available to the tenants, such rent is called composite rent.
The tax-treatment of such composite rent shall be as follows:
(a) If the composite rent is received on account of rent of the property and for services like lift, water,
electricity, watchmen, air-conditioning, etc., the rent received for use of the house property shall
be separated from those received for other services. The rent attributable to the use of the house
property shall be charged to tax under the head Income from house property, while those
received for other services shall be charged to tax as Income from other sources or as Profits and
gains of business or profession, as the case may be [CIT vs. Kanak Investments P. Ltd. 95 ITR 419].

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(b) If the composite rent is received for the use of the house property as well as for the use of
machinery, plant, furniture, etc., and if the rent can be separated between use of house property
and other purposes, then the amount attributable to the use of the house property shall be
charged to tax under the head Income from house property and the remaining amount shall be
charged to tax as Profits and gains of business or profession or Income from other sources.
Where, however, the amount is inseparable, the entire rent would be brought under the head Profits
and gains of business or profession, or Income from other sources.

8.8 ANNUAL VALUE OF HOUSE PROPERTY

The basis of charge under Section 22 is not the rent, but the annual value of the property. The annual
value of a property under the Income-Tax Act is the sum for which the property might reasonably be
expected to let from year to year. It is the inherent capacity of a property to yield profit [Lallmal vs. CIT
4 ITR 250(FB)].

In determining this inherent capacity of the property to earn profit or income, several factors are to be
considered. These are:

(i) Rent received or receivable: For a property, which is actually let out, rent received by the owner
from the tenant serves as a good evidence to judge the earning potential of the property in question.
Rent received for this purpose means the de facto rent. Sometimes, the owner may receive a rent
which includes compensation for other services provided (e.g. electricity, water, watchman, etc.,
provided to the tenant). In such cases, the amount attributable to such services shall be deducted
from the amount of rent so received. Rent received from the tenant is, however, just a prima facie
evidence, not a conclusive proof of the earning potential of the property.
(ii) Municipal value: For the purpose of levying tax on the householders, the municipal authorities make
independent assessment to determine the letable value or municipal value of a house property, and
based on such assessment, they charge municipal taxes as a certain percentage of the letable value.
In some metropolis like Mumbai, Delhi, Kolkata and Chennai the municipal authorities charge the tax
on property after allowing 10% rebate on the municipal value to provide for repairs and maintenance
of the property. For the purpose of income-tax, however, such rebates are to be added back to
determine the gross municipal value.
(iii) Fair rent: Fair rent is the rent which a similar property may fetch in a similar locality. The Income-tax
Department may in fact consider transactions entered into by other property holders to judge the
earning potential of a particular property [Lallmal vs. CIT 4 ITR 250].
(iv) Standard rent: In case a property is covered under the Rent Control Act, the reasonable rent that
an owner may get from the property cannot exceed the rent as determined under the Rent Control
Act [Sheila Kaushish vs. CIT 131 ITR 435]. It is the maximum amount that a landlord can legally get from
the tenant. The standard rent is, therefore, an important factor to determine the annual value of a
property.

8.9 ANNUAL VALUE HOW DETERMINED [SECTION 23]

Section 23 of the Income-tax Act lays down the procedure for determination of annual value of a
house Property. This section divides, and contemplates, determination of the annual value of house
properties as under:
Let-out house property Self-occupied house property
 Property which is let out throughout the  Self-occupied house property and used as
previous year such throughout the year
 House property which is let out but remains  Self-occupied house property which remains

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 vacant for part of the year/whole of the year vacant whole of the year or part of the
previous year
 Let out for part of the year and self-occupied  More than one self-occupied property
for part of the year

1. Property which is let out throughout the previous year [Section 23(1(a); 23(1)b]:

 Computation of annual value when there is no unrealised rent :

Step1. Find out the reasonable expected rent of the property, according to Section 23(1)(a), which is
the higher of the following:
(a) Gross municipal value,
(b) Fair rent.

However, in case the property is covered under the Rent Control Act, the reasonable rent
determined in Step 1 cannot exceed the Standard rent under the Rent Control Act [Shiela Kaushish
vs. CIT (1981) 131 ITR. 589(SC)].

Step 2. Find out the rent received or receivable [Section 23(1)(b)].

The higher of the amounts in Step 1 and Step 2 shall be the gross annual value.

Step3. Deduct the municipal tax actually paid by the owner during the previous year.
The remaining amount shall be the net annual value of the let out property.

Municipal tax is generally charged on the gross municipal value. But in the big cities like Mumbai,
Kolkata, Chennai and Delhi, such taxes are usually charged on the net municipal value or rateable
value, which is the amount remaining after allowing 10% rebate for repairs, and service taxes (e.g.,
water tax, sewerage taxes).
Therefore, when net municipal value or rateable value is given, this amount has to be increased by
1/9th to arrive at the figure for gross municipal value. When there are other service taxes like water tax
and sewerage tax, then the net municipal value has to be first increased by the amount of service
taxes and then 1/9th is to be added to arrive at the figure for gross municipal value.

 Computation of annual value when there is unrealised rent :

In the case of a property which is let out throughout the previous year and there is no vacancy, but
during the previous year the full rent could not be realised, then, subject to the conditions laid down
under Rule 4, the unrealised rent shall be excluded from the actual rent received or receivable under
Section 23(1)(b) or Section 23(1)(c). The annual value in such a case shall be determined as follows:

Step1. Find out the reasonable expected rent u/s 23(1)(a), which is the higher of gross municipal value
and fair rent, but subject to the maximum of the Standard rent.

Step2. Find out the rent received or receivable excluding the unrealised rent.
If Step 2 is higher than Step 1, then the amount determined in Step 2 shall be the gross annual
value. But if Step 2 is less than Step 1, the amount determined in Step 1 shall be the gross annual value.
In other words, unrealised rent cannot decrease the gross annual value determined in Step 1.

Step3. Deduct municipal tax actually paid by the owner during the previous year.
The remaining amount after Step 3 shall be taken to be the net annual value of the let out property.

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 When unrealised rent is allowed to be deducted from the rent received or receivable [Rule 4]:
Under Rule 4, the unrealised rent for the current previous year shall be deducted from rent receivable
if the following conditions are satisfied:
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated or steps have been taken to compel him to vacate the
property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless

2. House property is let out, but it remains vacant for any part or whole of the previous year:
According to Section 23(1), the annual value of a property, which is let out but remains vacant for part
or whole of the previous years, shall be deemed to be:
(a) the expected reasonable rent of the property [u/s 23(1)(a)], or
(b) 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 Section 23(1)(a), the amount so
received or receivable [Section 23(1)(b)] ; or
(c) Where the property or any 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 Section 23(1)(a), the amount so received
[Section23(1)(c)].

To put it in other words, the gross annual value of house property is the higher of reasonable expected
rent u/s 23(1)(a) or rent received u/s 23(1)(b). But if owing to vacancy the actual rent received or
receivable is lower than the reasonable rent [under Section23(1)(a)], then actual rent received shall be
the gross annual value in terms of Section 23(1)(c).
In a practical situation one may face the following cases:
 Where rent received is higher than the reasonable expected rent:
 Where rent received is less than the reasonable expected rent:
 The property remains vacant for some time and there is unrealised rent

In a situation like this, the following general formula may be used:

Step1. Find out the reasonable expected rent (higher of municipal value and fair rent, but subject to a
maximum of Standard rent).

Step2. Find out the annual rent (i.e. if the property is let out throughout the previous year) excluding
unrealised rent, if any.

Step3. Select the higher of Step 1 and Step 2.

Step4. From the amount determined in Step 3, deduct rent for the vacancy period.
The amount so determined in Step 4 is the gross annual value of the property.

3. Computation of annual value of house property which is self-occupied but let out for part of the year
[Section 23(3)]:
Where a self-occupied house property is let out for any part of the year, its annual value shall be
determined under the provisions of Section 23(1) as if the property has been let out throughout the
previous year. In this case the reasonable expected rent under Section 23(1)(a) shall be computed as
usual, but rent received or receivable under Section 23(1)(b) shall be taken only for the period during
which the property is actually let out. The gross annual value will be the higher of reasonable expected
rent and rent actually received.

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4. Computation of annual value of self-occupied property which is used throughout the previous year
for residence of the owner [Section 23(2)(a)]:
Subject to the fulfillment of the following conditions, under Section 23 (2)(a), where the property consists
of one house or part of the house, which is in the occupation of the owner for his own residence, the
annual value in respect of this house or part thereof shall be nil:
(a) the property is not actually let during any part of the previous year; and
(b) no other benefit is derived from such house.

5. Computation of annual value of a self-occupied residential house which remains vacant during the
whole or any part of the previous year [Section 23(2)(b)]:
Where the property consists of one house or part thereof which is in the occupation of the owner for his
own residence but could not be occupied by him because of his employment, business or profession
carried on at any other place, and he has to reside at that other place in a house not belonging to
him, the annual value of such house or part of the house shall be taken to be nil. The owner of such
property should, however, satisfy the following conditions:
(a) The owner could not occupy the house due to his business or profession carried on in another
place.
(b) The house (or part of the house) remains vacant.
(c) No other benefits are derived from the house.

If the house remains vacant for purposes other than (a) above, the benefit under Section 23(2)(b)
cannot be claimed.

6. Computation of annual value in the case of more than one self-occupied residential house [Section
23(4)]:
When the owner occupies more than one house for his own residence, then at the option of the
assessee, the annual value of one such house only shall be taken as nil. The other houses shall be
deemed to be let out and the annual value of such houses shall be computed u/s 23(1)(a), as in para
9.1.

Points to note:
 Since the owner can exercise his option regarding choice of one self-occupied house, to reduce
his tax burden, he may choose the house property which has the maximum annual value.
 The option regarding choice of a self-occupied house may be changed from year to year.
 In the case of a self-occupied house property which has more than one unit and all the units are
occupied by the owner, the annual value of all these units shall be taken to be nil.

8.10 DEDUCTIONS FROM ANNUAL VALUE [SECTION 24]

The following deductions are available from the annual value of the house property:

1. Deductions from annual values in case of let out and deemed to be let out properties:
The following deductions are available from the annual value of the let out or deemed to be let out
properties:

1. Standard deduction [Section 24(a)]:30% of the net annual value is deductible. This deduction is fixed
and is allowed irrespective of actual expenditure incurred by the owner.

2. Interest on borrowed capital [Section 24(b)]: Where the property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on

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such capital is to be deducted. Interest on borrowed capital, which is utilised for any other purpose,
cannot be claimed as deduction.
 Interest on borrowed capital prior to completion or acquisition of property: Interest on borrowed
capital is generally allowed as deduction on accrual basis. But in case the money is borrowed earlier
and the acquisition or completion of the property takes place in a subsequent year, the assessee
cannot claim deduction on account of interest as and when it becomes payable. This is so because
the source of income (i.e., house property) is yet to come into existence.

By virtue of the Explanation to Section 24, the accumulated interest for such pre-construction period
can be deducted in five equal installments starting from the previous year in which the property has
been acquired or completed.

For this purpose, pre-construction period means the period beginning from the date on which the
money was borrowed and ending on 31st March immediately prior to the date of completion of
construction (or acquisition) of property or the date of repayment of loan, whichever is earlier.

Points to note:
 Since interest is allowed as deduction on an accrual basis, interest for the previous year can be
deducted even if it is not actually paid.
 Interest on unpaid interest is not deductible.
 Brokerage, commission, etc., paid for raising loan is not deductible.
 Where any interest is paid outside India for which no tax has been paid or deducted at source or
in respect of which there is no person in India who may be treated as an agent, cannot be
allowed as deduction (Section 25).
 Interest on fresh loan taken to repay the original loan is allowable as deduction
 Interest on loan is allowed as deduction only to the person who has
constructed/purchased/undertaken repairs with the borrowed fund. Such interest is not allowable
to the successor of the property, unless he has utilised the fund for the above purposes.
 An arrangement between the buyer and the seller to pay the purchase consideration of the
property in instalment shall be regarded as capital borrowed for the purpose of acquiring the
house, and interest thereon is allowable as deduction u/s 24.

2. Deduction u/s 24 in case of self-occupied property:

In the case of a house property, the annual value of which has been taken as nil under the provision of
Section 23(2)(a) or Section 23(2)(b), only interest on borrowed capital can be allowed as deduction
under the provision of Section 24(b).

The deduction of interest on borrowed capital is, however, subject to the following conditions:
(a) The amount of interest will include interest for the current previous year as well as 1/5th of the
accumulated interest for the pre-construction period.
(b) The maximum amount of interest which will be allowed as deduction is as follows:

Date of Purpose *Maximum amount

borrowing allowed
Before Any purpose related to the house, i.e., acquisition, construction, ` 30,000
1.4.1999 repairs, renewal, etc.
On or after  Repairs, renewal or re-construction ` 30,000
1.4.1999  Acquisition or construction ` 2,00,000
 Acquisition or construction but completion of acquisition or ` 30,000
construction takes more than 5 years from the end of the
financial year in which the fund is borrowed

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8.11 RECOVERY OF ARREARS OF RENT AND UNREALIZED RENT [SECTION 25A]

With effect from the assessment year 2017-2018, Sections 25A/ 25AA and 25B relating to unrealized rent
and arrears of rent respectively, have been merged into a new section 25A to provide as under:
(i) If any amount of arrears of rent received from a tenant or the unrealised rent is realized
subsequently from a tenant, it shall be deemed to be the income from house property in respect of
the financial year in which such rent is received or realised.
(ii) The amount so realized or recovered shall be included in the total income of the assessee under
the head ―Income from house property‖.
(iii) A sum equal to thirty per cent of the arrears of rent or the unrealised rent as mentioned above shall
be allowed as deduction.

8.12 TREATMENT OF LOSS

A loss under the head Income from house property may arise under the following cases:
(i) Owing to the deduction of interest a loss up to ` 2,00,000 may arise in respect of a self-occupied
property.
(ii) In the case of let out property or deemed to be let out property, it can show a loss if : (i) the
municipal tax paid during the year is more than the gross annual value and/or (ii) if the total
deductions under section 24 exceeds the net annual value.

Such loss may be set off, first, from the income against other houses and then against income under
other heads (not against lottery income) in the same previous year. The remaining loss not so set off,
shall be carried forward up to a maximum of eight assessment year and set off against Income from
house property only.

Example 1: A is the owner of a house in Chennai. He lets out this house to a tenant for ` 4,000 p.m. The
municipal value of the house is ` 40,000 p.a. During the year, he pays municipal tax of ` 4,000.
Find out the annual value of the house for the assessment year 2017-2018.

Answer:
Computation of annual value of the let out house property of A for the assessment year 2017-18
relating to the previous year 2016-2017.
` `
Gross annual value being the higher of :
(a) Gross municipal value [being reasonable expected rent u/s 23(l)(a)] 40,000
(b) Rent received [u/s 23(l)(b)] 48,000 48,000
Gross annual value [alternative (b) being higher] 4,000
Less : Municipal tax paid by the owner
Net Annual Value 44,000

Example 2: B is the owner of a house in Kolkata. He lets out the house to his cousin for ` 4,000 p.m.
similar house in the locality can fetch a rent of ` 5,000 p.m. and the net municipal value of the house is
` 36,000 p.a. Municipal tax paid during the year was 10%.
Compute the annual value of the house property for the assessment year 2017-2018.

Answer:
Computation of annual value of the let out house property of A for the assessment year 2017-18
relating to the previous year 2016-2017.

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 ` ` `
Step 1: Reasonable expected rent u/s 23(l)(a) being higher of the
following:
(a) Gross Municipal value [36,000 x 100/90] 40,000 60,000
(b) Fair Rent [` 5,000 X 12] 60,000 48,000 60,000
Step 2: Rent received [` 4,000 x 12] 3,600
Gross annual value [being higher of step 1 and 2]
Less : Municipal tax paid by the owner (Note 1)
Net Annual Value 56,400

Note: When net municipal value is given, municipal tax is to be computed on net municipal value.

Example 3: X is the owner of a house in Mumbai. The particulars regarding the house is as follows:
(a) Gross municipal value ` 3,00,000 p.a.
(b) Fair rent ` 3,50,000 p.a.
(c) Standard rent ` 2,80,000 p.a.
(d) Rent actually received ` 2,40,000.
(e)Municipal tax paid @ 10%.
Compute the annual value of the house for the assessment year 2016-2017.

Answer:
Computation of annual value of annual value for the assessment year 2017-18 relating to the previous
year 2016-17

` `
Step 1. Reasonable expected rent u/s 23(l)(a) being the higher of Municipal
value and Fair rent, but subject to the maximum of Standard rent 2,80,000
Step 2. Actual rent received 2,40,000 2,80,000
Gross annual value being higher of the amount 27,000
in Step 1 and Step 2
2,53,000
Less : Municipal tax (Note 1)
Net Annual Value

In Delhi, Mumbai, Chennai and Kolkata, municipal authorities usually allow 10% rebate on the gross
municipal value. Municipal tax therefore has to be charged on the net municipal value as under:
` 3,00,000 x 90/100 x 10/100 = ` 27,000

Alternatively,
Net Municipal Value = ` 3,00,000 x 90/100 = ` 2,70,000
Municipal tax= ` 2,70,000 x 10/100 = ` 27,000

Example 4: A is the owner of 5 houses in different parts of India. From the following particulars compute
the gross annual value of the houses:
House I House II House III House IV House V
` ` ` ` `
Municipal value (gross) 20,000 36,000 15,000 45,000 32,000
Rent received 24,000 27,000 18,000 48,000 40,000
Fair rent 23,000 30,000 16,000 42,000 44,000
Standard rent 22,000 33,000 20,000 N/A N/A

Answer:
Computation of Gross annual value for the assessment year

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 Hi Hii Hiii Hiv Hv
Step I: ` ` ` ` `
Reasonable expected rent u/s 23(1)(a): Higher of
Gross municipal value and Fair rent, but subject
to the maximum of Standard rent 22,000 33,000 16,000 45,000 44,000
Step II:
Rent actually received:
Gross annual value being the higher of Step I 24,000 27,000 18,000 48,000 40,000
and Step II
24,000 33,000 18,000 48,000 44,000

Example 5:
K is the owner of a house in Hyderabad. The house is let out to a tenant for ` 1,20,000 p.a. The other
particulars regarding the house are as follows:
(a) Municipal value ` 80,000 p.a.
(b) Fair rent ` 1,20,000 p.a.
(c) Municipal tax 10%
(d) The tenant has left the house without paying the rent for February and March, 2017.
Compute annual value of the house property for the assessment year 2017-2018.

Answer:
Computation of annual value of let out house property for the assessment year 2017-2018 relating to
the previous year 2016-2017.

` `
Step 1. Reasonable expected rent being higher of Gross municipal value and 1,20,000
Fair rent
Step 2. Rent received excluding unrealized rent (` 1,20,000 x 10/12) Gross 1,00,000 1,20,000
annual value (since Step 1 is higher than Step 2)
Less: Municipal tax [10% of ` 80,000] 8,000
Net Annual Value 1,12,000

Example 6: A has a house in Bhubaneshwar, which is let out throughout the previous year for `1,60,000
p.a. The particulars regarding the house are as follows:
(a) Gross municipal value `1,00,000 p.a.
(b) Fair rent `1,10,000 p.a.
(c) Standard rent under the Rent Control Act, `1,20,000
(d) Total municipal tax during the year was `16,000, of which `16,000 was paid by the tenant and the
balance was paid by A.
(e) Two months‘ rent for the previous year could not be realised from the tenant. The tenant is
occupying another house of Shri Prasad for which he is paying the rent regularly. Shri Prasad has
not taken any legal steps against the tenant so far.
Compute the annual value of the house property for the assessment year 2017-2018.

Answer:
Computation of annual value of let out house property of Shri B. Prasad, a resident individual, for the
assessment year 2017-2018 relating to the previous year 2016-2017

` `
Step 1. Reasonable expected rent being higher of Gross municipal value and 1,10,000
Fair rent (Not 1)
Step 2. Rent received (Note 2) 1,60,000

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 Gross annual value (since Step 1 is higher than Step 2) 1,60,000
Less: Municipal tax paid by the owner 10,000
Net Annual Value 1,50,000

Note 1: Since Standard rent is higher than municipal value or fair rent, it has been ignored. In case
Standard rent is lower than municipal value or fair rent, it is to be considered.

Note 2: Since A does not fulfill the conditions laid down under Rule 4, unrealised rent cannot be
deducted from rent receivable.

Example 7: X is the owner of three houses in New Delhi, which are all let out and covered by the Rent
Control Act. From the following particulars find out the annual value of the properties:
H1 H2 H3
Municipal value 30,000 26,000 3,000
Annual rent 4,000 36,000 30,000
Fair rent 3,000 2, 000 30,000
Standard rent 30,000 35,000 36,000 2,500
Unrealized rent 7,000 9,000 3months 15%
Vacancy period 1 month 10% 2months 10%
Municipal tax paid

Compute annual value of the properties for the assessment year 2017-2018.

Answer:
Computation of annual values of let out house properties of X for the assessment year 2017-2018
relating to the previous year 2016-2017
H1 H2 H3
Step 1. Reasonable expected rent(Higher of Gross municipal value and 30,000 28,000 35,000
Fair rent, but subject to a maximum of Standard rent)
Step 2. Annual rent excluding unrealized rent 35,000 27,000 27,500
Step 3. Higher of Step 1 and Step 2 35,000 28,000 35,000
Step 4. Step 3 minus rent for vacancy period (Note 1) Gross annual value 31,500 22,000 27,500
as in Step 4 31,500 22,000 27,500
Less: Municipal tax paid (Note 2) 2,700 2,340 4,725
Net Annual Value 28,800 19,660 22,775

Notes:
1. Step 3 minus rent for the vacancy period:
House 1: ` 35,000 – ` 42,000 x 1/12 = ` 31,500
House 2: ` 28,000 – ` 36,000 x 2/12 = ` 22,000
House 3: ` 35,000 – ` 30,000 x 3/12 = ` 27,500
2. Municipal tax: Since the properties are situated in Kolkata, municipal taxes have been calculated
on the ratable values as follows:
House 1: ` 30,000 X 90/100 x 10/100 = ` 2,700
House 2: ` 26,000 X 9/100 x 10/100 = ` 2,340
House 3: ` 35,000 X 90/100 x 15/100 = 4,725

Self-occupied house property let out for part of the year:

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Example 8:
S has a house property in Coimbatore which he uses for his own residence. But during the previous year
he was transferred to Chennai and for that reason he let out the house from 1st July, 2016 to a tenant
for ` 16,000 p.m.
The other particulars of the house are as follows :
Municipal value ` 80,000
Fair Rent ` 1,20,000
Standard rent under the Rent Control Act ` 1,00,000
During the year S pays ` 8,000 as municipal tax.
Compute annual value of the house for the assessment year 2017-2018.

Answer:
Computation of annual value of house property of S, for the assessment year
2017-2018 relating to the previous year 2016-2017
` `
Step 1. Reasonable expected rent being higher of the
following but not exceeding Standard rent: `
(a) Municipal value 80,000
(b) Fair rent 1,20,000
(c) Standard rent 1,00,000 1,00,000
Step 2. Rent received (` 16,000 x 9) 1,44,000
Gross annual value (being higher of Step 1 and Step 2) 1,44,000
Less: Municipal tax paid 8,000
Net Annual Value 1,36,000

Self-occupied property remained vacant for part of the year

Example 9: C is the owner of a house in North Delhi. He uses the house throughout the previous year for
his own residence. The gross municipal value of the house is ` 60,000 and C pays ` 5,000 as municipal
tax during the previous year. Compute annual value of the house property for the assessment year
2017-2018.

Answer:
Computation of annual value of self-occupied residential house of C for the assessment year 2017-2018
relating to the previous year 2016-2017
` `
u/s 23(2)(a) the annual value of one self-occupied residential house is nil. Nil
Less : Municipal tax Nil
Net Annual Value Nil

More than one self-occupied property

Example 10:
A is the owner of two houses. He uses both the houses for his residential purposes. The particulars
regarding the houses are as follows:
H1 H2
` `
Municipal value 80,000 1,20,000
Fair rent 90,000 1,40,000
Municipal tax paid 8,000 12,000
Compute annual value of the houses for the assessment year 2017-18.

DIRECT TAXATION 86
Answer:
Computation of annual value of self-occupied residential house of A, for the assessment year 2017-2018
relating to the previous year 2016-2017
H1 Self-occupied H2: let out
Option A:
Gross annual value (For the let out house higher of Nil 1,40,000
municipal value and fair rent )
Less: Municipal tax Nil 12,000
Net Annual Value Nil 1,28,000
Option B: H1 let out H2 Self-occupied
Gross annual value (For the let out house higher of
municipal value and fair rent) 90,000 Nil
Less: Municipal tax paid 8,000 Nil
Net Annual Value 82,000 Nil

Net Annual Value:

Option A: ` Nil + ` 1,28,000 = ` 1,28,000
Option B: ` 82,000 + Nil = ` 82,000.
Since option B results into a lower net annual, house 1 should be treated as Let out and House 2 self-
occupied.

Example 11: B owns a house property which is let-out for ` 6,500 per month. The fair rent of the property
is ` 90,000. Municipal taxes paid during the year for each half-year is ` 3,200. The tenant has spent `
10,000 towards repairs of the property during the year. Compute the income from the house property
for the assessment year 2017-18. [CMA- Inter, Dec. 2008]

Answer:
Computation of annual value of self-occupied residential house of B, for the assessment year 2017-2018
relating to the previous year 2016-2017

Gross annual value being higher of :

(a) Fair rent 90,000
(b) Rent received [` 6,500 x 12] 78,000 90,000
Less: Municipal tax paid [` 3,200 x2] 6,400
Net Annual Value 83,600

Example 12: X and Y are co-owners of two houses with equal share of both the houses. While the first
house is used by them for their residence, the second house is let to a tenant at a monthly rent of `
2,500. The other relevant particulars of the houses for the year 2016-17 are as follows:
First house Second house
Construction completed on 30.06.2005 31.03.2007
Municipal Tax @ 10% ` 2,000 ` 2,500
Insurance Premium ` 2,500 ` 2,500
Interest on loan ` 10,000 ` 9,000
Compute income from house property of X and Y for the relevant assessment year.
[CMA-Inter- Dec. 2009 (adapted)]

Answer:
Computation of annual value of house properties of A and B for the assessment year 2017-2018 relating
to the previous year 2016-2017

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 First house (Self-occupied): Nil
Gross annual value Nil
Less: Municipal tax paid
Net Annual Value Nil
Less: Deduction u/s 24(b) for interest on loan 10,000 (-) 10,000
Income from self-occupied house
Second house (let out):
Gross annual value being higher of:
(a) Municipal value [ ` 2,500 x 100/10] 25,000
(b) Rent received [` 2,500 x 12] 30,000 30,000
Less: Municipal tax paid 2,500
Net Annual Value 27,500
Less: Deduction u/s 24: 8,250 10,250
(a) Standard deduction u/s 24(a)@ 30% 9,000 17,250
(b) Interest on loan u/s 24(b):
Income from let out property 250
Income from house property

Note: Under section 26, when the house property is owned by co-owners and the share of each of the
owners is ascertainable, the shares of such income shall be assessed at the hands of the respective
owners. Accordingly, the share of X and Y into the income from the property shall be ` 125 each.

Example 13: (a) K, owner of a property, gives it on a rent of ` 11,000 per month to a bank. Municipal
value of the property is ` 1,30,000, fair rent is ` 1,40,000 and standard rent is ` 1,34,000. Municipal tax
paid by K is ` 26,000 on March 3, 2016 and ` 30,000 on May 10, 2016. On May 1, 2016, the rent is
increased from ` 11,000 per month to ` 15,000 per month with retrospective effect from April 1, 2015.
Arrears of increased rent are paid on May 1, 2016. Find out the income chargeable to tax for the
assessment year 2017-18. [CMA- Inter, Dec. 2007 (adapted)].

Answer:
Computation of annual value of self-occupied residential house of K, for the assessment year 2017-2018
relating to the previous year 2016-2017
` `
Gross annual value (being the higher of Municipal value and Fair
rent, but subject to the maximum of Standard rent 1,34,000
Rent received [ ` 15,000 x 12] 180,000 1,80,000
Less: Municipal tax actually paid during the year (Note) 30,000
Net Annual Value (NAV) 1,50,000
Less: Standard deduction u/s 24(a) @ 30 of NAV 45,000 1,05,000
Add: Arrears of rent for the financial year 2015-16 received during 48,000
the year [ ` 4,000 x 12]
Less: Standard deduction u/s 25A[ w.e.f. AY 2017-18] @30% 14,400 33,600
Income from house property 1,38,600

Notes: (1) Municipal tax is allowed to be deducted if it is actually paid during the year. Hence ` 26,000
paid on 3March shall be allowed as deduction during the previous year 2015-16.

(2) With effect from AY 2017-18, section 25A is inserted by the Finance Act 2016 to provide that arrears
of rent or unrealized rent as recovered subsequently shall be treated as income of the financial year
during which it is received. A deduction @30% of the amount received shall also be allowed.

Example 14: R owns a house in Hyderabad. Its Municipal valuation is ` 24,000. He incurred the following
expenditure in respect of the house property:

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(i) Municipal Tax at 20%;
(ii) Fire insurance premium ` 2,000; and
(iii) Land revenue ` 2,400.

He had taken bank loan of ` 25,000 at 16% per annum on April 1, 2014; the whole amount is still unpaid.
The house was completed on April 1, 2016. Find the income from house property for the assessment
year 2017-18 for the following situations:
(i) If the assessee uses house for self-occupation throughout the previous year, and
(ii) If the house is let-out for residential purpose on monthly rent of ` 2,500 from April 1, 2016 to
December 31, 2016 and self-occupied for the remaining period. [CMA-Inter, Dec. 2010]

Answer:
Computation of Income from house property for the assessment year 2017-2018 relating to the previous
year 2016-2017
` `
Situation I: The house is self-occupied throughout the year:
Gross annual value Nil
Less: Municipal tax Nil
Net Annual Value Nil
Less: Deduction u/s 24(b) for interest on loan (See note) 5,600
Income from house property (-) 5,600
Situation II: The house is let out for part of the year:
Gross annual value u/s 23(3) being the higher of:
A. Reasonable expected rent u/ 23(1), which is higher of:
(a) Municipal value ` 24,000
(b) Annual rent [ ` 2,500 x 12] ` 30,000 30,000
B. Rent received [` 2,500 x 9] 22,500
Gross annual value [(A)being higher] 30,000
Less: Municipal tax paid @20% 4,800
Net Annual Value
Less: Deduction u/s 24: 25,200
(a) Standard deduction u/s 24(a) @ 30% of Net annual value 7,560
(b) Interest on loan 5,600 13,160
Income from house property 12,040

Note: Interest on borrowed capital:

(a) Interest during the pre-construction period: [ 1.4.2014 to 31.3.2016] @ 16% = ` 8,000
1/5th of the interest for the pre-construction period [ ` 8,000 x 1/5] = ` 1,600
Add: Interest for the current period = ` 4,000
Total interest allowable during the financial year 2016-17 ` 5,600

Example15: V commenced construction of house meant for residential purpose on 01.11.2014. She
raised a loan of ` 10 lakhs @ 11% per annum from a bank. Finding that there was over run in the cost of
construction, he raised a further loan of ` 5 lakhs from her friend at 15% rate of interest per annum on
1.10.2016. The construction was completed by February, 2017.

Compute the amount of interest allowable exemption under section 24 of the income-tax Act, 1961 in
the following cases:
(i) The house was meant for self-occupation from 01.03.2017
(ii) The house was to be let out from 01.03.2017

Is there any deduction available u/s 80C towards principal repayment in respect of above loans?
[CMA-Inter - June 2011]

Computation of interest allowable u/s 24

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 `
(a) Preconstruction period: From 1.11.2014 to 31.3.2016 17 months
(b) Amount of loan eligible for deduction of interest: 10 lakhs
Total interest for 17 months ` 1,55,833
1/5th of the interest for pre-construction period = ` 31,167
(I) Interest allowable u/s 24(b) when the house is self-occupied:
i. Interest on loan from Bank for the current financial year
ii. Interest on loan from friend [ 1.10.2016 – 31.3.2017] ` 1,10,000
iii. 1/5th of interest for pre-construction period ` 37,500
Total ` 31,167 1,78,667
(I) Interest allowable u/s 24(b) when the house is let out: 1,78,667

Note: In the case of self-occupied property, maximum interest that can be allowed is ` 2,00,000

Example 15: N completed construction of a residential house on 01.04.2015.

Interest paid on loans borrowed for the purpose of construction during the 30 months prior to
completion was ` 60,000
The house was let-out on a monthly rent of ` 18,000.
Annual corporation tax paid is ` 35,000
Interest paid during the year is ` 25,000
Amount spent on repairs is ` 6,000.
Fire insurance premium paid ` 3,000 per annum
The property was vacant for 4 months.
Annual letting value as per municipal records is ` 1,50,000.
He had also received arrears of rent of ` 36,000 during the year, which had not been charged to tax in
the earlier year.
Compute the income under the head ―Income form house Property‖ for the assessment year 2017-18.
[CMA-Inter, Dec. 2012]

Answer:
Computation of Income from house property of N for the assessment year 2017-18 relating to the
previous year 2016-17
` `
Gross annual value :
Step 1: Reasonable expected rent (being higher of municipal value and fair
rent) 1,50,000
Step 2: Annual rent [ ` 18,000 x 12] 2,16,000
Step 3: Higher of step 1 and step 2: 2,16,000
Step 4: Deduct loss for vacancy [ ` 18,000 x4] 72,000
Gross annual value 1,44,000
Less: Municipal tax 35,000
Net Annual Value 1,09,000
Less: Deduction u/s 24:
(a)Standard deduction u/s 24(a) @30% of NAV 32,700 (-) 69,700
(b) Interest on borrowed capital (See Note) 37,000
Arrears of rent u/s 25A 36,000 25,200
Less: Standard deduction @30% 10,800
Income from house property 64,500

Note: Interest on borrowed capital: Current interest + 1//5th of interest for pre-construction period [`
25,000 + 1/5th of ` 60,000 ] = ` 37,000.

Example 16: S constructed his house on a plot of land acquired by him in Kolkata. The house has two
floors of equal size. He started construction of the house on 1st April, 2015 and completed construction

DIRECT TAXATION 90
on 30th June, 2016. He occupied the ground floor on 1 st July, 2016 and let out the first floor at a rent of `
20,000 per month on the same date. However, the tenant vacated the first floor on 31st January, 2017
and S occupied the entire house from 1st February, 2017 to 31st march, 2017.

Other information
Fair rent of each floor ` 1,20,000 per annum
Municipal value of each floor ` 80,000 per annum
Municipal tax paid ` 10,000
Repair expenses ` 5,000
S obtained a housing loan of ` 15 lacs at interest of 10% per annum on 1 st July 2015.He did not repay
any part of the loan till 31st March, 2017 [CMA-Inter , June 2013]

Answer:
Computation of Income from house property of S for the assessment year 2017-18 relating to the
previous year 2016-17
` `
Ground floor (Self-occupied):
Gross Annual Value Nil
Less: Municipal tax Nil
Net Annual Value Nil
Less: Deduction u/s 24(b) for interest on borrowed capital 86,250 (-)86,250
First floor (let out):
Gross annual value for 9 months:
Step 1: Reasonable expected rent being higher of : 60,000
(a) Municipal value for 9 months: [80,000 x 9/12] 90,000 90,000
(b) Fair rent for 9 months [ ` 1,20,000 x 9/12] 1,80,00
Step 2: Annual rent [20,000 x 9] 40,000 1,40,000
Less: Loss for vacancy [2 months x 20,000] 1,40,000
Gross annual value being higher of Step 1 and Step 2 5,000
Less : Municipal tax paid 1,35,000
Net Annul Value 40,500
Less: Deduction u/s 24: 86,250 1,26,750
(a) Standard deduction u/s 24(a)
(b) Interest on borrowed capital u/s 24(b) 8,250
Income from house property (loss) (-) 78,000

Note: Interest on borrowed capital:

(a) Interest for pre-construction period [1.7.2015 to 31.3.16 = 9months @10%] = 1,12,500
1/5th of the interest for pre-construction period ` 22,500
Add: Interest for the current year : ` 1,50,000
Total Interest allowable ` 1,72,500
Share of each floor (` 1,72,500/2) ` 86,250

Example 17: N owns two houses, both of which are occupied by him for residential purpose. The details
are given below:
House-I House-II
Fair rent ` 7,20,000 ` 6,30,000
Municipal value ` 5,00,000 ` 5,00,000
Standard rent ` 6,00,000 6,00,000
Date of completion 01.01.2002 01.07.2008
Municipal tax paid 10% 12%
Date of loan 01.07.1998 01.05.2005
Interest on loan for the financial year 2016-17 1,10,000 1,70,000

Compute his income from house property and advise which house should be opted by him as self-
occupied. [CMA-Inter, June 2014]

DIRECT TAXATION 91
Answer:
Under section 23(4), where both the houses are self-occupied, then, at the option of the assessee, any
one of the houses shall be treated as self-occupied and the other house/houses shall be deemed to be
let out. For the purpose of tax planning, the assessee should select the house as self-occupied in such a
way that it minimizes the tax burden of the assessee.
H1 Self-occupied H2: let out
Option A:
Gross annual value (For the let out house higher of municipal Nil 6,00,000
value and fair rent but not exceeding Standard rent) Nil 60,000
Less: Municipal tax
Net Annual Value Nil 5,40,000
Less: Deduction u/s 24:
(a) Standard deduction @ 30% Nil (-)1,62,000
(b) Interest on borrowed capital (Note 1) (-) 30,000 (-) 1,70,000
Income from house property (-) 30,000 (+)208,000
Option B:
Gross annual value (For the let out house higher of municipal H1 let out H2 Self-
value and fair rent but not exceeding Standard rent) occupied
Less: Municipal tax paid 6,00,000 Nil
Net Annual Value 50,000 Nil
Less: Deduction u/s 24:
(a) Standard deduction @ 30% 5,50,000 Nil
(b) Interest on borrowed capital (-) 1,65,000 Nil
Income from house property (-) 1,10,000 (-) 1,70,000
2,75,000 (-) 1,70,000

Income from house property:

Option A: [(-) 30,000 + 2,08,000] 1,78,000
Option B: [(+) 2,75,000 (-) 1,70,000] 1,05,000

Since option B results in a lower income from house property, it would also result in lower tax burden.
The assessee should therefore treat the first house as let out and the second house as self-occupied.

Objective questions:
1. Annual value of the house property located outside India is –
a) Taxable in hands of all assessee
b) Taxable in hands of non-resident assessee
c) Exempted from tax in India
d) Taxable in hands of resident and ordinarily resident assessee
Ans. (d) : Taxable in hands of resident and ordinarily resident assessee

2. Deduction u/s 24(a) is:

a) 30% of net annual value of the house property
b) 30% of gross annual value of house property
c) 30% of actual rent received
d) Actual interest incurred during the previous year
Ans. (a):30% of net annual value of the house property

3. Interest relating to pre-construction period is allowable-

a) In 5 equal installments from the year in which it was incurred
b) In the year in which it was incurred
c) In the year in which house property was constructed
d) In 5 equal installments from the year in which property is constructed
Ans. (d) In 5 equal installments from the year in which property is constructed

DIRECT TAXATION 92
4. For the purpose of claiming higher deduction u/s 24(b) while computing income of a self-occupied
property assessee is required to take—
a) Loan on or before 01-04-1999
b) Loan on or after 01-04-1999
c) Loan after 01-04-1999
d) Loan on 01-04-1999
e) Ans. (b)Loan on or after 01-04-1999

5. Deduction available under section 24(a) is ______________ of NAV

a) 30%
b) 50%
c) 15%
d) 70%
Ans. (a) 30%

(6) Unrealised rent of ` 50,000 was received in June, 2011. The property was sold before April,2011. How
much of unrealized rent is taxable?
(a) ` 50,000
(b) ` 35,000
(c) ` 30,000
(d) Not taxable
Ans. (b) ` 35,000

(7) Quantum of deduction by way of interest on moneys borrowed for construction of self-occupied
house property is
(a) ` 1,50,000
(b) ` 30,000
(c) `2,00,000
(d) ` 1,00,000
Ans. (c) ` 2,00,000

DIRECT TAXATION 93