3. Introduction
Income tax is a one of the major sources revenue to the government . The name tax indicates
compulsory contribution or payment of money by various persons to the government.
Income Tax means tax chargeable under the provisions of the income tax act [ Sec.2(43)]
In general sense income tax means tax on the income of the assessee whose income exceeds
the specified limit in the previous year and is chargeable at the prescribed rate.
Income tax can be charged only when the central Act, which normally is the Finance Act,
enacts that income tax shall be charged for any assessment year at the rate or rates
specified therein.
Every money receipt by a person is not chargeable to tax. Section 14 of the Act specifies five
heads of income on which tax can be imposed under the Income tax Act.
4. In order to be chargeable, an income has to be brought under one of these five heads.
The heads are
(i ) salaries
(ii) Income from House property
(iii) profits and gains of business or profession
(iv) capital gains and
(v) income from other sources.
In the discussion to follow, the relevant provisions of the Act relating to Income from
House Property would be considered and how the computation of income from this
source is to be made, namely, how the income is to be worked out and what are the
deductions to be given for computing the taxable income shall be explained. Sections
22 to 27 of the Act deal with the subject of taxation of income from house property.
5. Section 22 of the IT Act 1961
Section 22 provides for taxation of „annual value‟ of a property consisting of any
buildings or lands appurtenant thereto, of which the assessee is owner, under the head
“income from House Property”. Tax imposed under section 22 is a tax on „annual
value‟ of house property and is not a tax on “House Property”. However, if a house
property is occupied by a taxpayer for the purpose of business or profession carried on
by him (the profits of which are chargeable to income tax), annual value of such
property is not chargeable to tax under the head „Income from House Property‟
Conditions Necessary For Taxing Income From House Property:
These are:
• The property should consist of any building or land appurtenant thereto.
• The assessee should be the owner of the property.
• The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profits of which are chargeable to tax. Unless all the
aforesaid conditions are satisfied, the property income cannot be charged to tax under
the head „Income from House property‟.
6. Determination of Annual Value of Self-occupied property:
In case of one self-occupied house property which has not been actually let out at any
time, the annual value is taken as „nil‟. If, one is having more than one house property
using all of them for self-occupation, he is entitled to exercise an option in terms of
which, the value of one house property as specified by him will be taken at nil. The
annual value of the other self occupied house properties will be determined on
notional basis as if these had been let out.
The annual value of such a property would be taken to be nil subject to the following
conditions:
• The assessee must be owner of only one house property.
• He is not able to occupy the house property because of his employment, business
etc. being away from place where the property is situated.
• The property should not have been actually let.
• He has to reside at the place of employment in a building not belonging to him
[Section 23(2)(b)].
• He does not derive any other benefit from the property not occupied.
7. Determination of Annual Value of Let out house properties:
In respect of a let out house property, the rent received is usually taken as the annual let table
value. When, however, the rent is not indicative of the actual earning capacity of the house, the
notional annual value will have to be found and adopted. The standard rent would be the Annual
Value in the case of properties, subject to Rent Control Legislation, as mentioned earlier.
However, when the actual rent received or receivable is higher than the notional value as
calculated above, the higher figure will be taken for the purpose of Income-tax. From the annual
value as determined above, municipal taxes are to be deducted if the following conditions are
fulfilled:
1.The property is let out during the whole or any part of the previous year (There is no such
deduction in respect of a self-occupied house property).
2. The Municipal taxes must be borne by the landlord. (If the municipal taxes or any part thereof
are borne by the tenant, the same will not be deductible).
3. The municipal taxes must be paid during the year. (Where the municipal taxes have become due
but have not been actually paid, these will not be allowed. The municipal taxes may be claimed on
payment basis i.e., only in the year they were paid even if the taxes belonged to a different year).
Amount left after deduction of municipal taxes is net annual value
8. INCOME FROM HOUSE PROPERTY
It is one of the important head of the income under this head income tax payable by
the assessee on the annual value of the property consisting of any building or land
appurtenant there to of which he is a owner.
Important concepts or terms in Income from house property
1. Annual value (Sec.23):
Annual value is the basis for arriving at the income to taxed under this head. Hence the
determination of the correct amount of annual value of house property is important step
in computation of income from house property.
2. Gross Annual Value [Sec.23(1)]:
In India the Gross Annual value is the current value, the actual rent (whether received or
receivable) or the fair rental value, whichever is highest or which the property might be
expected to attract on the open market in ideal circumstances where there is neither a
glut nor a shortage of accommodation.
9. In other words,
The Gross Annual Value (GAV), also called just the Annual Value, of a property is used
in calculating the tax or rent which should be applied to the property.
Gross Annual Value can be understand with the help of following steps
Step.1: Municipal value or fair rent whichever is higher OR
Step 2: The amount arrived in step 1 or standard rent whichever is lower OR
Step 3: The amount arrived in step 2 or actual rent received whichever is higher.
Note: The computation of Gross Annual value occurs only in case of Let Out house
property but it is not so in case of Self occupied house property.
3. Actual Rent:
It means rent received minus unrealized rent and loss due to vacancy.
4. Unrealized rent: It means the rent which the owner could not collect or recover the
same from the tenant.
10. Types of House Property
Based on the computation of annual value house property can be divided in to two
categories such as;
1. Self Occupied House Property.
2. Let out house property.
1.Self Occupied House Property : If any one Building or house property occupied by the
assessee for his own residence during the previous year is called self occupied property.
Notice that he must occupied house property for whole years.
If assessee occupied more than one house for his self occupied purposes in that case
any one house can be treated as self occupied house of which annual value is Nil,
Remaining house should be treated as let out house property only. It is determined at the
option of the assessee.
11. Expenses allowable and Deductions allowable for self occupied house property:
1.Interest on loan taken for acquisition, construction, repairs and renovation
2.Pre construction period interest ( in 5 Annual equal installment )
Expenses allowable and Deductions not allowable for self occupied house property:
1.Municipal tax paid by owner or tenant is not allowed
2.Standard deduction u/s 24 is not allowed
3.Ground rent, Collection charges, Legal charges, repairs, insurance etc are not an allowable
expenses.
Proforma/ specimen of Computation of
Income from Self Occupied House Property for relevant A.Y 0000
Particulars Amount
Self-occupied House:
Gross annual value Nil
Less : Municipal tax Paid ( Not allowed ) ----
Annual Value Nil
Less : 1.Standard deduction @30% ( Not allowed ) ----
2. Interest on loan taken for acquisition/repair/renovation xxx
preconstruction period (in 5 equal instalment) xxx xxx
Income from Self occupied house property xxxx
12. Example with imaginary Figures
Particulars Amount
Gross annual value Nil
Less : Municipal tax Paid ( Not allowed ) -----
Annual Value Nil
Less: Deductions U/s 24
1.Standard deduction @30% ( Not allowed ) ----
2. Interest on loan taken for acquisition/repair/renovation 3000
preconstruction period interest (i.e. 10000x1/5) 2000 -5000
Income from Self occupied house property -5000
2.Let out house property: Let out house property means any building or house property let-
out to other persons in partly or fully during the previous year for which assesse collects
certain amount of money as a rent is called Let out house property.
Before computation of income from let-out house property we should compute Gross
annual value.
It can be calculated by using following Steps.
13. Calculation of Gross Annual Value:
Particulars Amount
Step(1) : Municipal value xxx
OR
Fair Rent xxx
Whichever is higher xxx
Step(2) : Results of Step(1) xxx
OR
Standard Rent xxx
Whichever is lower xxx
Step(3) : Results of Step(2) xxx
OR
Actual Rent received (Rent-Unrealised Rent ) Xxx
Whichever is more xxx
Less : Loss due to vacancy xxx
Gross annual value xxx
14. Note:
1.Municipal Value : Municipal Value means the annual letting value of the property as fixed by the
purposes of levying municipal taxes.
2.Fair rent: Fair rent means the rent that the property might reasonably expected to fetch from year
to year depending upon the locality, rent of similar properties in the surrounding area, etc.
3. Standard rent: Standard rent is the as fixed under the provisions of the Rent Control Act.
Example with imaginary Figures
Particulars Amounts
Step(1) : Municipal value 800000
OR
Fair Rent 600000
Whichever is higher 800000
Step(2) : Results of Step(1) 800000
OR
Standard Rent 1000000
Whichever is lower 800000
Step(3) : Results of Step(2) 800000
OR
Actual Rent received (1200000-200000) 1000000
Whichever is higher 1000000
Less: Loss due to Vacancy 250000
Gross Annual Value 750000
15. Expenses allowable and deductions allow
able for Computing income from Let Out House Property:-
1.Expenses Allowable: Municipal Tax paid by the owner or assessee during the previous. It
is collected at municipal value at certain Percentage.
2.Deductions Allowable: As per Sec.(24) following deductions are allowable
1) Standard deduction at 30% on annual value.
2) Interest on loan taken for Construction, acquisition, repairs and renovation of house
property.
3) Pre-construction period interest in 5 equal annual installment.
Expenses not allowed and deductions not allowed in computation of income from Let-
out house Property:-
1) Municipal tax Paid by tenant and municipal tax due is not an allowable expenses.
2) Expenses like repairs, insurance, fire insurance, ground rent, cost of amenities, collection
charges etc. should not be considered.
16. Proforma of Computation of Income from Let-out House
Property
Particulars Amount
Gross Annual value xxx
Less: Municipal tax paid xxx
Annual value xxx
Less: Deductions U/s 24 :
1. Standard deduction @30% on annual value xxx
2. Interest on loan taken for acquisition/ construction/ repairs/
renovation of house property. xxx
3. Pre-construction period interest xxx xxx
( in 5 equal annual installment )
Income from let-out house property xxxx
17. Remarks:
1. Rent on Sub-letting of house property is not taxable under the head income from
house property but it is taxable under the head income from other sources.
2. The loss on house property can be sett-off either against income from other house
property or it can be sett-off against income arrived in other head of incomes.
19. Residential Status & Tax Incidence
Residential Status of a company Sec. 6(3) :
An Indian company is always resident in India. A foreign company is resident in
India only if , during the previous year , control & management of its affairs is
situated wholly in India.
20. Points to be Kept in view at time of determining the
Residential Status of the Company :
1. Control & mgmt. refers to “Head & Brain”
2. Place of control & incorporation may differ
3. A company may be resident in more than one country
4. Central control & mgmt. lies where meeting of board of directors held
5. Place of operation may be differ from place of control of business
6. Control is different from shareholding control
7. A non-Indian company s de facto control must be in India
for residence in India
21. Residential Status & Tax Incidence Sec 5 :
According to Income Tax Act 1961, incidence of tax on a tax payer depends on
their residential status and also on the place of accrual or receipt of income In
case of company assessee, tax incidence depends upon following two
1. Indian Income &
2. Foreign Income
22. Indian Income:
Any of the following three is an Indian Income:
1.If income is received or deemed to be received in India during the previous
year & at the same time it accrues or arises or deemed to be arises in India during
previous year.
2. If income is received or deemed to be received in India during the previous
year but it accrues or arises outside India during previous year
3.If income received outside India during previous year but it accrues or arises
deemed to be accrues or arises in India during previous year.
23. Foreign Income :
If following two conditions are satisfied, then
such is foreign income-
1.If income is not received or not deemed to be received in India &
2.Income does not accrue or arise or does not deemed to accrue or arise in India.
Type of Income Resident in India Non-resident in
India
Indian Income Taxable in India Taxable in India
Foreign Income Taxable in India Not Taxable in India
24. Company :
Section 2(17) of the act defines company. The term company includes:
1.any Indian company
2.any corporate incorporated by or under the laws of country outside India
3.any institution, association or body which is or was assessable or was assessed
as a company for any assessment year under the 1922 Act or under the 1961 act
any institution, association or body, whether incorporated or not and whether
Indian or non Indian, which is declared by general or special order of the board to
be a company only for such assessment year or assessment years.
25. Indian Company
Indian company means a company formed and registered under the companies
act, 1956. Any company formed and registered under any law relating to
companies formerly in force in any part of India, other than Jammu and Kashmir
and the union territories as specified or a corporation established by or under a
central, state or provincial act or any institution, association or a body which is
declared by the board to be company under section2(17) are referred as Indian
company. In the case of state of Jammu and Kashmir, a company formed and
registered under any law for the time being in force in the state. Similarly in case
of union territories
26. Previous year :
The Financial Year in which the income is earned is known as the previous year.
Any financial year begins from 1st of April and ends on subsequent 31st March.
The financial year beginning on 1st of April2007 and ending on 31st
March2008isthe previous year for the assessment year 2008-2009.
Income :
There is no specific definition of income but for statutory purposes there are
certain items which are listed under the head income. These items include
those heads also which normally will not be termed as income but for
taxation we consider them as income. These items are included under
section2(24) of the income tax act, 1961. As per the definition in
section2(24), the term income means and includes:
27. INCOME :
1. Profits and gains
2. Dividends
3. Voluntary contributions received by a trust
4. The Value of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17of the act
5. Any special allowance or benefit, other than those included above
6. Any allowance granted to the assessee either to meet his personal expenses or at a place where he ordinarily
resides or to compensate him for the increased cost of living.
7. Capital gains
8. Any sum chargeable to income tax under section28of the income tax act
9. Any winnings from lotteries, crossword puzzles, races, including horse races, card games and games of any
sort or from gambling or betting of any form or nature whatsoever
10. Any received as contribution to the assessee's provident fund Gross Total Income
11. Under the scheme of computation of total income under the Income Tax Act, the income falling under each
head is to be computed as per the relevant provisions of the Act relating to computation of income under
that head. The aggregate of income under each head is known as 'Gross Total Income'
