How use of house property matters in taxation

House property can be let for residential or commercial purpose. Annual value from building or land appurtenant thereto is always taxable 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.

To get it taxable under the head income from house property, the following three conditions are to be satisfied;

  • income must be from building or lands appurtenant thereto; and
  • Assessee must be the owner of the building; and
  • such property is not used by the assessee for the purpose of any business or profession carried on by him/her, the profit of which are chargeable to income tax.

Based on the use, house property can be classified as self occupied, let-out or deemed to be let-out for tax purposes. Based on this classification, income under the head house property will be calculated and taxed.

Self-occupied house property

A house will be self-occupied, when it’s used by the assessee for own residence. If the assessee has own and occupied more than one house, then out of these, one 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.

From financial year 2019-20 onwards, benefit of considering a house as self-occupied has been extended to 2 houses. This means, assessee can claim 2 house property as self-occupied and others as deemed to be let out property.

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.

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 one house (two houses 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.

Let-out

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 assesseeIs it given on rentTreated as
OneYesLet-out
OneNoSelf-occupied
TwoYes, both given on rentLet-out
TwoNo, not given on rent. Both are self-occupied.One house will be considered as self occupied based on assessee’s choice and the other one will be considered as deemed to be let out. From financial year 2019-20 onwards, both can be considered as self-occupied.
ThreeYesLet out
ThreeYes, out of which one is used for own residenceThe 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 residenceFor financial year 2018-19, one house out of the two used for own residence based on assessee’s choice will be treated as self occupied and the other one will be considered as deemed let-out. The house rented will be considered as let out property. For financial year 2019-20, both the houses used for own residence can be considered as self-occupied. The building rented is considered as let-out property. 



Three



No, all are self occupied
For financial year 2018-19, one out of these three, one house based on assessee’s choice will be considered as self-occupied. The other two will be considered as deemed to be let-out property. 
For financial year 2019-20, 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.

How tax head for house property income is decided on nature of business


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.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.