Income tax has five heads of income. Have you rental income ? It is covered under income from House property. Learn from this article income from house property computation from let out property and self occupied property and about deduction.

Definition of income from house property:

Income from building or land appurtenant thereto is taxable under the head income from house property.

Two types of  house property income:

  1. Income from let out property
  2. Income from self occupied property.

Income from house property calculation : with example

Income tax on income from let out property:

Let out property means property which is given on rent or lease.

Computation of income from house

Computation of income from let out property:

You can compute income from let out property from using following example :

Particular Rs.
Gross annual value 10,00,000
Less municipal tax    (10,000)
Net annual value 9,90,000
Less deduction u/s 24
Standard deduction @ 30% of NAV (2,97,000)
Interest on borrowed capital (1,00,000)
Income from house property  5,93,000

By this table, you can get rough idea about calculation of income. But you must have knowledge of each element in deep to calculate tax because one mistake and tax computation will be wrong. I personally advise to avail services of CA for return filling. Good news is that you can avail it online through our site.

Computation of gross annual value:

Step 1 Find out reasonable expected rent of property
Step 2 Find out rent actually received/ receivable (do not include unrealized rent and deduct loss due to vacancy)
Step 3 Higher from step 1 and step 2
Step 4 Loss due to vacancy
Step 5 Step 3 less step 4

How to find reasonable expected rent ?

Reasonable expected rent is higher of the following:

  1. Municipal annual value decided by local authority
  2. Fair rent of the property expected to fetch by similar property in same or similar locality.

Reasonable expected rent calculated by above method should not be exceed from standard rent of property decided by rent control acts.

How to find rent actually received or receivable?

To find out rent received or receivable, reduce rent received of the previous year or part of the previous year from unrealized rent if few conditions are satisfied.

Owner can reduce unrealized rent if following conditions are satisfied:

  1. The tenant is bonafied.
  2. The tenant has vacated property or steps have been taken to compel him to vacate property.
  3. The tenant is not in occupation of any other property of the assessee.
  4. The assessee has taken reasonable steps to recovery of unpaid rent.

Example for computation of gross annual value:

Particulars House 1 House 2 House 3
Municipal value 100 105 101
Fair rent 102 100 105
Standard rent 105 98 100
Rent received 100 98 115
Unrealized rent 2 0 3
Vacancy period 0 0 0

 

Solution:

Step 1 Reasonable expected rent 102 98 105
Step 2 Rent receivable after adjusting unrealized rent 98 98 112
Step 3 Higher of the following 102 98 112
Step 4 Loss due to vacancy 0 0 0
Step 5 Gross annual value 102 98 112

Deduction available for house property income:

Deduction of municipal tax:

Municipal tax is deductible if it is paid by owner of the property and paid during previous year.

Deduction u/s 24:

Deduction u/s 24 is available to reduce income from house property.

Following deductions are available:

  1. Standard deduction at 30% of net annual value.
  2. Interest on borrowed capital.

Important points for interest on borrowed capital:

  1. Interest on borrowed capital is allowed on acrual basis. So if owner has not paid interest but got loan, he can claim interest u/s 24 on yearly basis.
  2. interest on unpaid interest is not available.
  3. Preconstruction interest for borrowed capital is available. Pre construction period means the period commencing on the date of borrowing and ended on 31/3 prior to the date of completion of construction/ acquisition of loan or date of repayment of loan, whichever is earlier. The deduction is available in five equal installments, commencing from the previous year in which house is acquired or constructed.

Example of calculation of interest on pre construction period:

Mr. Pranay has taken loan for construction of the house on 1/1/11. Construction of house is completed on 31/5/13.

Loan amount is Rs. 5,00,000. Interest rate is 16% p.a.

Pre construction period in above example:

1/1/11 to 31/3/13.

Pre construction period interest :

5,00,00016/10027/12 = Rs. 1,80,000.

Interest allowed for deduction p.a. from f.y.2013-14 to 2017-18 = 180000/5 = Rs. 36000 p.a. + current year’s interest.

Financial year 2013-14 2014-15 2015-16 2016-17 2017-18
Current year’s interest 80,000 80,000 80,000 80,000 80,000
Pre construction period interest 36,000 36,000 36,000 36,000 36,000

 

 Computation of income from self occupied property:

  1. When person has one house property which he uses for residential purpose.Gross annual value of the property shall be considered as NIL and no standard deduction and municipal taxes deduction allowed to him. Only interest for construction or purchase of property is allowed.
  2. When person has more than one self occupied property, he can consider only one as self ocuupied and others as deemed let out property. The taxable value for deemed let out property shall be calculated as same manner as let out property and rent received /receivable is considered as zero.
  3. Interest on borrowed capital is allowed for deduction with some restriction under section 24 (b).

Interest on borrowed capital for self occupied property:

Interest on borrowed capital is allowed up to Rs. 150000 (for A.Y. 2002-03 to A.Y. 2014-15) and Rs. 2,00,000 from the A.Y. 2015-16 onwards if following conditions are satisfied:

  1. Loan is taken after 1/4/1999 for purchase or construction of property.
  2. Purchase or construction should be completed within 3 years from the end of financial year when loan is taken. suppose loan is taken 1/1/2010. Construction should be completed up to 31/3/13.
  3. There is certificate from lender that interest is payable in respect of amount given for purchase or construction of property.

In following cases, limit for deduction for interest on borrowed capital is Rs. 30,000.

  1. If capital is borrowed before 1/4/1999 for purchase, construction, reconstruction, repairs of a property OR
  2. If capital is borrowed after 1/4/1999 for repair, reconstruction or renewal of property.

 Other important points:

  1. Sometimes owner of property cannot use house due to employment or business is carried on at any other place and he stays other place by paying rent. He can consider that owned property as self occupied if the property is vacant and not let out during the year.
  2. when some part of property is let out and another is self occupied, assessee has to calculate income from house property separately for each part.
  3. When property is self occupied for some period and let out during remaining period of the year, the property is required to be considered as let out property.

Resource:

Income tax website

 

There are 5 heads of income as per income tax act. In this article, I have covered main points to compute tax on income from house property. Have you any question on this topic? Ask me in comments.