House Property Income is one of the most discussed and debated topics on this blog. There are a lot of misconceptions or myths related to House Property Income. In this ball game, most of the times the tax payer end up paying a higher tax. Therefore, i thought of sharing a post to clarify the most common doubts and misconceptions among the taxpayers. As we are moving towards the end of financial year, i receive maximum queries on tax related topics in last quarter of FY. Another peak season is near the last date of filing of income tax return. The income from house property has a major impact on TDS for salaried employees. Therefore, any mistake in Income Tax investment proof submission should be avoided. Before we proceed i would request readers to go through following two posts related to House Property Income
Also read:
How to calculate Income from House Property?
How to save tax on Rental Income?
House Property Income – 10 Facts You Are Not Aware of
1. House Property Occupied for Business or Profession:
In metro and mini metros, there is a trend to buy residential property and use it for business and profession. According to one of the recent studies, in Mumbai 1/3rd residential properties are used for business and profession. It is but obvious because of skyrocket commercial property rates. I observed a similar trend in other metros and state capitals. It is perfectly legal if the taxpayer installs commercial electricity/water meter and pay commercial property tax.
In such scenarios, the annual value of the property is considered as NIL. Basically, the tax is imposed on the annual value of the property not on house property as such. Therefore, the taxpayer misleads by the income tax experts to blindly consider house property income in case of residential property. It is not true always. In case, the annual value is NIL then tax on house property income is technically Zero. The reason being, if you are using house property for business or profession then the profits from your business will be taxed. In case, you are using house property for business or profession and paying tax on housing property income along with profit from the business then it is double taxation. Indian laws prohibit double taxation (not always).
To summarize, if you are using a house property for business or profession then the house property income is not chargeable to tax under income from house property.
2. Income from Land:
The biggest confusion in on income from land. Recently i received a query from Nashik. The individual had vacant plot or land. He rented the same for parking. Now how to report income from vacant land/plot. Whether he should report house property income or income from other sources. Prima facie from a tax perspective it is beneficial to report as house property income because of standard deduction especially for land attached to the building. To answer the query, it is important to understand the type of land.
In layman terms, there are 2 types of land (a) Land attached to Building or (b) Independent or Standalone plot/land. In the case of independent plot/land, there is NO confusion as the income will be treated as income from other sources. In Income Tax Act there is a term “Lands Appurtenant thereto”. In layman terms, it means land attached to the building. How to conclude the same. If the land is undivided part of the building and cannot be used for any other purpose then it is Lands Appurtenant thereto. Here the building can be residential or commercial like flat, house, office, factory, godown, warehouse etc. Again there is a catch that “building” should not be used for business or profession by the owner as i explained in point no 1. In this case, income from the building will be treated as “Income from house property”. If it is let out then it is immaterial for what purpose the tenant is using the building. In short, if the godown is rented and the tenant is using it for commercial purpose, the income from godown will be house property income. Lastly, the tenant can be individual, company, firm etc.
3. Definition of House Property Income:
The income is classified as Income from House Property if and only if it fulfills ALL of the following three conditions
(a) Property can be Building or Lands Appurtenant thereto (as explained earlier)
(b) Taxpayer should be owner of the property
(c) The property is not used by owner for business or profession
Any other permutation or combination does not qualify house property income.
4. Ownership:
There is a lot of dispute on the definition of “Property Owner”. There are lot of scenarios but key ones are following
(a) If you have taken the property on a long-term lease of more than 12 months then legally you are the owner of the property. In the example mentioned above, if the godown is put on lease for more than 12 months then the lessee is deemed owner of the property. Income will be taxed in his hand if godown is not used for business or profession.
(b) Property in the name of Wife or Minor Child without adequate consideration. This is similar to clubbing of income provisions.
(c) Allotment under any Govt Housing Scheme like co-operative society etc.
(d) In the case of co-ownership, house property income will be assessed in the proportion of ownership.
5. Waiver of tax on house property income if the property is not in city of employment/business:
Under a very specific case, a taxpayer can declare annual value as NIL even if it is not self-occupied. Assuming, i stay in Bangalore and my property is in Mumbai. As a general thumb rule, income tax experts suggest that Mumbai property will be declared let out even if it is vacant. The house property income of Mumbai property at notional rent will be taxed. It is not correct. If the following conditions are fulfilled then i need not pay tax on Mumbai Property
(a) I own only One Property i.e. Mumbai Property. In the case of co-ownership in another property in Delhi, it will be treated as two properties.
(b) The only reason why i am not able to occupy Mumbai property is employment or business.
(c) Mumbai Property is Vacant. Even if it is occupied by my parents, it will not be treated as vacant. So let out does not mean it is put on rent. In other words, if it is occupied but i am not getting rent then it means it is not vacant.
(d) I am staying on rent and not in owned property in Bangalore
(e) I am not deriving any kind of benefit from Mumbai property
6. Municipal taxes can be claimed on payment basis:
If i pay my property tax of last 4 years during the current financial year then i can claim entire amount during current FY. In short, municipal taxes can be claimed on payment basis even it is paid for the previous year.
7. Interest deduction is on “Accrual/Payable Basis” not on “Payment Basis” (Most Imp):
I can claim interest deduction even i have not paid a single penny during the financial year. Provided the interest is payable during FY. On the other hand, taxpayer claims interest deduction on payment basis. This is the biggest mistake of a taxpayer. They claim interest deduction on payment basis for house property income calculation. The reason for this anomaly is that EMI or Interest for March’15 is paid in April’15. If everything is constant then it does not make any difference. Assuming, i received disbursement of Rs 50L from the bank on 2nd Mar 2015. In this case, assuming interest is 40k for March’15. As i mentioned i will pay the interest for Mar’15 in April’15. Therefore, in case, the interest deduction on an accrual basis is 40k can be claimed in March for FY 2014-15 even though payment is made in FY 2015-16. This clause is also applicable for any delayed payment. For example, i paid EMI of Jan to Mar in April.
8. Let out property vacant for part of FY:
If the property is let out for 8 months and remains vacant for 4 months. In case if actual rent received is less than expected rent. The actual rent can be considered as gross annual value. The lower rental value is applicable only in case of vacancy of let out properties. If the property is vacant i.e. not let out then this clause is not applicable.
9. Rental Arrears:
A common problem in small towns and cities. Tenants don’t pay rent on time. For example, if my tenant paid rent from Dec’15 to Mar’16 in May’16. In this case, rent of Dec’15 to Mar’16 will be house property income for FY 2016-17, not the FY 15-16. In short, rental income is taxed on receipt basis. Assuming you sold property in April’16 or May’16 i.e. you are not an owner at the time of receipt of rent still it will be taxed in FY 2016-17.
10. A loss from one house property can be set off against income from another house property
Not many people are aware of this rule. Assuming i have 2 properties i.e. property A and property B. My salary income is 1.6L, Income from property A is 1L and loss from property B is 4L. In this case, loss of property B i.e. 4L can be set off against income of property A i.e. 1L. My net loss is 3L. It can be adjusted against salary income i.e. 1.6L. Even after that, my loss is 1.4L. I can carry forward this LOSS. It can be carried forward until 8 Assessment years and in future can be adjusted only against income from house property.
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I ,as a NRI , bought an under-construction property in resale on construction linked payment plan through bank loan in 2008 from a builder in Gurgaon . Till 2012 , bank paid the builder demands for me and after that i started to pay next demands i.e., 5 lakh in 2014 , 4 lakh in 2015 and around 10 lakh in Jan.,2016 to get possession of flat just 2 weeks before . . Is there any TDS thing i should have deducted ?
You have not mentioned basic consideration value of the property.
BSP was 45,00,000 that time in 2008 and not including other charges like EDC , Car Parking , etc.
Prima facie it seems that TDS is not applicable.
Thanks for your reply . As i understand from your reply that BSP of Rs. 45,00,000 of flat when i booked it as under-construction will be considered and the 10% increse in price or in original BSP due to area increase demand by builder now at possession time in 2016 is not considered towards the limit of Rs. 50,00,000 . Thus , no TDS thing and car parking, EDC , etc. are not needed to add to increase basic sale price , ………….am i right ?
It depends how builder is accounting the increase. You may clarify from builder.
Dear Nitin saab, We are an NRI couple and our under construction property will be handed over in end 2017. We have taken bank loans of course.We have no other taxable income in India now. So we need to worry about tax filings on this house only after taking over it from the builder ? Anything else we should be doing now except keeping all the relevant papers safe ?
You also need to check the taxation rules of the country in which you are residing,
Sir, You said rental arrears are taken on receipt basis, can you give any supporting case law….Section 22 charging section says Annual value to be taken as Rent & Section 23 defines Annual value, as rent received or receivable.
Rent receivable is explained in this case law:
CIT v. J.K. Investors (Bombay) Ltd. [2000] 112 Taxman 107 (Bom.)
Under section 23(1)(b), the word ‘receivable’ denotes payment of actual annual rent to the assessee. However, if in a given year a portion of the actual annual rent is in arrears, it would still come within section 23(1)(b) and it is for this reason that the word ‘receivable’ must be read in the context of the word ‘received’ in section 23(1)(b). In the light of the above interpretation, notional interest cannot form part of the actual rent as contemplated by section 23(1)(b).
My understanding is based on the income tax act. You may find judgement contradicting the income tax act but such judgement are case specific and cannot be taken as reference especially in tax related matters.
As far as the term receivable is concerned, as i understand it is applicable for cases wherein the property is leased for long term.