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25. Income Tax Act

Taxability of Income from House Property

The inherent capacity of the property to earn income called the Annual Value of the property is taxable under the head ‘House Property’. This is taxed in the hands of the owner of the property

Computation of Annual Value:

The Gross Annual Value (G.A.V.) is the highest of

Rent received or receivable
Fair Market Value.
Municipal valuation.
(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent received, whichever is higher).

It may be noted that if the let out property was vacant for whole or any part of the previous year and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause (a) above, then the amount actually received/receivable shall be taken into account while computing the G.A.V. If any portion of the rent is unrealisable, (condition of unrealisability of rent are laid down in Rule 4 of I.T. Rules) then the same shall not be included in the actual rent received/receivable while computing the G.A.V. Net Annual Value (N.A.V.) is the GAV less the municipal taxes paid by the owner, provided the taxes were paid during the year.

Annual Value is the N.A.V. less the deductions available u/s 24.                    

Deductions available under Section 24:

A sum equal to 30% of the annual value as computed above.
Interest on money borrowed for acquisition/ construction/ repair/ renovation of property is deductible on accrual basis. Interest paid during the pre construction/acquisition period will be allowed in five successive financial years starting with the financial year in which construction/acquisition is completed subject to the following:
The amount of deduction shall not exceed Rs. 30000/-.
Where the  property is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and acquisition or construction is completed  within three years from the end of the financial year in which capital was borrowed, the amount of deduction shall not exceed Rs. 150000/-.
Some Important Points:

In case of a self occupied property, the annual value is taken as nil. Deduction u/s 24 for interest paid may still be claimed therefrom. The resulting loss may be set off against income under other heads but can not be carried forward.

If more than one property is owned and all are used for self occupation purposes only, then any one can be opted as self occupied, the others are deemed to be let out.

Annual value of one house away from workplace which is not let out can be taken as NIL, provided that it is the only house owned and it is not let out.

If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion of self occupied property or period of self occupation, as the case may be is to be excluded from the annual value.

From assessment year 1999-2000 onwards, an assessee who apart from his salary income has loss under the head ”Income from house property”, may furnish the particulars of the same in the prescribed form to his Drawing and Disbursing Officer who shall then take the loss also into account for the purpose of TDS from salary.

As per section 25B, where an assessee, being the owner of any property consisting of any building or lands appurtenant there to which may have been let to a tenant, receives any arrears of rent not charged to income tax for any previous year, then such arrears shall be taxed as the income of the previous year in which the same is received after deducting therefrom a sum equal to 30% of the amount of arrears in respect of repairs/collection charges.

It may be noted that the above provision shall apply whether or not the assessee remains the owner of the property in the year of receipt of such arrears.