Your guide to taxes

For the convenience of home owners, Bengal Ambuja would like to bring you
information on the latest tax provisions relating to house property.

Is income from house property taxable?

Yes. Income from different heads such as salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources are first determined and then aggregated as total income which is subject to tax at the specified rates.

Who is the owner?

It is the legal owner of the house property who is chargeable to tax in respect of property income. In the following cases as enumerated by Section 27 of the Income Tax Act 1961 space persons are deemed to be owners of the house property for the purpose of computing income from house property:

1. An individual, who transfers house property otherwise than for adequate consideration to his or her spouse
(not being a transfer in connection with an agreement to live apart) or to his minor child (not being a married daughter), is treated as deemed owner of the house property.

2. The holder of an impartible estate is treated as deemed owner of the house property.

3. 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 of persons, is treated
as deemed owner of such property.

4. A person who comes to have control over the property in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act or by virtue of such transactions as are referred to in Clause (f ) of Section 269UA

(i.e. taking a property on lease for not less than 12 years) is deemed as owner of such property.

How do you calculate income from house property?

The basis for calculation is the Annual Value which is the inherent capacity of the property to earn income. The legal owner of the house property is taxed on the income determined in terms of its Annual Value.

How is the Annual Value computed?

Annual value is the amount for which the property might reasonably be expected to be let out. Reasonable rent could be the actual rent paid by the tenant, or annual rateable value as fixed by the Municipality, or rent for similar property in the neighbourhood, etc. whichever is higher, subject to standard rent.

What is the Annual Value if the property is occupied by the owner?

When a house is self-occupied and no other benefit therefrom is derived by the owner, the Annual Value is taken as nil. However, where a person is in occupation of more than one house for his own residential purposes, only one house according to his option would be treated as self-occupied. All other houses shall be deemed to be let out and income thereon shall be taxable.

What is the Annual Value of one's own house as distinct from one's work place?

It is quite common for a person to own a house property, say in Kolkata, and work in another place where he stays in a rental accommodation. In such a case, the Annual Value of his own property will be treated as nil, provided that the house is not actually let out and no other benefit therefrom is derived by the owner.

What are the deductions allowed from the Annual Value?

Self occupied:
Where the house property is acquired or constructed after April 1, 1999 with borrowed capital and such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed, interest payable on loan taken for this purpose is allowable up to Rs 1,50,000 in a financial year.

Rented:
The following deductions are permitted:

1.  Municipal taxes paid:

2.  Standard deduction @ 30% of Net Annual Value
     (i.e. Annual Value minus municipal tax). (Allowed on notional basis, whether incurred or not).

3.  Interest: Where capital is borrowed, and the property in question is being acquired or constructed or repaired or reconstructed with such borrowed funds for purpose other than self occupation, interest payable is allowed in full. There is no cap on the quantum of deduction for interest as in the case of self occupied property as stated above.

Is interest attributable to the period prior to construction or acquisition allowed as a deduction?

Yes. It may so happen that money is borrowed earlier and acquisition or construction takes place in any subsequent year. In such cases, interest paid/payable before the final completion of construction or acquisition of the property will be aggregated and allowed in equal instalments over five successive financial years starting with the year in which the acquisition or construction is completed. This facility is however, not allowed for repairs, renewal or reconstruction of the subject property.  

Are there any other permissible deductions?

Yes. The following payments are further eligible for deduction from total taxable income under Section 80C, up to a maximum of Rs 1,00,000 per annum:

a) repayment of the principal amount borrowed by the assessee from:

1) The Central Government or any State Government, or

2) Any bank, or

3) The Life Insurance Corporation of India, or

4) The National Housing Bank, or

5) Any public company duly recognised by the concerned authorities carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, or

6) Any co-operative society, where such co-operative society is engaged in the business of financing the construction of houses, or

7) The assessee's employer where such employer is a public company or public sector company, or a university established by law or a college affiliated to such university or local authority or co-operative society.

b) stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee.

Can there be any loss under the head income from house property?

Yes. In respect of self occupied property as the Annual Value is taken as nil, deduction allowed on interest on borrowed capital up to a maximum of Rs 1,50,000 will be the loss under the head income from house property. In respect of let out property there are no restrictions on deducting the full interest payable on borrowed capital and so there can be loss under this head if net income from house property before adjusting interest is lower than interest payable on loan, taken in respect of such house property. Further, loss from one house property can be set-off against income from any other house property.

How is the loss under the head income from house property treated?

This loss can further be set off against income under any other head such as salaries, etc. in the same year. Further, where this loss cannot be fully adjusted against other heads of income in the same year, the balance loss can be carried forward and set-off in subsequent years, subject to a limit of 8 years. However such loss can be set-off only against income from house property.

What are the tax saving provisions relating to capital gains arising on transfer of a residential house?

Capital gain arising from the transfer of a house property is exempt from tax provided the following conditions are satisfied:

a.  The house property is a residential house and is transferred by an individual or a Hindu undivided family.

b.  The house property whether self-occupied or let-out is a long-term capital asset (i.e. it must be held for a period of more than 36 months before sale or transfer).

c.  The assessee has purchased a residential house within one year before or two years after the transfer or has completed construction of a residential house property within three years from date of transfer.

d.  If the investment is not made before the due date for furnishing the return of income of the relevant year, then the unutilised amount of capital gain must be deposited in a special bank account in accordance with the Capital Gains Accounts Scheme 1998.

e.  The new house should not be transferred within three years of its purchase or construction. If the new house property is transferred, within a period of three years from the date of its purchase or construction, the amount of capital gains arising from it, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new house property. It may be noted that for computing long term capital gain on the house property, the assessee shall have the benefit of cost indexation. (Section 54 of Income Tax Act)

Further, under Section 54F of Income Tax Act, capital gain arising on the transfer of any long-term capital asset i.e. an asset held for more than three years (one year in case of shares, debentures, mutual fund and UTI units), can also be neutralised if capital receipts arising from transfer of long term capital assets other than a house property is invested in a house property within the stipulated time. (as specified in point c) subject to following:

i.  If the investment is not made before the due date for furnishing the return of income of the relevant year, then the unutilised amount of Net consideration must be deposited in a special bank account in accordance with the Capital Gains Accounts Scheme 1998. If the amount so deposited is not utilised fully for the purchase/ construction of the new house within the stipulated period, the proportionate amount shall be treated as long-term capital gain of the previous year in which the period of three years from the date of transfer of the original asset expires.

ii.  If the individual sells or transfers the new house within 3 years of its purchase or construction, or if the individual purchases, within a period of two years of the transfer of the original asset, or constructs within a period of three years of transfer of such asset, a residential house other than the new house, than the amount of capital gains arising from the transfer of original asset, which was not charged to tax, will be deemed to be the income by way of long-term capital gains of the year in which new house is transferred or another residential house (other than the new house) is purchased or constructed, as the case may be.

However, if the assessee claims deduction under Section 80C in respect of repayment of loan, and if he transfers the house property before the expiry of five years from the end of the financial year in which possession of such property is obtained, the aggregate amount of the deduction of income so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant to such previous year.

What is the position under the Wealth Tax Act?

One house or a part of a house belonging to an individual or a Hindu undivided family is not chargeable to Wealth Tax.