House property can be let for residential or commercial purpose. As per the present tax laws, annual value from building or land appurtenant thereto is always taxable in the hands of the assessee under the head income from house property. However based on different circumstances, taxation may change. Below in this article, we will be discussing how use of house property can change the way income is taxed in India. You will also understand the difference between self-occupied and let out property in taxation.
To get the income taxable under the head house property, the following conditions are to be satisfied;
- the house property must consist of building and lands appurtenant thereto; and
- assessee must be the owner of the house property; and
- income must be from building or lands appurtenant thereto; and
- such property is not used by the assessee for the purpose of any business or profession carried on by him, the profit of which are chargeable to income tax.
Based on the use by the assessee, house property can be classified as self occupied, let-out or deemed to be let-out for income tax purposes. Based on this classification, income under the head house property will be calculated and taxed.
What is Self-occupied house property
A house will be treated as self-occupied, when it’s used by the assessee for own residence.
If the assessee has own and occupied more than two house, then out of these, any two house based on his choice will be considered as self-occupied and all others will be considered as deemed to be let out property. If its vacant, then it can be considered as self-occupied.
In case of self occupied property, you consider the interest from borrowed capital as tax deduction under section 24 as annual value and standard deduction is considered as Nil.
In other words, annual value of the two self occupied property based on assessee’s choice can be considered as nil.
Deemed to be let-out
As discussed above, a property can be considered as deemed to be let-out, if the assessee has occupied more than two house (two houses is applicable with effect from financial year 2019-20 onward) during the financial year.
If it’s treated as deemed to be let out, then income will be taxable under the head house property as if its let out. All other tax deductions as applicable under section 24 is also allowed for a deemed to be let out property.
House property is considered as let-out if its rented for the whole or part of the financial year. In this case, income will be taxable under the head house property after allowing tax deduction under section 24. For a let-out property, standard deduction is 30% of the net annual value and there is no limit for deduction on interest on borrowed capital.
Example to understand the concept of self-occupied, let out and deemed to be let out:-
|Number of houses property owned by assessee||Is it given on rent||Treated as|
|Two||Yes, both given on rent||Let-out|
|Two||No, not given on rent. Both are self-occupied.||Both can be considered as self-occupied.|
|Three||Yes, out of which one is used for own residence||The house used for own residence will be considered as self-occupied and the other two will be treated as let out.|
|Three||Yes, out of it two houses are used for own residence||Both the houses used for own residence can be considered as self-occupied. The building rented is considered as let-out property.|
No, all are self occupied
|Two out of three houses can be considered as self occupied based on assessee’s choice. The other one house can be considered as let-out property.|
When income from house property is taxed as business income
In case of a company, we have to check its main objective, as stated in the memorandum of association and the nature of business to know exactly what kind of business the company is doing.
If the company is engaged in the business of acquiring premises and letting them on rent to outsiders, then the income earned shall be taxable as business income instead charging to tax under the head income from house property. This means, if the assessee is in the business of taking land, putting commercial building thereon and letting it out for rent, then income derived by the assessee would not be chargeable to tax under the head ‘income from house property’, instead it would constitute business income.
In case the company’s main business is not to acquire buildings or commercial complex and letting them on rent, then income derived from letting out any building or land appurtenant thereto will always be taxable under the head house property.
Here is a list of cases where income will be taxable under the head house property if assessee’s main business is not letting out property on rent;
- Rent from a commercial complex even though it’s constructed on leasehold plot.
- Rent from unsold flats of a builder
- Income from letting out house property along with additional right of using furniture and fixtures.
- Income earned from leasing of properties of a manufacturing concern after cessation of its business.
If the business of the company is to lease its buildings or commercial complex to earn rent, it was held that the income so earned should be treated as its business income.
In case assess has earned rent for putting hoarding on the top of the building, then such income will be taxable under the head other sources instead of charging under the head house property. The reason for taking it as income from other sources is that the hoarding do not form part of the building.
Income from house property exempt from tax
Here is a list of certain selected cases where income from house property is not charged to tax;
- Income from firm house forming part of agricultural income – Section 10(1)
- Income from building or land appurtenant thereto held for any charitable purpose – Section 11
- Income from house property for a political party – Section 13A
- Property income to a local authority, approved scientific research institution, university, educational institutions, philanthropic hospital or medical institution, institution for the development of khadi and village industries, khadi and village industries board, body or authority for administering religious or charitable trust or endowment, registered trade union, statutory corporation or an institution or association financed by the government for promoting the interests of members of scheduled castes or scheduled tribes, co-operative society formed for promoting the interests of the members either of the scheduled castes or scheduled tribes or both. – Section 10
In case of composite rent, tax head will change based on the agreement executed and services rendered.
Note: With effect from assessment year 2021-22, if an individual or HUF opts to be taxed under the new tax regime as per the provisions of section 115BAC, that individual or HUF shall not be entitled to tax deduction of the interest amount of 30,000 or 2,00,000 rupees, as the case may be.