Income from House Property – Basis of Charge and Computation

Income from house property is one of the key heads of income under the Income-tax Act, 1961. It covers rental income or notional income from owned buildings and adjoining land. Section 22 lays down the basis of charge—tax applies only if the assessee owns the property and it is not used for business or professional purposes. This article explains how income from house property is computed, the rules for let-out and self-occupied properties, and the deductions available under Section 24.

Table of Contents

1. What is the Basis of Charge [Sec. 22]
2. When Property Income is Not Charged to Tax
3. What is the Basis of Computing Income from a Let Out House Property
4. How to Compute Taxable Income From Self-Occupied Property

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1. What is the Basis of Charge [Sec. 22]

Income is taxable under the head “Income from house property” if the following three conditions are satisfied:

Condition 1	The property should consist of any buildings or lands appurtenant thereto.
Condition 2	The assessee should be owner of the property.
Condition 3	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 income tax.

Unless, therefore, all the aforesaid conditions are satisfied, the property income cannot be charged to tax under the head “Income from house property”.

To put it differently, if all the aforesaid conditions are satisfied, property income is taxable under section 22 under the head “Income from house property”. It makes no difference if the assessee is a company which has been incorporated with the object of buying and developing landed properties.

Provisions Illustrated

The following illustrations are given to have better understanding:

1. X owns a building. It is given on rent. Income of the property is taxable under the head “Income from house property”, as the above-noted three conditions are satisfied.
2. Y owns a building. It is used by him for carrying on a business or he uses the building as his office/factory/godown. In this case, no income is taxable under the head “Income from house property”, as Condition 3 is not satisfied.

1.1 Property Consisting of Any Buildings or Lands Appurtenant Thereto

The property should consist of any buildings or land appurtenant thereto. Rental income of a vacant plot (not appurtenant to building) is not chargeable to tax under the head “Income from house property”, but is taxable either under the head “Profits and gains of business or profession” or under the head “Income from other sources”, as the case may be.

“Building” – The word “building” is wide enough to include residential houses (whether let out or self-occupied), building let out for office use, or for storage or for use as factory. Even music halls, dance halls, lecture halls and other public auditoriums are “buildings”.

“Land Appurtenant Thereto” – The appurtenant lands in respect of a building may be in the form of approach roads to and from public streets, compounds, courtyards, backyards, playgrounds, etc. It also includes car-parking spaces, roads connecting one department with another department, playgrounds for the benefits of employees, etc.

1.2 Assessee Should be the Owner of the Property

Income is taxable under the head, “Income from house property” only if the assessee is the owner (or deemed as “owner”) of a house property. The owner may be an individual, HUF, firm, company, co-operative society or association of persons, etc. Annual value of property is assessed to tax under section 22 in the hands of owner, even if he is not in receipt of income. It is not necessary that ownership should extend to the site on which building stands as well as the superstructure. Income from subletting is not taxable as income from house property.

Deemed Owner – Besides the legal owner, section 27 provides that the following persons are to be treated as deemed owner of house property for the purpose of charging tax on annual value under the head “Income from house property”:

1. If an individual transfers a house property without adequate consideration to his/her spouse or his/her minor child, the transferor is deemed as owner of the property. This rule is, however, not applicable if an individual transfers a house property to his/her spouse under an agreement to live apart or to his or her minor married daughter.

2. The holder of impartible estate is deemed as owner of the property.

3. If a property is allotted by a group co-operative housing society to its members under the house building scheme of the society, members are deemed as owner of the property. A similar rule is applicable, if a property is allotted to members by a company/AOP.

4. If a person has acquired a property under a “power of attorney transaction” by satisfying the conditions of section 53A of the Transfer of Property Act, he is deemed as owner of the property, although he may not be the “registered owner” of the property. Section 53A of the Transfer of Property Act requires the following conditions:

a. there is a registered agreement to sell in writing between the purchaser and the seller;

b. the purchaser has paid the consideration or he is ready to pay the consideration; and

c. the purchaser has taken the possession of the property.

If the aforesaid three conditions are satisfied, the purchaser becomes the deemed “owner” of the property for the purpose of income tax, even if he is not the registered owner of the property.

5. If a person takes a property on lease for 12 years or more, he becomes deemed owner of the company.

1.3 Property Should Not be Occupied by the Owner for His Own Business or Profession

Annual value of a house property is not chargeable to tax under the head “Income from house property”, if the owner uses the property for the purposes of carrying on his business or profession (whose income is chargeable to tax). The reason of this exclusion seems to be that notional rent of property is not allowable as a permissible deduction while computing business income, if a person carries on business or profession in his own house property.

A Few Examples – A few examples are given below:

1. X owns a property. He uses the property as his office, factory or godown. As the property is used for the purpose of carrying on own business or profession, nothing is taxable under section 22.
2. X Ltd. is a manufacturing company. The factory of the company is situated in Andhra Pradesh. Within the factory campus, there is a residential colony having 80 quarters for workers. These quarters are given to the workers for residential purposes. A nominal rent of Rs. 100 per month is recovered from the workers. As the purpose of letting out of residential quarters is to run the business smoothly, the residential quarters will be treated as house property used by the assessee for the purpose of its business. Accordingly, annual value thereof is not chargeable under section 22. Recovery of rent of Rs. 100 per month from the workers will be taken as business receipt.
3. Y Ltd. makes available a few rooms in its factory on nominal rent to the Government for locating a branch of nationalised bank, post office and central excise office for carrying on its business efficiently and smoothly. Nothing is taxable under section 22. Rent collected, being incidental to the business of Y Ltd., is assessable as business income under section 28.

1.4 Applicability of Section 22 in Certain Typical Cases

Apart from what is discussed earlier, the following points merit consideration while understanding implications and scope of section 22:

• House Property in a Foreign Country – A resident assessee is taxable under section 22 in respect of annual value of a property situated in a foreign country.
• Composite Rent – Apart from recovering rent of the building, in some cases, the owner gets rent of other assets (like furniture) or he charges for different services provided in the building (for instance, charges for lift, security, air conditioning, etc.). The amount so recovered is known as “composite rent”. The tax treatment of the composite rent is as follows:

1. 1. Where Composite Rent Includes Rent of Building and Charges for Different Services (Like Lift, Air Conditioning) – If the owner of a house property gets a composite rent for the property as well as for services rendered to the tenants, composite rent is to be split up and the sum which is attributable to the use of property is to be assessed in the form of annual value under section 22. The amount which relates to rendition of the services (such as electricity supply, provision of lifts, supply of water, arrangement for scavenging, watch and ward facilities, etc.) is charged to tax under the head “Profits and gains of business or profession” or under the head “Income from other sources”.
   2. Where Composite Rent is Rent of Letting Out of Building and Letting Out of Other Assets (Like Furniture) and the Two Lettings Are Not Separable – In this case, rent is received for letting out of building and letting out of other assets and the two lettings are not separable (e.g., letting out of cinema house along with letting out of furniture and projector). Such income is taxable either as business income or income from other sources. This rule is applicable even if sum receivable for the two lettings is fixed separately.
   3. Where Composite Rent is Rent of Letting Out of Building and Letting Out of Other Assets and the Two Lettings Are Separable – If there is letting out of building and letting out of other assets and the two lettings are separable (in the sense that letting of one is acceptable to the other party without letting out of the other; for instance letting out of building along with car), then income from letting out of building is taxable under the head “Income from house property” and income from letting out of other assets is taxable either as business income or income from other sources. This rule is applicable even if the assessee receives composite rent from his tenant for two lettings.

• When a House Property is Owned by Co-owners [Sec. 26] – If a house property is owned by two or more persons, then such persons are known as co-owners. If respective shares of co-owners are definite and ascertainable, the share of each such person (in the computed income of property) shall be included in his total income. It may be noted that co-owners are not taxable as an association of persons.

2. When Property Income is Not Charged to Tax

In some cases, rental income is not chargeable to tax. Some such cases are – income from farmhouse; annual value of any one palace of an ex-ruler; property income of a local authority/trade union/political party; house property held for charitable purposes, etc.

3. What is the Basis of Computing Income from a Let Out House Property

Income from a let out house property is determined as under:

	Rs.
Gross annual value [see para 3.1]	xxxx
Less – Municipal taxes [see para 3.2]	xxxx
Net annual value	xxxx
Less – Deduction under section 24 [see para 3.3]
Standard deduction	xxxx
Interest on borrowed capital	xxxx
Income from house property	xxxx

3.1 Gross Annual Value

Tax under the head “Income from house property” is not a tax upon rent of a property. It is tax on inherent capacity of a building to yield income. The standard selected as a measure of the income to be taxed is “annual value”.

Gross annual value is determined as follows:

Step I	Find out reasonable expected rent of the property [see para 3.1.1]
Step II	Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
Step III	Find out which one is higher—amount computed in Step I or Step II.
Step IV	Find out loss because of vacancy
Step V	Step III minus Step IV is gross annual value

Note – Where the house property is held as stock-in-trade and it is not let during the whole or any part of the previous year, the annual value of such property (or part thereof) shall be taken as nil. However, this concession is available only for a period up to 2 years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

Step I – Find out Reasonable Expected Rent

Reasonable expected rent is deemed to be the sum for which the property might reasonably be expected to be let out from year to year. In determining reasonable rent, several factors have to be taken into consideration, such as, location of the property, annual ratable value of the property fixed by municipalities, rents of similar properties in neighbourhood, rent which the property is likely to fetch having regard to demand and supply, cost of construction of the property and nature and history of the property. These factors play a vital role in determining reasonable expected rent of a house property. In a majority of cases, however, expected rent can be determined by taking into consideration the following factors:

a. municipal valuation of the property; or

b. fair rent of the property;

The higher of (a) or (b) is generally taken as expected rent.

If, however, a property is covered by a Rent Control Act, then the amount so computed cannot exceed the ‘standard rent’ determinable under the Rent Control Act.

• Municipal Valuation – For collecting municipal taxes, local authorities make a periodical survey of all buildings in their jurisdiction. Such valuation may be taken as a strong evidence representing the earning capacity of a building.
• Fair Rent of the Property – Fair rent of the property can be determined on the basis of a rent fetched by a similar property in the same or similar locality.
• Standard Rent Under Rent Control Acts – Standard rent is the maximum rent which a person can legally recover from his tenant under a Rent Control Act. A landlord cannot legally recover from his tenant more than standard rent, if a property is covered by a Rent Control Act.

Provisions Illustrated

As mentioned earlier, the reasonable expected rent is computed on the basis of three factors, namely:

a. Municipal Valuation (MV),

b. Fair Rent of the Property (FR); and

c. Standard Rent of the Property (SR).

The higher of (MV) and (FR), subject to maximum of (SR) is reasonable expected rent.

The example given below illustrates the aforesaid propositions:

(Rs. in thousand)

	A	B	C	D	E
Municipal Value (MV)	40	40	40	40	40
Fair Rent (FR)	46	46	46	48	51
Standard Rent (SR)	NA	45	35	45	63
Reasonable expected rent under Step I [MV or FR whichever is higher, subject to maximum of SR]	46	45	35	45	51*

*Reasonable expected rent cannot exceed the amount of standard rent. Reasonable expected rent can, however, be lower than standard rent.

STEP II – Find Out Rent Actually Received or Receivable

For the purpose of Step II, rent received or receivable shall be calculated as follows:

Rent of the previous year (or that part of the previous year) for which the property is available for letting out	xxxx
Less – Unrealised rent if a few conditions are satisfied	xxxx
Rent received/receivable before deducting loss due to vacancy	xxxx

The following points should be noted:

1. Loss due to vacancy shall not be deducted from the computation of rent received/receivable as given above. It shall be deducted under Step IV.
2. Sometimes a tenant pays a composite rent of property as well as certain benefits provided by the landlord. To determine rent received/receivable, composite rent must be disintegrated and it is only that part of it attributable to the let out of property which would form the basis for the aforesaid calculation.
3. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot be added to rent received or receivable.
4. A non-refundable deposit will be included in rent received or receivable on pro rata basis.
5. A refundable deposit cannot be included in rent received or receivable.
6. Advance rent cannot be rent received/receivable of the year of receipt.
7. Commission paid by the owner of a property to a broker is not deductible from rental income.
8. If maintenance charges are recovered from the tenant by a service provider (and not by the landlord), such maintenance charges cannot be added to actual rent received/receivable. Conversely, if maintenance charges are collected by the landlord, it shall be excluded from actual rent received/receivable in order to calculate rent received or receivable.

• When Unrealised Rent Shall be Excluded – Unrealised rent (which the owner could not realise) shall be excluded from rent received/receivable only if the following conditions are satisfied:

1. 1. the tenancy is bona fide;
   2. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
   3. the defaulting tenant is not in occupation of any other property of the assessee; and
   4. 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 proceedings would be useless.

3.2 Deduct Municipal Taxes

From the gross annual value computed above, deduct municipal taxes (including service taxes) levied by any local authority in respect of the house property. Municipal taxes are deductible only if:

(a) these taxes are borne by the owner, and

(b) are actually paid by him during the previous year.

The remaining amount left after deduction of municipal taxes is net annual value.

3.3 Deduction Under Section 24

The following two deductions are available under section 24:

a. Standard Deduction; and

b. Interest on Borrowed Capital.

• Standard Deduction – 30 per cent of net annual value is deductible irrespective of any expenditure in¬curred by the taxpayer.
• Interest on Borrowed Capital – Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

The following points should also be kept in view:

1. Interest on borrowed capital is deductible on “accrual” basis. It can be claimed as deduction on yearly basis, even if the interest is not actually paid during the year.
2. Deduction is available even if neither the principal nor the interest is a charge on property.
3. Interest on unpaid interest is not deductible.
4. No deduction is allowed for any brokerage or commission for arranging the loan.
5. Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is allowable as deduction.
6. Interest on borrowed capital is deductible fully without any maximum ceiling (in the case of a let out property).

• Interest of Pre-construction Period – Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property and pertaining to a period prior to the previ¬ous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, will be deducted in five equal annual instalments, commencing from the previous year in which the house is acquired or constructed.
• What is Pre-construction Period – Interest of pre-construction period is deductible in five equal instalments. The first instal¬ment is deductible in the year in which construction of property is completed or in which property is acquired. For this purpose “, pre-construction period” means the period commencing on the date of borrowing and ending on (a) March 31 immediately prior to the date of completion of construction/date of acquisition, or (b) date of repay¬ment of loan, whichever is earlier.

4. How to Compute Taxable Income from Self-occupied Property

Before steps for computation are explained, it would be advisable to highlight the following features which regulate tax incidence on self-occupied properties:

• A Property Occupied for Own Business Purposes – Where an assessee uses his property for carrying on any business or profession, no income is chargeable to tax under the head “Income from house property”. The assessee, in such a case, is not entitled to claim any deduction on account of rent in respect of such house property in computing taxable profits of the business or profession.
• Own Property Used for Own Residential Purposes – Where an assessee has occupied his property for own residential purposes, tax treatment is as follows:

If  only one property is used for own residential purposes	It is treated as self-occupied property
If  two  properties  are  used for own residential purposes	Two residential properties are treated as self-occupied properties
If more than two properties are used for own residential purposes	Only two houses (according to the choice of the taxpayer1) are treated as self-occupied properties and other house/houses will be treated as “deemed to be let out”

In the case of “deemed to be let out” property/properties, taxable income will be calculated in the manner explained in para 3 (gross annual value shall be taken as reasonable expected rent).

In the case of two self-occupied properties, treated as such, the procedure for determining taxable income is as follows:

4.1 Computation of Annual Value of Self-occupied Properties

Mode of computation is given below:

• If a person has occupied one property (or two properties) for his residential purposes, such property (or properties) are treated as “self-occupied property (or properties)”. Such property (or properties) may fall in any one of the following categories:
• If a person has occupied more than two properties for his residential purposes, only two properties (selected by the taxpayer) are treated as “self-occupied properties” and these properties may fall under any of the following categories:

Different Situations	Para No.
If such property is used throughout the previous year for own residential purposes, it is not let out or put to any other use	4.1.1
If  such  property  could not be occupied throughout the previous year because employment, business or profession of the owner is situated at some other place	4.1.2
When  a  part  of  the property (being independent residential unit) is self-occupied and the other part is let out	4.1.3
When such property is self-occupied for a part of the year and let out for the other part of the year	4.1.4

4.1.1 A House Property Fully Utilised Throughout the Previous Year for Self-Residential Purposes [Sec. 23(2)(a)]

Where the property consists of one house (or two houses) in the occupation of the owner for his own residence, the annual value of such houses shall be taken to be nil, under section 23(2)(a). The annual value shall also be considered nil if such properties could not be occupied by the owner due to employment, business, or profession carried on at another location, necessitating residence in a building not owned by him at that other place. Additionally, with effect from the assessment year 2025-26, the non-occupation of properties may be due to any other reason.

However, annual value of such property/properties shall be taken as nil only if the following conditions are satisfied:

Condition 1	The property (or part thereof) is not actually let during whole (or any part) of the previous year.
Condition 2	No other benefit is derived therefrom.

• Computation of Income – In the case of one property (or two properties) used throughout the previous year by the owner for his residential purpose, income shall be determined as follows:

Gross annual value	Nil
Less – Municipal tax	Nil
Net annual value	Nil
Less – Deduction under section 24
Standard deduction	Nil
Interest on borrowed capital	Deductible [see para 4.1.1a]
Income from one self-occupied property	xxxx

4.1.1a Interest on Borrowed Capital [Sec. 24(b)]²

Interest on borrowed capital [of the current year and pre-construction period] is deductible as explained in para 3.3. However, it is deductible in the case of one self-occupied property (or two self-occupied properties) subject to a maximum ceiling given below:

• Maximum Ceiling If Capital is Borrowed on or After April 1, 1999 – If the following three conditions are satisfied, interest on borrowed capital is deductible up to Rs. 2,00,000:

Condition 1	Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
Condition 2	The acquisition or construction should be completed within 5 years from the end of financial year in which the capital was borrowed.
Condition 3	The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.

If capital is borrowed for any other purpose (e.g., if capital is borrowed for reconstruction, repairs or renewals of a house property), then the maximum amount of deduction on account of interest is Rs. 30,000 (and not Rs. 2,00,000).

• Maximum Ceiling in Any Other Case – If the above three conditions [i.e., conditions (1), (2) and (3) (supra)] are not satisfied, then interest on borrowed capital is deductible up to a maximum of Rs. 30,000.

4.1.2 A House Property Which Is Not Actually Occupied by the Owner Owing to Employment or Business/Profession Carried On at Any Other Place [Sec. 23(2)(b)]

Section 23(2)(b) (up to the assessment year 2024-25) is applicable if the following conditions are satisfied:

Condition 1	The taxpayer owns one (or two) house properties, which cannot actually be occupied by him by reason of the fact that owing to his employment, business or profession, carried on at any other place.
Condition 2	He has to reside at that other place in a building not owned by him.
Condition 3	The property (or properties) mentioned at (a) (or part thereof) is not actually let out during whole (or any part of the previous year).
Condition 4	No other benefit is derived from the above property (or properties) by the owner.

If the above conditions are satisfied, income from the property (or properties) shall be determined according to the method given in para 4.1.1.

• Amendment Applicable from the Assessment year 2025-26 – The annual value shall be considered nil if one property (or two properties) could not be occupied by the owner for any reason, provided there is no letting out or no other benefit derived.

4.1.3 When a Part of Property is Self-Occupied and a Part is Let Out

If a house property consists of two or more independent residential units, one of which is self-occupied for own residential purposes and other unit(s) are let out, income is computed as follows:

1. Unit self-occupied for residential purpose throughout the previous year (which is not let out nor put to any other use)	See para 4.1.1
2. Let out units	See para 3
3. Unit self-occupied for residential purpose for a part of year and lying vacant for remaining part because of business, profession or employment, is situated at some other place	See para 4.1.2

4.1.4 Where a House is Self-Occupied for a Part of the Year and Let Out for the Remaining Part of the Year

In this case the benefit of section 23(2)(a) [see para 4.1.1] is not available and income will be computed as if the property is let out.

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1. The option should be exercised in such a way that the net income of a taxpayer is reduced to the minimum possible level. Moreover, the option may be changed every year.
2. If an individual/HUF opts for the new tax regime under section 115BAC, deduction under section 24(b) (i.e interest liability pertaining to one or two self-occupied properties) is not available.