Income From House Property (Sections 22-27): Detailed Guide to Taxing Rental Income & Owned Houses in India 🏠💰

Owning a property, whether for renting out or self-occupation, has significant implications under the Income Tax Act, 1961. The rules for calculating and taxing income generated from or related to immovable property fall under the head “Income from House Property” 🏡, primarily governed by Sections 22 to 27 of the Act. Understanding the Income Tax on House Property is crucial for all property owners in India.

Understanding these sections is vital for property owners to correctly compute their income or loss from house property and determine their overall tax liability. This detailed guide will walk you through the charge, the calculation of Annual Value 📊, permitted deductions, and special cases under house property income tax rules.

Section 22: The Charge of Income from House Property 🔖

Section 22 is the charging section that brings income from house property into the tax net 💸. It specifies the fundamental condition for taxability under this head, establishing the base for taxing rental income.

The Rule: Income tax shall be leviable under the head “Income from house property” in respect of the Annual Value of a property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner.

Explanation of Key Terms:

• Annual Value: This is the potential rent-earning capacity of the property 🏠💰, not necessarily the actual rent received. It is the base figure on which tax is calculated under this head, and its determination is detailed in Section 23. The Annual Value calculation is the starting point for house property tax computation.
• Property consisting of any buildings or lands appurtenant thereto: This includes any type of building (residential house 🏠, office building 🏢, factory 🏭, shop 🏪, godown, etc.) and the land attached to it (like a compound, garden, or garage) which is necessary for the enjoyment of the building.
• Assessee is the Owner: The person who owns the property. The Act, however, has specific provisions (Section 27) for ‘deemed owners’ who are treated as owners for tax purposes even if they are not the legal owners. Understanding deemed ownership rules is important.
• Assessee: A person by whom any tax or any other sum of money is payable under the Act.

Conditions for Chargeability under Section 22:

For income to be taxed under this head, two conditions must be met:

• The property must consist of a building or land appurtenant to it.
• The assessee must be the owner (legal or deemed) of the property.

Note: Income from letting out vacant land (without any building) is not taxed under this head but is taxed under ‘Income from Other Sources’. Income from property used for the assessee’s own business or profession is also not taxed under this head; instead, it’s dealt with under ‘Profits and Gains of Business or Profession’. This distinction is vital for correct classification of income.

Section 23: Determining the Annual Value (AV) 🧮

Section 23 is arguably the most critical section under this head as it provides the rules for calculating the Annual Value 📊, which is the starting point for the tax computation. The method depends on whether the property is let out property (LOP), self-occupied property (SOP), or deemed to be let out.

For Let Out Property (LOP):

The Annual Value of a property that is let out is the higher of the following two:

• Expected Rent: The rent that the property is expected to fetch 🧐. This is calculated as the higher of:
  • Municipal Value (MV): Value determined by the municipal authorities for levying municipal taxes.
  • Fair Rent (FR): Rent that a similar property in the same or similar locality would fetch.
  • However, if the property is covered by the Rent Control Act, the Expected Rent cannot exceed the Standard Rent (SR) fixed under that Act.
  • Calculation: Expected Rent = Higher of MV or FR (but restricted to SR). Understanding Municipal Value vs Fair Rent and Standard Rent is key here.
• Actual Rent Received or Receivable: The rent actually collected or due for the previous year 📅.

Comparison Rules (Section 23(1)(a), (b), (c)):

• If the Actual Rent > Expected Rent: Annual Value = Actual Rent.
• If the Actual Rent < Expected Rent solely because the property was vacant for a part of the year: Annual Value = Actual Rent (if Actual Rent covers rent for the period the property was let out). If the Actual Rent is zero because the property was vacant for the entire year, the Annual Value is NIL. This is often referred to as the Vacancy Allowance rule under Income Tax on House Property.
• If the Actual Rent < Expected Rent for any other reason (e.g., let out at a lower rent): Annual Value = Expected Rent.

Example 1 (LOP – Calculation of Annual Value):

• Municipal Value (MV): ₹ 90,000
• Fair Rent (FR): ₹ 1,00,000
• Standard Rent (SR): ₹ 1,10,000
• Actual Rent Received: ₹ 1,20,000
• Expected Rent = Higher of MV/FR (₹ 1,00,000) but not exceeding SR (₹ 1,10,000) = ₹ 1,00,000.
• Actual Rent (₹ 1,20,000) > Expected Rent (₹ 1,00,000).
• Annual Value = ₹ 1,20,000

Example 2 (LOP – Vacancy Allowance):

• Same MV, FR, SR as above. Expected Rent = ₹ 1,00,000 (@ ₹ 8,333 per month).
• Property was vacant for 2 months 🗓️. Let out for 10 months at ₹ 8,500 per month.
• Actual Rent Received = ₹ 8,500 * 10 = ₹ 85,000.
• Actual Rent (₹ 85,000) < Expected Rent (₹ 1,00,000).
• Reason for difference: Vacancy for 2 months. Expected Rent for period property was let out (10 months) = ₹ 8,333 * 10 ≈ ₹ 83,333.
• Since Actual Rent (₹ 85,000) is more than or equal to the Expected Rent for the period let out (₹ 83,333), Annual Value = Actual Rent = ₹ 85,000.

For Self-Occupied Property (SOP):

• Section 23(2): If a property is used throughout the previous year for the assessee’s own residence 🏡, and is not actually let out during any part of the year, the Annual Value is NIL. This benefit is available for up to two self-occupied properties. Tax on self-occupied property with NIL AV is a key feature.
• Section 23(3): If a self-owned property could not be occupied by the owner due to their employment, business, or profession carried on at another place, and they reside at that other place in a property not owned by them, the Annual Value is still NIL, provided the property is not let out during the year.

Example (SOP):

• Mr. Patel owns one house and uses it for his own residence throughout the year.
• Annual Value = NIL (under Section 23(2)).

For Deemed to be Let Out Property:

• Section 23(4): If an assessee owns more than two properties that are used as self-occupied residences, they must choose any two properties to be treated as Self-Occupied Property (SOP) with NIL Annual Value.
• The remaining self-occupied properties are treated as ‘deemed to be let out’.
• For these deemed let-out properties, the Annual Value is computed as if they were let out, i.e., the Expected Rent is considered as the Annual Value (following the higher of MV/FR, restricted by SR rule). Understanding tax on deemed let out property is important for multiple property owners.

Example (Deemed LOP):

• Ms. Lee owns three houses and uses all of them for her own residence.
• She can declare two houses as SOP (AV=NIL).
• The third house is deemed to be let out. Its Annual Value will be calculated as the Expected Rent (e.g., ₹ 1,00,000 based on MV/FR/SR).
• Annual Value for the third house = ₹ 1,00,000. This is the figure used for tax on rental income calculation for this deemed property.

Section 24: Permitted Deductions from Annual Value ➖

Once the Annual Value is computed, certain deductions are allowed from it to arrive at the income chargeable under the head “Income from House Property”. These are crucial for reducing the taxable rental income.

• Net Annual Value (NAV): Annual Value minus Municipal Taxes Paid during the previous year. Only municipal taxes paid by the owner during the previous year are deductible. Taxes paid by the tenant or taxes outstanding are not deductible. Ensure you have proof of municipal taxes paid.

The following deductions are allowed from the Net Annual Value:

• Section 24(a): Standard Deduction:
  • A flat deduction of 30% of the Net Annual Value (NAV).
  • This deduction is allowed irrespective of the actual expenditure incurred by the owner on repairs, maintenance, collection of rent, etc. It’s a fixed percentage allowed for all let out property and deemed let out property.
  • For SOPs where AV is NIL, the NAV is also NIL, so the Standard Deduction is NIL. The Standard Deduction House Property rule is simple – 30% of NAV.
    
    
• Section 24(b): Deduction for Interest on Borrowed Capital:
  • Interest paid or payable on a loan taken for the purpose of acquiring, constructing, repairing, renewing, or reconstructing the property is deductible. This is the popular interest on housing loan deduction.
  • For Let Out Property (LOP) and Deemed to be Let Out Property: The entire interest paid or payable during the previous year is allowed as a deduction, with no upper limit.
  • For Self-Occupied Property (SOP): The deduction for interest is restricted.
    • The maximum deduction is ₹ 2,00,000 if the loan was taken on or after 1st April 1999, for acquisition or construction of the property, and the acquisition/construction is completed within 5 years from the end of the financial year in which the loan was taken. This limit on interest deduction SOP is very important.
    • The maximum deduction is ₹ 30,000 in all other cases (e.g., loan taken before 1st April 1999 for acquisition/construction, or loan taken for repair/renewal/reconstruction regardless of the date of loan).
    • This ₹ 2,00,000 or ₹ 30,000 limit applies to the aggregate interest deduction for all self-occupied properties claimed by the assessee in a year.
  • Pre-construction Period Interest: Interest payable for the period from the date of borrowing up to the end of the financial year immediately prior to the year of completion of construction/acquisition is called pre-construction interest. This total pre-construction interest is allowed as a deduction in 5 equal annual installments starting from the financial year in which the construction/acquisition is completed. This deduction is in addition to the interest for the current year, but subject to the overall limits for SOP (₹ 2 lakhs/₹ 30k). This allows claiming pre-construction interest deduction.

Impact of New Tax Regime (Section 115BAC) on Section 24 Deductions:

It is important to note that if an individual opts for the new tax regime (Section 115BAC), the deductions under Section 24 (a) Standard Deduction and Section 24(b) Interest on Borrowed Capital are generally NOT allowed for self-occupied property. For let-out or deemed let-out property, the interest deduction under Section 24(b) is still generally allowed, but the standard deduction under Section 24(a) remains disallowed. This is a major difference compared to the old tax regime. Taxpayers must evaluate which regime is beneficial based on their specific deductions, especially the interest paid on housing loans.

Proof of Interest Paid:

To claim deduction for interest on borrowed capital, especially for housing loans, the assessee must obtain an interest certificate from the lender specifying the interest due and paid during the previous year. For claiming the enhanced deduction of ₹ 2 lakhs for SOP, a certificate from the lender is mandatory stating that the loan was taken for acquisition or construction, and the construction was completed within the specified period.

Calculation of Income/Loss from House Property 🧮

The calculation flow is straightforward:

For Let Out Property (LOP) / Deemed Let Out Property:

• Annual Value (as per Sec 23)
• Less: Municipal Taxes Paid
• = Net Annual Value (NAV)
• Less: Standard Deduction @ 30% of NAV (Sec 24(a))
• Less: Interest on Borrowed Capital (Full amount) (Sec 24(b))
• = Income from House Property (Can be a Loss if deductions exceed NAV – Loss from House Property)

For Self-Occupied Property (SOP – up to two):

• Annual Value = NIL (Sec 23(2))
• Less: Municipal Taxes Paid = NIL (NAV remains NIL)
• = Net Annual Value (NAV) = NIL
• Less: Standard Deduction @ 30% of NAV = NIL
• Less: Interest on Borrowed Capital (Restricted to ₹ 2,00,000 or ₹ 30,000) (Sec 24(b))
• = Income from House Property (Will be NIL or a Loss, always non-positive – Loss from House Property)

Example Calculation (LOP Income):

• Annual Value (from Example 1 above) = ₹ 1,20,000
• Municipal Taxes Paid = ₹ 10,000
• NAV = ₹ 1,20,000 – ₹ 10,000 = ₹ 1,10,000
• Standard Deduction (30% of ₹ 1,10,000) = ₹ 33,000
• Interest on Loan (taken for construction, total interest for the year) = ₹ 70,000
• Income from HP = ₹ 1,10,000 – ₹ 33,000 – ₹ 70,000 = ₹ 7,000

Example Calculation (SOP Loss):

• Annual Value = NIL
• Municipal Taxes Paid = ₹ 5,000 (Not deductible as NAV is NIL)
• NAV = NIL
• Standard Deduction = NIL
• Interest on Loan (taken post-1999 for construction, completed in time) = ₹ 1,80,000
• Income from HP = NIL – ₹ 1,80,000 = – ₹ 1,80,000 (Loss from House Property)

Section 27: Deemed Owner 🤔

Section 27 expands the definition of ‘owner’ for the purpose of taxing house property income, ensuring that tax avoidance by transferring property without transferring full rights is prevented. A person is treated as the ‘deemed owner’ in the following cases:

• Transfer to Spouse/Minor Child: If an individual transfers a house property to their spouse (other than for adequate consideration) or to a minor child (other than a minor married daughter) without adequate consideration. The transferor is deemed owner. This prevents avoiding tax on rental income by transferring property to family members.
• Holder of Impartible Estate: The holder of an impartible estate (property that cannot be divided).
• Member of Co-operative Society/Company/Association: 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.
• Person with Power to Enjoy Property: A person who has acquired a right in the property (other than by way of lease) for a period not less than 12 years, or holds power of attorney from the owner, enabling them to enjoy the property. This covers situations where effective control and enjoyment are transferred.

Other Relevant Sections 📄

Briefly, some other sections provide specific rules under the head “Income from House Property”:

• Section 25: Deals with certain interest payable outside India that is not deductible unless tax has been paid/deducted at source in India.
• Sections 25A, 25AA, 25B: These sections deal with the taxability of Unrealised Rent and Arrears of Rent.
  • Unrealised Rent: Rent for the previous year which the owner could not recover. It is deducted from Actual Rent while computing Annual Value (under Section 23) subject to prescribed rules (Rule 4 of Income Tax Rules, 1962). When this unrealised rent is subsequently recovered, it is taxed under the head “Income from House Property” in the year of receipt, after allowing a Standard Deduction of 30% on the recovered amount (Section 25A).
  • Arrears of Rent: Rent due for a past period which has not been charged to tax earlier. When received, it is taxed under “Income from House Property” in the year of receipt, after allowing a Standard Deduction of 30% on the received amount (Section 25B).
• Section 26: Co-ownership: When property is owned by two or more persons (Joint Ownership), their respective shares in the income from that property are computed separately and taxed in their individual assessments. This is important for tax on jointly owned property. Note that the limit of ₹ 2 lakhs/₹ 30k for interest deduction on SOP applies to each co-owner individually in respect of their share of interest, provided the loan was taken jointly and they are co-owners of the property.

Treatment of Loss from House Property 📉🛡️

If the deductions (Standard Deduction + Interest) exceed the Net Annual Value, the result is a Loss from House Property.

• This loss can be set off against income from other heads (Salary, Business/Profession, Capital Gains, Other Sources) in the same assessment year, but the maximum amount of loss from house property that can be set off against other heads in a year is limited to ₹ 2,00,000.
• Any loss from house property that cannot be set off in the current year (either because there isn’t enough income under other heads, or because it exceeds the ₹ 2 lakh limit) can be carried forward for set-off against Income from House Property in the following 8 assessment years.

Conclusion ✅

Sections 22 to 27 provide a comprehensive framework for taxing income related to house property in India. Section 22 establishes the charge based on Annual Value. Section 23 details the crucial calculation of Annual Value for different property types (Let Out, Self-Occupied, Deemed Let Out). Section 24 lists the key deductions allowed (Standard Deduction and Interest on Borrowed Capital). Sections 25-27 cover special cases like unrealised rent, co-ownership, and deemed ownership.

Accurately computing income or loss under the head House Property requires careful application of these sections, particularly in determining the Annual Value and understanding the limits on interest deduction for self-occupied properties, and considering the implications of the new tax regime. Consulting a tax professional 🧑‍💼 is highly advisable to ensure correct computation and compliance, especially for complex scenarios, properties with loans, or when deciding between the old and new tax regimes. This ensures accurate tax implications of owning multiple properties and compliance with house property tax rules India.