The taxation of income in India is organized under different heads, and one of the most significant categories is income from house property. This head of income does not only concern rental income but also includes certain deemed incomes linked to the ownership of immovable properties. The framework is contained in the Income-tax Act, which provides the basis of charge, exemptions, computation methods, and deductions. Understanding the principles is important for both individuals and businesses because property ownership is widespread, and tax treatment of property income can significantly influence overall liability.
This article covers the foundation and basis of charge, the scope of house property income, ownership requirements, and judicial interpretations. The subsequent parts will explore exemptions and computation rules.
Basis of Charge
The chargeability of property income under the head income from house property arises from section 22 of the Income-tax Act. This provision specifies that the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, shall be chargeable to income tax under this head, provided the property is not used for the purposes of carrying on any business or profession.
There are three essential conditions:
- The property should consist of any building or land attached to a building.
- The assessee must be the legal or deemed owner of the property.
- The property should not be used for business or professional purposes carried on by the owner.
If all these conditions are satisfied, the income is taxable under section 22. The scope of this charge is wide and applies regardless of whether the assessee is an individual, Hindu undivided family, firm, company, association of persons, or any other taxable entity.
Property Covered under the Head
The term property includes all kinds of buildings, whether residential, commercial, or mixed-use. It may be a house, shop, office building, warehouse, or any other structure. Along with the building, the law also covers lands appurtenant thereto. The expression land appurtenant refers to land that is necessary for the enjoyment of the building, such as a garden, courtyard, compound, or parking space attached to the house or commercial complex.
It is important to note that vacant land not appurtenant to any building is not taxed under this head. Such income, if any, is taxable under the head income from other sources or business income, depending on the facts. For example, if an assessee owns vacant plots and earns rent by allowing them to be used for temporary parking, such income would not fall under house property but under other sources.
Ownership Requirement
The second essential condition is that the assessee must be the owner of the property. Ownership may be legal or deemed. Legal ownership is straightforward: the person whose name is registered in the property records and who holds title deeds is regarded as the owner. However, the law recognizes deemed ownership in specific situations.
Some situations of deemed ownership are:
- Transfer of house property to spouse or minor child without adequate consideration. In such cases, income is taxable in the hands of the transferor.
- The holder of an impartible estate is deemed owner of all properties in the estate.
- A member of a cooperative society or company who is allotted a building or flat is treated as the owner, even if the society or company is the legal owner of the property.
- A person acquiring rights in a property under a long-term lease of more than twelve years is considered owner for tax purposes.
These provisions prevent avoidance of tax through transfers, benami arrangements, or long leases.
Non-Business Use Condition
The third condition is that the property must not be used for business or professional purposes of the assessee. If an assessee uses the building for running his own business or profession, the income from such property is not taxable under house property. Instead, it is considered part of the business income, and the assessee can claim depreciation, repair expenses, and other deductions under the head profits and gains of business or profession.
For example, if an assessee owns a building and uses it as his office, no notional rent is charged under house property. But if the building is let out to someone else for running a business, the rent becomes taxable under house property.
Judicial Interpretations of Section 22
Several judicial pronouncements have clarified the scope of charge under this head. Courts have consistently emphasized that the charge is not limited to residential houses but covers all types of buildings. For instance, rent from letting out of warehouses, office buildings, or commercial complexes is taxable under house property, provided the owner is not carrying on a composite business activity involving exploitation of property as a commercial asset.
In one leading case, the Supreme Court held that income from letting out of property by a company formed with the main object of acquiring and developing properties was still taxable under house property and not as business income, unless the exploitation of property was in the nature of commercial operations. This established the principle that the character of income depends on the nature of exploitation, not merely on the object clause of the company.
Scope of the Head Income from House Property
The scope is very broad. It includes not only actual rent received but also notional or deemed income in certain cases. For example, if a property is kept vacant but is not self-occupied, the law requires computation of annual value as if it were let out.
Similarly, if rent charged is below market value due to collusive arrangements, the law may substitute notional rent based on fair rent, municipal valuation, or standard rent under rent control laws. The scope also covers arrears of rent received in subsequent years and unrealized rent recovered later. These amounts are taxed in the year of receipt, subject to certain deductions.
Illustration of Conditions
Consider an individual who owns a residential house in Delhi. He has let it out to a tenant for residential purposes. The property is not used for his business, and he is the legal owner. The income is chargeable under house property.
If the same person uses the house as his office for business, then no income is charged under house property because it is used for business purposes.
If he transfers the house to his wife without adequate consideration but continues to be the original owner, he is deemed owner, and the rental income is still taxable in his hands.
Importance of Distinguishing Heads of Income
The correct head of income is crucial for computation of tax. If income is classified under house property, only the deductions allowed under section 24 can be claimed, such as standard deduction and interest on borrowed capital. If income is classified under business head, wider deductions are available such as depreciation, repairs, and other expenses.
For instance, a company engaged in running hotels may own a building and use it for hotel operations. The income from hotel business is not house property income because the property is a commercial asset used in business. On the other hand, if the company merely lets out buildings to tenants, the income is taxable as house property, even if the object of the company is to deal in properties.
Residential and Commercial Properties
Both residential and commercial properties fall within the ambit. Rent from houses, apartments, flats, or bungalows is clearly house property income. Similarly, rent from shops, malls, office complexes, and warehouses is also taxable under this head, unless they are used for the owner’s own business.
This treatment is significant because many taxpayers believe commercial property rent is business income. However, the law does not make this distinction. The deciding factor is whether the owner is carrying on business with the property or simply earning rent as an owner.
Composite Letting
Sometimes, a property is let out along with furniture, fixtures, or other services. In such cases, if the letting of building and letting of other assets or services are inseparable, the income may be treated as business income or other sources, depending on circumstances. But if they are separable, then the rent of the building is taxable under house property, and income from services is taxable separately.
For example, letting out of a furnished office with air-conditioning, security, and maintenance services may be considered a composite letting. If inseparable, it will be treated as business income. But if furniture rent is charged separately from building rent, they can be separated.
Tax Planning Considerations
Understanding the basis of charge under house property is important for tax planning. Assessees should structure ownership and use of properties in a way that optimizes tax liability. For instance, transferring property to a spouse or minor child without consideration does not help reduce tax because of deemed ownership rules. Similarly, using personal property for business can shift income from house property head to business head, which may be advantageous if business deductions are larger.
Another aspect of planning is loan structuring. Since interest on borrowed capital is deductible under section 24, borrowing for acquisition, construction, repair, or reconstruction of house property can provide significant tax relief. However, this point will be discussed in detail in the computation part of the series.
Legislative Intent
The legislative intent behind taxing income from house property is to bring to tax the inherent capacity of property to generate income, whether or not it is actually let out. The concept of annual value is based on this principle. A property is considered to have the potential to earn rent, and therefore, its notional value is taxed in certain cases.
The law strikes a balance by providing relief for one self-occupied property and allowing deductions for municipal taxes and interest. At the same time, it prevents leakage by taxing deemed income in the case of vacant or under-rented properties.
Exemptions and Non-Chargeable Situations
While income from house property is generally taxable under section 22 of the Income-tax Act, there are several situations where such income is either exempt from taxation or not chargeable at all. The law recognizes that certain categories of property income serve social, political, educational, or charitable objectives, and therefore, exemptions are granted. In other cases, income is excluded because the property is used by the owner for purposes other than earning rent.
We explore in detail the situations where property income is not taxed. Each exemption or exclusion has specific conditions, and understanding these provisions is important for accurate tax compliance and effective planning.
Farmhouse Income
Section 2(1A) defines agricultural income, which includes income derived from any farmhouse situated in or around agricultural land. Under section 10(1), such income is exempt from tax. A farmhouse qualifies for exemption if it satisfies the conditions relating to distance from urban areas and its connection with agricultural land.
The logic behind this exemption is that income connected with agricultural activity is outside the scope of income tax. Thus, rent or revenue from a farmhouse used in connection with agricultural operations is treated as agricultural income and remains untaxed under the head income from house property.
Palace of an Ex-Ruler
Section 10(19A) grants exemption to the annual value of one palace in the occupation of an ex-ruler. Before the abolition of privy purses, rulers of princely states owned several palaces. After integration, the government decided to allow exemption in respect of one palace occupied by an ex-ruler, while other palaces may be taxed depending on their use.
This provision is limited in application but continues to apply to former rulers recognized under the law. The exemption ensures that one residential palace of the ex-ruler does not attract tax under house property.
Property Income of Local Authorities
Local authorities perform essential civic functions and operate without profit motives. Section 10(20) exempts income of local authorities, which includes income from house property owned by them. Municipal corporations, district boards, and other recognized local bodies fall within the scope of this section.
For example, rent earned by a municipal corporation from letting out community halls, markets, or office premises is exempt. This relief ensures that local authorities can utilize their income fully for developmental and welfare activities without being burdened by income tax.
Scientific Research Associations
Section 10(21) exempts income of approved scientific research associations. These associations are often formed to promote scientific advancement and receive grants, donations, and property income. If they own buildings and earn rent, such property income is also exempt.
The exemption is available only to associations approved by the prescribed authority. The objective is to encourage scientific research in the country by providing financial freedom and relief from taxation.
Educational Institutions and Hospitals
Section 10(23C) provides exemptions to certain educational institutions and hospitals. Institutions existing solely for educational purposes or charitable hospitals that are approved under this section enjoy exemption from income tax, including income from house property.
For example, if a university owns hostels or staff quarters and receives rent, such income is exempt as long as the institution satisfies the prescribed conditions. Similarly, charitable hospitals owning residential facilities for staff or other related buildings are not required to pay tax on the property income.
The exemption ensures that funds of these institutions are channeled toward their primary objectives of education and healthcare rather than diverted to tax obligations.
Trade Unions
Section 10(24) exempts the income of registered trade unions, including property income. Trade unions function to protect the rights of workers and are recognized as nonprofit organizations. If a trade union owns a building and lets out a portion, the rental income is exempt from taxation.
This exemption supports trade unions in maintaining their financial independence, allowing them to concentrate on welfare and representation of workers without the burden of tax on incidental property income.
Charitable and Religious Trusts
Section 11 grants exemption to income derived from property held under trust wholly for charitable or religious purposes, provided the income is applied or accumulated for such purposes. This includes property income such as rent from halls, hostels, or other premises owned by the trust.
For instance, a charitable trust running an orphanage may own a building and earn rent from a part of it. The income will be exempt if applied for charitable purposes like education, relief of the poor, or medical relief. The exemption is subject to conditions of application and investment of funds in specified modes. This provision plays a vital role in supporting charitable and religious activities across the country.
Political Parties
Section 13A exempts the income of political parties, provided they comply with certain conditions such as maintaining proper books of account and filing returns. Property income of political parties, such as rent from party offices or halls, is therefore exempt.
The exemption reflects the recognition of political parties as institutions contributing to the democratic process. By freeing them from the burden of tax on property income, the law ensures that resources are available for political and electoral activities.
Property Used for Business or Profession
One of the fundamental exclusions from the charge under house property is where the property is used by the owner for his own business or profession. Section 22 makes it clear that such property is not taxable under house property. Instead, its income or value is taken into account while computing business income.
For example, if an assessee owns a factory building or an office used for business purposes, no notional rent is charged. The assessee can instead claim depreciation and other deductions as part of business expenditure. This provision prevents double taxation and ensures consistency in treatment.
Self-Occupied Property
Section 23(2) provides relief in respect of one self-occupied residential property. The annual value of one house or part of a house occupied by the owner for residential purposes is taken as nil. Thus, no tax is payable under house property for such property.
However, interest on borrowed capital for acquisition or construction of the self-occupied property is allowed as deduction subject to monetary limits. If the assessee owns more than one property for self-occupation, only one can be treated as self-occupied, and the others are deemed to be let out.
This relief recognizes the personal use of a house by the owner and ensures that no notional rent is charged on self-occupation, which otherwise could create an unfair burden.
Situations of Mixed Use
In many cases, a property may be partly used for self-occupation and partly let out. In such situations, the property is divided, and income is computed separately for the let-out portion while the self-occupied portion enjoys exemption under section 23(2).
For example, if an individual owns a two-storey house, occupies one floor, and lets out the other, the rental income of the let-out portion is taxed, and the self-occupied portion is treated as nil annual value. This method ensures a balanced treatment for mixed-use properties.
Case Laws on Exemptions
Judicial decisions have played a major role in clarifying exemptions. Courts have repeatedly upheld the principle that exemptions must be strictly construed but applied liberally in favor of institutions genuinely pursuing charitable, educational, or political purposes.
In several cases, courts have held that incidental income from letting out halls or hostels by educational institutions is exempt, provided the primary purpose remains educational. Similarly, charitable trusts have been allowed exemption where rental income is applied to their objectives. On the other hand, exemptions have been denied where institutions diverted property income for personal benefits or commercial activities not aligned with their stated objectives.
Real-World Scenarios
In practice, taxpayers often encounter complex situations. For example, a hospital may own a building partly used for hospital operations and partly let out. In such cases, income from the let-out portion may still be exempt if applied for the hospital’s charitable purposes under section 11.
Similarly, a political party may own several properties, some used for party offices and others let out. As long as the conditions of section 13A are satisfied, property income remains exempt.
Local authorities frequently let out markets, stalls, and community halls. These are exempt under section 10(20). However, disputes sometimes arise over whether certain bodies qualify as local authorities, leading to litigation.
Importance of Compliance
While exemptions provide significant relief, they are subject to strict compliance. Institutions must maintain proper accounts, apply income for their stated purposes, and file returns within prescribed timelines. Non-compliance can lead to denial of exemptions and taxation of property income.
For example, if a charitable trust does not apply the required percentage of its income for charitable purposes, the exemption may be withdrawn. Similarly, political parties that fail to file returns are not entitled to exemption.
Broader Perspective on Exemptions
The exemptions under house property reflect the broader policy objectives of the tax system. By exempting income from charitable trusts, educational institutions, hospitals, and political parties, the law supports social development, healthcare, education, and democracy. By exempting self-occupied properties, it recognizes the necessity of personal residence and avoids taxation on notional benefits.
At the same time, the law carefully restricts exemptions to prevent misuse. For instance, only one self-occupied property is exempt, not multiple houses. Similarly, only approved institutions enjoy exemption, and their income must be applied strictly for their purposes.
Computation of Taxable Income
Once the basis of charge and exemptions are understood, the most important part of taxation under the head income from house property lies in computation. The Income-tax Act provides a specific mechanism to compute taxable income from let-out and self-occupied properties. This mechanism is mechanical in nature, leaving little scope for personal interpretation. The computation method is designed to ensure uniformity, fairness, and clarity in determining taxable property income.
We explain in detail how to compute income from a let-out property and a self-occupied property. It also highlights the rules for interest deduction, treatment of multiple properties, and handling of special cases like partly let-out or partly self-occupied properties.
Structure of Computation
The general steps to compute income from house property are as follows:
- Determine the gross annual value (GAV) of the property.
- Deduct municipal taxes actually paid by the owner.
- Arrive at the net annual value (NAV).
- Claim deductions available under section 24.
- Arrive at the income from house property.
Each of these steps involves specific rules, which are discussed in detail below.
Gross Annual Value (GAV)
The starting point of computation is the determination of the gross annual value. It represents the reasonable expected rent of the property. The law provides specific guidance on how to compute GAV, and it differs based on whether the property is let out, self-occupied, or deemed to be let out.
Expected Rent
For a let-out property, GAV is the higher of the expected rent and actual rent received or receivable, subject to certain adjustments. Expected rent is generally the higher of municipal valuation and fair rent, but restricted to standard rent if the Rent Control Act applies.
For example, if the municipal valuation of a property is 1,20,000, the fair rent is 1,40,000, and the standard rent is 1,30,000, then the expected rent will be 1,30,000. If actual rent received is 1,35,000, the gross annual value will be 1,35,000.
Actual Rent Received or Receivable
Actual rent includes rent for the whole year but excludes unrealized rent subject to conditions. If rent is not received due to vacancy, the GAV may be reduced to actual rent received. This ensures fairness when a property remains vacant despite efforts to let it out.
Vacancy Allowance
If a property remains vacant for part of the year, resulting in lower rent, the actual rent received is taken as GAV, even if it is lower than expected rent. This benefit, known as vacancy allowance, ensures that landlords are not taxed on income they did not actually receive.
Municipal Taxes
From the GAV, municipal taxes paid during the year by the owner are deducted to arrive at the net annual value (NAV). Municipal taxes include property tax levied by the local authority. The deduction is allowed only if taxes are actually paid during the year, irrespective of the year to which they relate.
For example, if GAV is 1,50,000 and municipal taxes of 20,000 are paid, the NAV will be 1,30,000. If taxes are not paid, no deduction is allowed.
Net Annual Value (NAV)
NAV represents the taxable value of the property after adjusting for municipal taxes. This figure forms the basis for further deductions under section 24.
Deductions under Section 24
Section 24 provides two key deductions from NAV:
Standard Deduction
A flat deduction of 30 percent of NAV is allowed irrespective of actual expenditure. This standard deduction covers repairs, maintenance, and collection charges. No further deduction is allowed for actual expenses incurred.
For example, if NAV is 1,00,000, standard deduction will be 30,000.
Interest on Borrowed Capital
Interest on capital borrowed for acquisition, construction, repair, renewal, or reconstruction of the property is deductible without any limit in case of let-out properties. For self-occupied properties, the maximum deduction is restricted to 2,00,000 per annum if certain conditions are met, or 30,000 otherwise.
The conditions include that the loan must be taken after April 1, 1999, for acquisition or construction, and the construction must be completed within five years. Pre-construction interest is also allowed as a deduction in five equal annual installments starting from the year of completion.
Income from a Let-Out Property
The computation of income from a let-out property can be illustrated step by step.
Suppose the municipal valuation of a property is 1,50,000, fair rent is 1,60,000, standard rent is 1,55,000, and actual rent received is 1,58,000. Municipal taxes paid are 20,000. The loan interest payable is 60,000.
- Expected rent = higher of municipal valuation (1,50,000) and fair rent (1,60,000), restricted to standard rent (1,55,000).
- Compared with actual rent received 1,58,000. Gross annual value = 1,58,000.
- Less municipal taxes 20,000 = Net annual value 1,38,000.
- Less standard deduction (30 percent of NAV) = 41,400.
- Less interest on loan = 60,000.
- Income from house property = 36,600.
This figure will be included in total income and taxed at applicable rates.
Income from a Self-Occupied Property
For a self-occupied property, the annual value is taken as nil. Thus, there is no income from house property. However, deduction for interest on borrowed capital is allowed subject to limits.
If the property is acquired or constructed with borrowed funds, interest up to 2,00,000 is deductible. If conditions are not met, the deduction is restricted to 30,000. Since annual value is nil, the result is usually a loss under house property. This loss can be set off against other income.
For example, if an assessee occupies his house for residence and pays interest of 1,80,000 on a housing loan, the income from house property will be a loss of 1,80,000. This loss can be adjusted against salary or other income.
Deemed to be Let-Out Property
Where an assessee owns more than one self-occupied property, only one can be treated as self-occupied with nil annual value. The other properties are deemed to be let out, and their GAV is determined on a notional basis, even if they are not actually rented out.
For example, if an individual owns three houses, occupies one, and keeps the other two vacant, one house can be treated as self-occupied, and the other two are deemed to be let out. Their income is computed as if they were rented.
Partly Let-Out and Partly Self-Occupied Properties
Sometimes, a property may be partly used for self-occupation and partly let out. In such cases, the property is treated as two separate units, and income is computed accordingly.
For example, if the ground floor of a house is occupied by the owner and the first floor is rented, the rental income from the first floor is computed as let-out property, while the ground floor is treated as self-occupied with nil annual value.
Unoccupied Property
If a property is neither let out nor occupied due to employment, business, or profession at another place, it can still be treated as self-occupied, and annual value will be nil. However, this benefit is restricted to one property only.
Treatment of Arrears of Rent and Unrealized Rent
Section 25A provides that arrears of rent or unrealized rent recovered later are taxable in the year of receipt, whether or not the assessee owns the property at that time. A deduction of 30 percent of such arrears is allowed.
This ensures that rent which was earlier not taxed due to non-recovery is brought to tax when actually received.
Loss under the Head House Property
Since interest on borrowed capital is allowed as deduction, property income often results in a loss, especially for self-occupied properties where annual value is nil. This loss can be set off against income from other heads up to 2,00,000 in a year. Any excess loss is carried forward for eight assessment years to be set off against house property income only.
Judicial Interpretations
Courts have clarified several aspects of computation. For example, they have held that vacancy allowance applies only when the property is actually vacant and efforts were made to let it out. Similarly, pre-construction interest is deductible in installments only from the year of completion.
Judicial decisions also emphasize that standard deduction is mandatory and cannot be denied even if no actual expenditure is incurred.
Importance of Accurate Computation
Accurate computation of property income is crucial for tax compliance. Errors in determining GAV, ignoring vacancy allowance, or claiming excessive interest deduction can lead to penalties. At the same time, taxpayers should ensure they claim all eligible deductions to reduce taxable income.
Conclusion
The taxation of income from house property is one of the most structured and formula-based areas under the Income-tax Act. Unlike many other heads of income where personal judgment and varying circumstances can create complexities, the law has provided a systematic mechanism for computing property income.
The foundation lies in three essential conditions: the existence of a property in the form of a building or land appurtenant thereto, ownership of the property, and its non-use for business or professional purposes. Once these conditions are met, the income falls under the head Income from House Property. At the same time, the Act also recognizes situations where property income is exempt, such as property held by charitable institutions, political parties, local authorities, or even self-occupied houses to a certain extent. These exemptions ensure fairness and acknowledge the social, economic, and political functions served by different categories of owners.
The computational framework, starting from gross annual value, reducing municipal taxes, and applying deductions under section 24, provides clarity and consistency. The availability of a standard deduction, irrespective of actual expenses, simplifies compliance for taxpayers. The allowance of interest on borrowed capital reflects the recognition of housing finance as an essential element in property ownership. By providing generous interest deductions for let-out properties and reasonable limits for self-occupied ones, the law balances the twin objectives of revenue collection and encouraging home ownership.
The distinction between let-out, self-occupied, and deemed-to-be let-out properties plays a crucial role in determining the taxable base. While let-out properties generate actual rental income, self-occupied properties are given concessional treatment by considering their annual value as nil. However, taxpayers with more than one self-occupied property must classify additional properties as deemed let-out, ensuring that tax is not avoided merely by keeping houses vacant.
Provisions relating to arrears of rent, unrealized rent, and vacancy allowance further add flexibility and realism to the law. They ensure that taxation is based on real income while still safeguarding the interests of the revenue. The possibility of a loss under the head house property, particularly due to interest deductions, also reflects the genuine financial burden of property ownership, and the law permits such loss to be set off or carried forward.
Judicial interpretations over time have strengthened the framework by clarifying key issues such as vacancy allowance, pre-construction interest, and the mandatory nature of standard deductions. These rulings underline the principle that taxation of house property income must remain equitable and in line with legislative intent.
Overall, the treatment of income from house property under the Income-tax Act strikes a balance between simplicity and fairness. It acknowledges the reality of housing needs, provides relief for genuine costs, and ensures that rental and notional incomes are taxed in a consistent manner. For individuals and entities alike, understanding these provisions is essential not only for compliance but also for effective tax planning. Proper application of the rules can minimize disputes, optimize deductions, and ensure that property income is taxed in line with both legal requirements and economic realities.