NEERAJ GUPTA CA IPCC TAX CLASSES

INCOME FROM HOUSE PROPERTY

CHAPTER - 4 INCOME FROM HOUSE PROPERTY (Sections 22 to 27)

IMPORTANT SECTIONS TO BE DISCUSSED IN THIS CHAPTER: Section 22 Section 23(1)(a),(b)& (c) Section 23(2)(a) Section 23(2)(b) Section 23(4)(a)& (b) Section 24 Section 24(a) Section 24(b) Section 25 Section 25A & 25AA Section 25B Section 26 Section 27 Income from house property basis of charge Annual value of let-out property Annual value of self-occupied (residential) property Annual value of a property employment/ business etc. Deemed to be let out houses Permissible deductions Standard deduction Deduction for interest on borrowed capital Amount not deductible from income from house property Recovery of unrealised rent Taxation of Arrears of rent Property owned by co-owners Deemed owner non-occupied due to

Question 1. Explain the concept of Annual Value ? Ans: As per Section 22 of Income Tax Act, annual value of a house property is taxable under this head. Property may be let out for residential & commercial purpose. What is annual value ?- Annual value is the amount for which the property might reasonably be expected to let during the year. The taxability is not on the rent received, but on the inherent capacity of house property to receive rental income. Thus here income is taxable on notional basis. What is annual value ? Annual value is the amount for which the property might reasonably be expected to let during the year.

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The taxability is not on the rent received, but on the inherent capacity of house property to receive rental income. Thus here income is taxable on notional basis.

Note 1 : This Chapter deals with the rental Income of Buildings whether Residential or Commercial like : Office, shop, Factory, Godown etc. Note 2 : Taxation is on the Rental Capacity of the Building not on the rent earned . Note 3: Annual Value is for one year rent earning capacity of Building.

HOW MUCH A BUILDING CAN EARN BY WAY OF RENT IN ONE YEAR IS ANNUAL VALUE WHICH IS TAXABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY
Steps for computing taxable income from house property (IFHP) Gross Annual Value (GAV) (-) Municipal taxes paid by the owner ------------------------------------------------------------------Net Annual Value (NAV) (-) Deduction u/s 24(a) Std. Ded. @ 30% of +NAV (-) Deduction u/s 24(b) Interest on housing loan ------------------------------------------------------------------Income from house property (IFHP) ------------------------------------------------------------------All steps discussed above will be covered in detail later on. First try to understand the basic points: GAV : In normal case, it is annual rental income from the house property. MUNICIPAL TAX: It is the house tax paid by owner during the previous year. It is fully deductible. STANDARD DEDUCTION: This is deduction for various repair & maintenance expenses of building. INTEREST: Interest on loan for purchase, construction, repair etc. is deductible.

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Question 2. Mr. N G is owner of a flat in Delhi. It is let out @Rs.7,000 p.m. to Bank Officer. Municipal tax paid by Mr. N G during the year Rs.4,000. Interest paid during the year for a loan to purchase a house is Rs.20,000. in addition he incurred following expenses : (i) (ii) (iii) Insurance of the property Repair expenses for the year Ground rent 600 4,000 300

Compute taxable income from house property. Question 3. Rental income of property House tax payable for year Annual repair expense Interest on housing loan Annual insurance premium Compute income from house property? Question 4 Explain deduction of municipal taxes from GAV. Ans: Deduction of municipal taxes Municipal tax paid during the year is fully deductible, if paid by owner. Municipal taxes can be : House Tax Water Tax Fire Tax Education Tax Scavenging Tax [Cleaning Tax] Sewage Tax General Tax Local Tax If amount is paid by tenant, the amount is not deductible. This deduction is on payment basis. Thus, if any portion of municipal tax remains unpaid, it is not deductible on due basis. Municipal tax paid can exceed the GAV. In this case Net Annual Value shall be negative. MUNICIPAL TAX PAID BY OWNER IS FULLY DEDUCTIBLE. AMOUNT WHICH IS DUE OR PAID BY TENANT IS NOT DEDUCTIBLE 10,000 p.m. 15,000 (60% paid by owner and 40% paid by tenant) 3,000 Rs. 20,000 Rs. 500 Rs.

Deduction is available for the municipal tax paid whether for current year, earlier years or next years.

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Question 5 (a) (b) (c) (d) (e) (f) (g) (h)

Compute NAV in following situations if GAV is Rs. 60,000

Municipal tax paid by owner is Rs. 6,000. Municipal tax paid by owner is 18,000 (including Rs. 12,000 by way of advance) Municipal tax paid by owner is Rs. 66,000 (including arrears for last 10 years) Municipal tax is paid by owner Rs. 6,000 but later on reimbursed by tenant. Municipal tax is paid by tenant Rs. 6,000 Municipal tax is paid by tenant Rs. 6,000 but later on he get reimbursement from landlord. Municipal tax due is Rs. 6,000 Municipal tax paid is Rs. 6,000 (including Rs. 2,000 by tenant).

Question 6 Mr. X is owner of a property which is let out @ 3000 p.m. Its annual municipal tax liability is Rs. 4,000/-. Compute NAV in following assumptions (a) (b) (c) Municipal Tax is paid by owner Municipal Tax is paid by tenant Municipal Tax is outstanding

Question 7: A flat is let out a monthly rent of Rs.5,000 p.m. , housing tax payable for one year is Rs.6,000. During current year he paid house tax for 11 years, interest on housing loan Rs.8,000 p.a. Compute income from house property Question 8: How to compute Gross Annual Value? Annual value is generally determined taking into account the following factors: (a) Actual Rent received or receivable by owner; (b) Municipal value of the property; (c) Fair rental value; (d) Standard rent. Municipal value of the property: Generally at all places, these days municipalities or municipal corporations impose house tax and for that purpose annual value of the properties is determined. The rental value so fixed by these local bodies is known as municipal value, which forms the basis of annual value.

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Fair rental value / Market rental value : Rent of similar property in same or similar locality is also used for determining GAV.

Fair rental value of the property depends on the rental value in general prevailing in the same or similar locality, for the same type of houses. It is certain that no two types of properties are similar and therefore rents of the two houses are not comparable. Even then the general trend of rents prevailing is definitely available and forms the basis of the annual value. Standard rent: This is the rent as per Rent Control Act. If standard rent is fixed for a particular area, the landlord cannot reasonably expect to receive from a tenant anything more than the standard rent and the Rent Control Act. Computation of GAV: Rule 1 Take higher of Municipal valuation (MV) or market rent (MR) of the property. Rule 2 Compare higher of the two with Standard rent (SR) & find lower of two figures. This figure is known as expected rental value (ERV) of the property. Rule 3 Expected rental value shall be compared with ARV (actual rental value / reduced actual rental value) & higher of the two is GAV. SPACE FOR DIAGRAM:

Question 9 Compute GAV in following situations : (a) (b) Market rent 80,000 38,000 Municipal Value 85,000 30,000 Standard rent 83,000 40,000 Actual rent 84,000 36,000

(c) 63,000 63,000 N.A. 62,000

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Question 10 Compute NAV with the help of following data: Market Rent Municipal Value Standard Rent Actual Rent Municipal tax paid by tenant Rs. Rs. 2,30,000 p.a. Rs. 2,00,000 p.a Rs. 2,10,000 p.a. Rs. 15,000 p.m. Rs. 16,000 (p.a.)

Question 11. Compute GAV in following situations: P 1,20,000 1,15,000 1,18,000 1,17,000 Q 8,90,000 7,00,000 9,00,000 8,50,000 R 1,40,000 1,50,000 1,60,000 1,70,000 S 6,80,000 7,00,000 7,30,000 6,50,000

Market rent Municipal value Standard rent Actual rent

Question 12. Explain provisions relating to Standard Deduction from NAV. Ans: Standard Deduction u/s 24(a) This is equal to 30% of positive NAV. Even if actual expenses are less or NIL, full deduction of 30% of NAV shall be allowed. If NAV is negative due to excess of municipal tax over GAV then such deduction is not allowed. Basically this deduction is allowed to cover repair expenses of house property & similar other expenses like Insurance premium, Annual Charge, ground rent, land revenue, depreciation of the building etc.

STANDARD DEDUCTION = 30% OF POSITIVE NAV. NO STANDARD DEDUCTION IF NAV IS NIL OR NEGATIVE.

Question 13 Compute IFHP with the help of following data (a) (b) (c) (d) (e) (f) (g) Annual rental value Municipal tax due Annual repair expenses Insurance Premium Paid Annual Charges due Ground rent paid Land revenue due : : : : : : : Rs.60,000 Rs. 7,000 Rs. 3,000 Rs. Rs. Rs. 500 100 300 Rs. 3,000

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Question 14: Compute IFHP with the help of following data (a) (b) (c) (d) (e) (f) MV Rs 89,000 FR Rs 90,000 SR NA AR Rs 92,000 Municipal tax paid by owner Rs 12,000 Interest on borrowed capital Rs 14,000

Question 15 Compute IFHP with the help of following data (a) (b) (c) (d) (e) (f) MV Rs 40,000 FR Rs 50,000 SR Rs 42,000 AR Rs 40,000 Municipal tax paid including arrears Rs 45,000 Interest on borrowed capital Rs 8,000

Question 16: Discuss the impact of non-receipt of rent from tenant i.e. unrealized rent. Ans: TREATMENT OF UNREALIZED RENT Unrealized rent is the rent which could not be recovered from the tenant inspite of legal efforts by assessee.

In this situation while computing GAV, ARV is reduced to the extent of unrealized rent. Actual rental value (-) unrealized rent -----------------------------Reduced actual rental value In such cases of unrealized rent, GAV is higher of ERV & Reduced ARV. Note: only current years unrealized rent is deductible. Unrealized rent of last years is not deductible. UNREALISED RENT OF CURRENT YEAR IS DEDUCTIBLE AGAINST ACTUAL RENTAL VALUE Question 17 Compute GAV in following cases Owner ERV (p.a.) Actual rent (p.m.) Unrealized rent

Mr. X 70,000 6,000 5,000

Mr. Y 65,000 7,000 6,000

Mr. Z 80,000 6,000 3,000

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Question 18 Compute GAV with the help of following data: ERV ARV Unrealized rent of current year Unrealized rent of last year : : : : Rs.1,60,000 Rs.15,000 p.m. Rs.15,000 Rs.10,000

Question 19 : Compute NAV with the following data: 1) 2) 3) 4) 5) 6) MV : Rs 99,000 FR : Rs 90,000 SR : Rs 89,000 AR : Rs 8,000 pm UR : Rs 4,000 Municipal Tax paid : Rs 8000

Question 20 : Compute NAV with the following data: 1) 2) 3) 4) 5) 6) MV : Rs 30,000 FR : Rs 34,000 SR : Rs 35,000 AR : Rs 2,500 pm UR : Rs 3,000 Municipal Tax paid : Rs 1000

Question 21 : Compute NAV with the following data: 1) 2) 3) 4) 5) 6) MV : Rs 66,000 FR : Rs 70,000 SR : NA AR : Rs 6,000 pm UR : Rs 8,000 Municipal Tax due : Rs 6500

Question 22 : What are the conditions which should be fulfilled in order to be eligible for deduction of unrealized rent. Ans: Conditions for claiming deduction of unrealized rent: Rule 4 of income tax rules It may so happen that a tenant has defaulted in payment of rent due to the assessee. In such a case, if the assessee is able to prove that the rent due from the tenant has become irrecoverable, the unrealized rent will be allowed as a deduction provided the following conditions mentioned in Rule -4 are satisfied: a) b) The tenancy is bonafide; The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property; Assessment Year 2013-14 For sms only 9810139214 Page 8

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c) d)

The defaulting tenant is not in occupations of any other property of the assessee: The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing Officer that legal proceeding would be useless;

Question 23. Compute GAV with the help of following data Owner Mr. X Mr. Y ERV 1,00,000 33,000 ARV 1,05,000 32,000 Unrealized rent 12,000 5,000

Mr. Z 67,000 72,000 3,000

Question 24 : What is the impact on computation of GAV if property remains vacant for some part of the year. Ans: Vacancy allowance [Deduction for loss due to vacancy] IF LET OUT PROPERTY IS VACANT FOR SOME PART OF THE YEAR: Taxable GAV = GAV [as per rules discussed above] (-) Vacancy allowance Vacancy allowance = Actual rental value p.m. X Vacant months VACANCY ALLOWANCE DEDUCTION IS LAST STEP FOR COMPUTING TAXABLE GAV Question 25 Compute NAV with the help of following data: Mr. A 1,00,000 8,000 2 months 7,000 Mr. B 80,000 7,000 1 month 4,000 Mr. C 60,000 5,000 2.5 months 3,500

ERV (p.a.) ARV (p.m.) Vacancy Municipal tax paid

Question 26 Compute NAV with the help of following data: Mr. P 1,50,000 12,000 5 months 11,000 Mr. Q 1,30,000 13,000 2 months 1,18,000 Mr. R 4,00,000 30,000 7 months 32,000

ERV (p.a.) ARV (p.m.) Vacancy Municipal tax paid

Question 27 Mr. B is owner of a building having three floors. Ground floor is let out @7,000 p.m. Other floors are let out @6000 p.m. each. Expected rental value of the property is Rs.3,00,000. Municipal taxes paid during current year is Rs.15,000. Ist floor of the house is vacant for one month & Ground floor is vacant for 2 months. Compute NAV.

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Question 28 N G has a house property situated in Mumbai, which has two units. Unit I has a floor area of 70% whereas the Unit II has a floor area of 30%. Both the units were self-occupied by the assessee. As the assessee was allowed a rent-free accommodation by his employer w.e.f. 1.4.2012, he vacated and let out Unit I at a rent of Rs. 11,000 p.m. Unit II was let out for Rs. 4,000 p.m. Unit I remained vacant for 1 months, whereas Unit II was vacant for March 2013. Other particulars of the house property are as under : Rs. 1,50,000 1,70,000 1,60,000 30,000 10,000

Municipal valuation Fair rent Standard rent Municipal taxes paid Ground rent due

Compute income from house property for the assessment year 2013-14. Question 29 : Compute IFHP with the following data: 1) 2) 3) 4) 5) 6) 7) MV : Rs 1,40,000 FR : Rs 1,90,000 SR : Rs 1,89,000 AR : Rs 16,000 pm UR : Rs 4,000 Vacancy: 1.5 months Municipal Tax paid : Rs 18,000

Question 30 : Compute IFHP with the following data: 1) 2) 3) 4) 5) 6) 7) 8) MV : Rs 2,00,000 FR : Rs 2,50,000 SR : Rs 2,60,000 AR : Rs 20,000 pm UR : Rs 10,000 Vacancy: 3 months Municipal Tax due : Rs 11,300 Interest on housing Loan: Rs 23,000

Question 31 : What is the treatment if property is vacant throughout the year. Ans: Property is vacant throughout the year (a) owner does not want to let out:- In this situation house property shall be taxable & ERV shall be taken as GAV. All other provisions shall apply in normal way. Suitable tenant is not available:- In this situation GAV shall be taken as NIL provided (b) assessing officer is satisfied about the fact that a suitable tenant is not available in this case.

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Question 32 Mr. A is working with a MNC. He is owner of a DDA flat in Rohini. The house is vacant throughout the year as the owner does not want to let out the property. If let, the property can fetch a rent of Rs.3,500 p.m. Municipal taxes (Rs.3,000) are duly paid by him. Whether he is taxable under Income Tax Act for this vacant house. If yes, compute his taxable IFHP. Question 32 Mr. D is owner of a showroom on the Main Road of Pitampura. He wants to let out the property but inspite of reasonable efforts a suitable tenant is not available throughout the year. Market rent of the property is Rs.25,000 p.m. Municipal valuation is Rs.2,30,000 p.a. Municipal taxes paid during the year is Rs.40,000. Compute NAV. Question 33 Compute IFHP with the help of following data: Market rent 1,30,000 p.a. Standard rent 1,35,000 p.a. Municipal value 1,18,000 p.a. Actual rent 12,000 p.m. Unrealised rent 5,000 Vacancy 1.5 months Local taxes paid 6,000 Interest on housing loan 15,000 Does it make any difference if tenant is using the property for commercial purpose. Question 34. Compute income from house property. ERV 2,00,000 ARV 16,000pm Unrealized rent for current year 5,000 Vacancy 1.5 months Municipal tax 11,000 Question 35 : How will you deal with change of rent in computation of NAV. Ans: TREATMENT OF CHANGE OF RENT DURING THE YEAR In this situation, Annual rental value & loss due to vacancy is calculated on the basis of average Rent received rental value calculated as follows: Average rental value: Let out months Question 36 Compute IFHP with the help of following information: Municipal value : Rs.56,000 p.a. Fair rent : Rs.66,000 p.a. Rent as per Rent Control Act : Rs.55,000 p.a. Actual rent : April July Rs. 4,000 p.m. Oct March Rs. 6,000 p.m Vacancy : Aug & September Fire & water tax paid to Municipality Rs.4000/- Fire insurance Premium paid Rs.3,000/Question 37 Mr. A is owner of a flat having ERV of Rs.30,000 p.a. Actual rent from April October is 2,000 p.m. For the month of Nov & December the flat is vacant. From Ist January the flat is again let out @3,000 p.m. As per rent agreement, tenant is liable for municipal tax & so an amount of Rs.1200/- is duly paid during the year. Compute NAV. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 11

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Question 38: How to compute NAV if property is purchased in current financial year or is sold in the current year. Ans: SALE / PURCHASE OF PROPERTY DURING THE YEAR In this situation, ERV is calculated for ownership months. ARV is also calculated for ownership months. If there is any vacancy then it shall be adjusted before computing taxable GAV. Question 39 Mr. A purchased a property on 1/7/2012 & let out w.e.f. 1/8/2012 @5000 p.m. ERV of property is Rs.66,000 p.a. Municipal tax paid during the year is Rs.3,000. Compute NAV. Question 40 Mr. A purchased a property on 1/6/12 from Mr. B. The property is let out w.e.f. 1/9/12 @15,000 p.m. ERV of property is Rs.2,10,000 p.a. Local taxes paid Rs.13,000. Unrealised rent is Rs.10,000. Compute IFHP for Mr. A for assessment year 2013 14. Question 41: Explain the treatment of composite rent. Ans :CONCEPT OF COMPOSITE RENT In this situation the composite rent is divided in two categories: One: the rent of building which is considered for calculating ARV. Two: the rent of facilities like electricity, food, cloth washing, guard, cable tv expenses etc which is considered for calculating Income from other source. If rent can not be disintegrated then total rent shall be treated in the chapter of IFOS like e.g. paying guest accommodation, renting of hospital, cinema hall etc. The test to determine the above concept is that if building is capable of being let out without attached furniture, machines & facilities then the rent charged shall be disintegrated. If this is not the case, then the rent shall be treated like business receipts or Income from other sources. Question 42 A building in Rohini is let out @6000 p.m. (including 1,000 p.m. for facilities of electricity & water). ERV of building is Rs. 54,000 p.a. The following expenses are incurred during the year: Municipal tax Electricity bills Water bills Repair expense : : : : Rs.2,500 Rs.6,000 Rs.2,100 Rs.4,000

Compute IFHP & IFOS.

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