Income from house property constitutes one of the five heads of income under the Income Tax Act, 1961, in India. This head of income primarily deals with the taxation of income derived from the ownership of house property, regardless of whether the owner actually occupies the property or lets it out to tenants. The fundamental principle underlying the taxation of house property income is not the actual rent received, but rather the inherent potential of the property to generate income. This potential income is precisely what the “Annual Value” aims to capture and serve as the base for taxation.

The concept of “Annual Value” is therefore central to understanding and computing income under this head. It represents the notional income that a property is capable of yielding, which then serves as the starting point for calculating the taxable income from house property. From this Annual Value, certain statutory deductions are permitted to arrive at the net taxable income. These deductions are designed to account for legitimate expenses or charges that an owner might incur, thereby ensuring that the tax is levied on a more realistic net income rather than the gross notional receipt. The intricate rules governing the determination of Annual Value and the subsequent deductions make this a nuanced and critical area of direct taxation.

Determination of Annual Value

The Annual Value of a property is the basis on which income from house property is computed under the Income Tax Act, 1961. Section 23 of the Act lays down the provisions for determining this value. The Annual Value is essentially the sum for which the property might reasonably be expected to be let from year to year. It is a notional or hypothetical rent, not necessarily the actual rent received, although actual rent plays a significant role in its determination. The computation of Annual Value varies depending on whether the property is let out, self-occupied, or deemed to be let out. The starting point for calculating taxable income from house property is the Gross Annual Value (GAV).

Gross Annual Value (GAV) for Let-out Property

For a property that is let out throughout the previous year, the Gross Annual Value is determined by comparing four key figures:

  1. Fair Rent (FR): This is the rent which a similar property in the same or similar locality would fetch if let out. It reflects the market rent for comparable properties.
  2. Municipal Value (MV): This is the value determined by the municipal authorities for the purpose of levying municipal taxes. It is often a statutory valuation based on certain parameters.
  3. Standard Rent (SR): Applicable only in areas where the Rent Control Act is in force, Standard Rent is the maximum rent that can be legally charged for a property under that Act. If a property is covered by the Rent Control Act, the rent cannot exceed the Standard Rent.
  4. Actual Rent Received or Receivable (AR): This is the actual rent collected or due from the tenant for the previous year. It includes all sums received or receivable for the use of the property, but excludes any portion of the rent which is attributable to the provision of amenities (like furniture, air conditioning, lifts) or services (like security, cleaning) for which a separate charge is made. Such charges, if any, are taxable under “Profits and Gains of Business or Profession” or “Income from Other Sources.”

The process for computing GAV for a let-out property is as follows:

  • Step 1: Determine Expected Rent (ER). Expected Rent is the higher of Municipal Value (MV) and Fair Rent (FR). However, this “higher of MV or FR” value is subject to a ceiling, which is the Standard Rent (SR). Therefore, Expected Rent (ER) is the higher of MV or FR, but limited to SR (i.e., ER = Min [Max(MV, FR), SR]). If there is no Rent Control Act applicable, then ER is simply the higher of MV or FR.
  • Step 2: Compare Expected Rent (ER) with Actual Rent (AR).
    • If Actual Rent (AR) is greater than or equal to Expected Rent (ER), then GAV is the Actual Rent (AR).
    • If Actual Rent (AR) is less than Expected Rent (ER), the reason for the shortfall needs to be considered.
      • Reason 1: Vacancy. If the property remained vacant for a part of the year, and because of this vacancy, the actual rent received (or receivable) is less than the expected rent, then the GAV will be the actual rent received (or receivable). This is a beneficial provision, as it prevents taxation on notional income during periods of genuine vacancy.
      • Reason 2: Other reasons (e.g., lower rent agreed). If the property was let out throughout the year but the actual rent received is still less than the expected rent for reasons other than vacancy, then the GAV will be the Expected Rent (ER). The law presumes that the owner could have reasonably expected to receive the higher expected rent.

It is important to note that “Actual Rent Received or Receivable” is reduced by “Unrealized Rent” if certain conditions are met under Rule 4 of the Income Tax Rules. Unrealized rent is rent that the owner was unable to recover from a tenant. If conditions (like the tenancy being bona fide, the defaulting tenant vacating or being evicted, and no other property of the tenant being occupied by the taxpayer) are satisfied, this unrealized portion reduces the actual rent for GAV calculation.

Gross Annual Value (GAV) for Self-Occupied Property (SOP)

As per Section 23(2) of the Act, if a property is occupied by the owner for their own residence, or cannot be occupied by the owner due to employment, business, or profession at another place, and the property is not actually let out during the whole or any part of the previous year, then its Gross Annual Value is taken as NIL. This provision applies to up to two self-occupied properties from assessment year 2020-21 onwards (previously only one property was allowed as SOP). If an individual owns more than two self-occupied properties, the GAV for any two properties (chosen by the taxpayer) will be NIL, and the remaining properties will be treated as “deemed to be let out.”

Gross Annual Value (GAV) for Deemed to be Let-out Property (DLOP)

A property is “deemed to be let out” in the following situations:

  1. If the owner has more than two self-occupied properties. In this case, the GAV for any two properties will be NIL, and the remaining properties will be treated as deemed to be let out.
  2. If the property is held as stock-in-trade by a builder or developer, and it is not let out for a period exceeding two years from the end of the financial year in which the certificate of completion of construction is obtained. For such properties, GAV for the period beyond two years will be computed as if they are let out. From Assessment Year 2020-21, this period was extended from one year to two years.

For a deemed to be let out property, the Gross Annual Value is taken as the Expected Rent (ER). Since there is no actual rent received, the comparison with actual rent is not possible. Thus, the GAV is simply the higher of Municipal Value or Fair Rent, subject to Standard Rent if applicable.

Gross Annual Value (GAV) for Partially Let-out and Partially Self-Occupied Property

If a property consists of two or more independent residential units, and one unit is self-occupied while the other unit(s) are let out, then the GAV is computed separately for each portion. The self-occupied portion will have a GAV of NIL, while the let-out portion will have its GAV computed as if it were a separate let-out property.

If a single property is let out for a part of the year and self-occupied for the remaining part of the year, it is treated as a let-out property for the entire year. The GAV will be computed as for a let-out property, with the actual rent being the rent received for the period it was let out. The vacancy adjustment rule will apply if the actual rent is lower than the expected rent due to vacancy.

After determining the Gross Annual Value (GAV), the first deduction allowed is for Municipal Taxes (also known as local taxes, property taxes). These taxes are deductible from the GAV only if they have been actually paid by the owner during the previous year. If the taxes are paid by the tenant, or if they are merely due but not paid, no deduction is allowed. The amount deducted for municipal taxes arrives at the Net Annual Value (NAV). It is from this Net Annual Value that further deductions are allowed under Section 24.

Deductions from Annual Value

Once the Net Annual Value (NAV) of the property is determined, the Income Tax Act, 1961, allows for specific deductions under Section 24 to arrive at the taxable income from house property. These deductions are granted to cover certain essential expenses and liabilities related to the property.

1. Standard Deduction (Section 24(a))

The most straightforward deduction is the standard deduction. This deduction is allowed irrespective of any actual expenditure incurred by the owner on repairs, collection charges, insurance, etc.

  • Amount: A flat 30% of the Net Annual Value (NAV).
  • Applicability: This deduction is available for all let-out properties and deemed to be let-out properties.
  • Purpose: It is presumed to cover all expenses related to the property like repairs (major or minor), collection charges for rent, building insurance premiums, electricity and water charges (if not borne by the tenant), etc. No other deductions are allowed for these specific expenses, even if the actual expenditure incurred is higher than 30% of NAV.
  • Non-Applicability: No standard deduction is allowed for self-occupied properties (SOP) because their NAV is NIL.

For instance, if the NAV of a let-out property is INR 5,00,000, the standard deduction allowed will be INR 1,50,000 (30% of INR 5,00,000), irrespective of the actual expenditure on repairs or other associated costs.

2. Interest on Borrowed Capital (Section 24(b))

This is a crucial deduction, especially for homeowners who have purchased or constructed their properties with the help of loans. Interest payable on money borrowed for the purpose of acquiring, constructing, repairing, renewing, or reconstructing the property is deductible. The rules for this deduction differ significantly for let-out/deemed let-out properties and self-occupied properties.

a. For Let-out / Deemed to be Let-out Properties:

  • Amount: There is no upper limit on the amount of interest that can be claimed as a deduction for a let-out or deemed to be let-out property. The entire amount of interest payable on the borrowed capital for the previous year is allowed as a deduction, provided the loan was utilized for the specified purposes.
  • Purpose of Loan: The loan must have been taken for the acquisition, construction, repair, renewal, or reconstruction of the house property.
  • Certificate: It is advisable to obtain an interest certificate from the lender (bank or financial institution) specifying the interest paid during the financial year.
  • Pre-construction Period Interest: Interest pertaining to the period prior to the completion of construction (known as pre-construction interest or pre-acquisition interest) is also allowed as a deduction. However, this is not allowed in one go. It is aggregated and allowed as a deduction in five equal annual instalments starting from the previous year in which the construction is completed.
    • Calculation: The pre-construction interest period starts from the date of borrowing and ends on 31st March immediately preceding the date of completion of construction or acquisition, or the date of repayment of the loan, whichever is earlier.
    • Example: If a loan was taken on 01.04.2020 and construction was completed on 30.09.2023, the pre-construction interest period would be from 01.04.2020 to 31.03.2023. The total interest for this period would be divided by five, and one-fifth would be allowed as a deduction for AY 2024-25 and the subsequent four assessment years.

b. For Self-Occupied Properties (SOP):

For self-occupied properties (where GAV is NIL), the deduction for interest on borrowed capital is subject to certain limits. This is a critical distinction from let-out properties.

  • Maximum Limit: The maximum interest deductible for a self-occupied property is INR 2,00,000 (Two Lakhs Rupees) or INR 30,000 (Thirty Thousand Rupees), depending on specific conditions.

    • INR 2,00,000 Limit: This higher limit applies if all the following conditions are satisfied:

      1. The loan was borrowed on or after April 1, 1999.
      2. The loan was taken for the acquisition or construction of the house property.
      3. The acquisition or construction of the house property is completed within five years from the end of the financial year in which the capital was borrowed. For example, if the loan was taken in FY 2018-19, and construction completed by FY 2023-24, this condition is met.
      4. A certificate from the person to whom the interest is payable (the lender) is obtained, specifying the amount of interest payable.
      5. The property is self-occupied.

    • INR 30,000 Limit: This lower limit applies in all other cases, specifically:

      1. If the loan was borrowed before April 1, 1999, for acquisition or construction.
      2. If the loan was borrowed for repair, renewal, or reconstruction of the property (irrespective of when the loan was taken).
      3. If the acquisition or construction is not completed within five years from the end of the financial year in which the capital was borrowed, even if the loan was taken on or after April 1, 1999, for acquisition/construction.

  • Pre-construction Interest for SOP: Similar to let-out properties, pre-construction interest for SOP is also allowed as a deduction over five equal annual instalments from the year of completion of construction. However, the total deduction (current year’s interest + 1/5th of pre-construction interest) cannot exceed the overall limit of INR 2,00,000 or INR 30,000, as applicable, for the self-occupied property.

  • Joint Ownership: If a property is jointly owned, each co-owner can claim the interest deduction up to the permissible limit (INR 2,00,000 or INR 30,000) for their respective share of interest. This means a couple jointly owning a house and taking a joint loan can potentially claim up to INR 4,00,000 (INR 2,00,000 each) as interest deduction if all conditions are met.

It is critical to understand that for self-occupied properties, even if the NAV is NIL, the interest on borrowed capital can lead to a loss from house property. This loss can be set off against other heads of income (like salary, business income, etc.) in the same assessment year, up to a maximum of INR 2,00,000. Any unadjusted loss can be carried forward for up to eight subsequent assessment years to be set off against income from house property only.

Other Important Considerations Regarding Deductions:

  • Municipal Taxes: As mentioned earlier, these are deducted from GAV to arrive at NAV. The deduction is allowed only if the taxes are actually paid by the owner during the previous year.
  • No Other Expenses: Apart from the standard deduction and interest on borrowed capital, no other expenses related to the house property (such as ground rent, land revenue, collection charges, commission for letting out, general repairs, insurance premium, etc.) are allowed as deductions. These are all covered under the standard deduction for let-out properties.
  • Arrears of Rent and Unrealized Rent (Section 25B): Any arrears of rent received, or unrealized rent subsequently realized, by an assessee are deemed to be income from house property in the financial year in which they are received or realized. From this amount, a standard deduction of 30% is allowed. No other expenses are deductible.

In summary, the deduction framework under Section 24 aims to provide relief to property owners by acknowledging the notional expenses and financial liabilities incurred. The clear distinction in interest deduction limits for self-occupied versus let-out properties reflects the legislative intent to provide a tax benefit for home ownership while also allowing full deduction for income-generating properties.

The taxation of income from house property in India is meticulously structured around the concept of “Annual Value,” which serves as the fundamental taxable base. This notional income, representing the property’s potential to generate rental income, is determined through a precise set of rules varying for let-out, self-occupied, and deemed to be let-out properties. For properties that are let out, the Gross Annual Value is a careful comparison between the market-driven expected rent and the actual rent received, with specific adjustments for vacancy and unrealized rent. In contrast, self-occupied properties benefit from a nil Gross Annual Value, recognizing their use for personal residence rather than income generation.

From the Gross Annual Value, municipal taxes actually paid by the owner are deducted to arrive at the Net Annual Value. It is from this Net Annual Value that the two primary deductions under Section 24 come into play, significantly influencing the final taxable income. The standard deduction, a fixed 30% of the Net Annual Value for let-out properties, serves as an all-encompassing allowance for routine expenses. This simplifies compliance by eliminating the need to track individual expenditure on repairs, insurance, or collection charges.

The deduction for interest on borrowed capital is particularly impactful, especially for taxpayers who leverage loans for property acquisition or construction. While let-out properties enjoy an unlimited deduction for interest, promoting investment in rental housing, self-occupied properties are subject to a specified maximum limit (either INR 2,00,000 or INR 30,000), contingent on the loan’s purpose, date, and construction completion timeline. This nuanced approach ensures that the tax system supports homeownership while also maintaining a balance in revenue collection. These statutory deductions collectively ensure that the tax burden on house property income is levied on a more equitable and realistic assessment of the owner’s net financial position, rather than on the gross notional income alone.