Tax Treatment of Income Under the Head “Income from House Property”

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

Check out Taxmann's Students' Guide to Income Tax Act including GST. It has been designed to bridge the gap between theory and application. This book is written in a simple language, explaining the provision of the law in a step-by-step manner – with the help of suitable illustrations, without resorting to paraphrasing of sections and legal jargons.

1. What is the basis of charge [Sec. 22]

66. 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. 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.

66.1 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.

66.2 Assessee should be owner of the property – Income is taxable under the head, “Income from house property” only if the assessee is the owner of a house property :

1. 1. The word “owner” includes a legal owner as well as deemed owner.
   2. For the purpose of section 22, owner may be an individual, HUF firm, company, co-operative society or association of persons, etc.
   3. 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.
   4. It is not necessary that ownership should extend to the site on which building stands as well as the superstructure.

66.2-1 Income from subletting is not taxable under section 22 – Income from subletting is not taxable as income from house property†.

Provisions illustrated

X owns a house property. He lets it out to Y for 3 years (rent being Rs. 10,000 per month). Y sublets it to Z on monthly rent of Rs. 40,000. Rental income of X is taxable under the head “Income from house property”. Since Y is not the owner of the house, his income is not taxable as under the head “Income from house property”, but is taxable as business income under section 28 or as income from other sources under section 56.

66.2-2 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”:

66.2-2a TRANSFER TO SPOUSE OR MINOR CHILD – 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.

Provisions illustrated

The following illustrations are given to have better understanding—

1. 1. X, an individual, owns a house property. On April 1, 2021, he transfers the property without any consideration to his wife. Rental income is received by Mrs. X after April 1, 2021. However, for the purpose of charging tax on rental income, X will be deemed as “owner” of the property. Consequently, income would be taxable in the hands of X.
   2. Y gifts Rs. 10,00,000 to Mrs. Y. Mrs. Y purchases a house property out of the gifted money. In this case, the aforesaid provisions are not applicable, as Y has transferred a sum of money to his wife who has purchased a property out of the gifted amount (he has not transferred a house property). Consequently, Y will not be deemed as “owner” of the property. In such a case, income of the property would be computed in the hands of Mrs. Y (as she is the owner of the property) and the income so calculated will be included in the income of Y under the provisions of section 64(1) [see para 123].

66.2-2b HOLDER OF IMPARTIBLE ESTATE – The holder of impartible estate is deemed as owner of the property.

Provisions illustrated

X is one of the ex-Rulers of a former princely state. He has divided all his properties amongst his three sons. However, he could not transfer a building, which is occupied by a temple and which is given, as per family convention, to his eldest son. All the three brothers along with other family members have right to enjoy the benefit of the property. Property is given to the eldest son as it cannot be divided amongst the three brothers as per the family convention. The eldest son is not the beneficial owner of the property. In other words, he holds the property as a trustee on behalf of his younger brothers. For the purpose of section 22, the eldest son, as holder of “impartible estate”, is deemed as “owner” of the property.

66.2-2c PROPERTY HELD BY A MEMBER OF CO-OPERATIVE SOCIETY/COMPANY/AOP – A member of co-operative society, company or other association of persons to whom a building (or a part thereof) is allotted or leased under the house building scheme of the society, company or association, is treated as deemed owner of such property.

Provisions illustrated

A flat is allotted by a co-operative group housing society to X, one of its members under the house building scheme of the society. X is deemed as “owner” of the property for the purpose of section 22 (although under the general law the property is owned by the co-operative society).

66.2-2d A PERSON WHO HAS ACQUIRED A PROPERTY UNDER A POWER OF ATTORNEY TRANSACTION – 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 :

Condition 1	There is an agreement in writing between the purchaser and the seller.
Condition 2	The purchaser has paid the consideration or he is ready to pay the consideration (if there is no consideration as in the case of gift, then section 53A of the Transfer of Property Act is not applicable).
Condition 3	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.

Provisions illustrated

X enters into a written agreement to purchase a property from Y for Rs. 25,00,000. He has paid the consideration and taken possession of the property. The sale deed is yet to be registered. He becomes deemed “owner” of the property for the purpose of paying tax on rental income, although he is not the registered owner of the property.

66.2-2e A PERSON WHO HAS ACQUIRED A RIGHT IN A BUILDING UNDER SECTION 269UA(f) – If a person acquires a right in a building by virtue of a transaction which is referred to in section 269UA(f), then he is deemed as owner of the property. Broadly speaking, section 269UA(f) covers the case of taking a property on lease for a term of not less than 12 years (whether fixed originally or there is a provision for extension of term and the aggregate period is not less than 12 years). This provision of deemed ownership does not cover any right by way of a lease from month to month or for a period not exceeding one year.

Provisions illustrated

The following illustrations are given to have better understanding—

1. 1. X owns a property. It is given on lease for a period of 12 years to Y, lease rent being Rs. 40,000 per month. As the period of lease is not less than 12 years, Y becomes deemed “owner” of the property.
   2. A owns a property. It is given on lease for a period of 6 years to B, lease rent being Rs. 20,000 per month. B has a right to get renewal of lease for further period of 6 years after the expiry of lease. In this case, the aggregate period of lease is not less than 12 years. Therefore, B is deemed as “owner” of the property.
   3. C owns a property, it is given on lease to D for a period of one month, rent being Rs. 10,000. D has a right to get renewal of the lease subject to the condition that every time it will be renewed only for a period of one month and such renewal is possible with mutual consent till 2051. In this case, the aggregate period of lease is more than 12 years, but D will not become deemed “owner” of the property (the property is given on lease from month to month).

66.3 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.

p A few examples – A few examples are given below –

1. 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.

66.4 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 :

66.4-1 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. A resident but not ordinarily resident or a non-resident is, however, chargeable under section 22 in respect of income of a house property situated abroad, provided income is received in India during the previous year. If tax incidence is attracted under section 22 in respect of a house property situated abroad, annual value will be computed as if property is situated in India.

66.4-2 DISPUTED OWNERSHIP – If title of ownership of a house property is under dispute in a court of law, the decision about who is owner rests with the Income-tax Department. Thus, mere existence of dispute as to title cannot hold up an assessment even if a suit has been filed. Generally, the person who is in receipt of income or the person who enjoys the possession of a house property as owner, though his claim is disputed, is assessable to tax under section 22.

66.4-3 PROPERTY HELD AS STOCK-IN-TRADE – As a specific head of charge is provided for income from house property, annual value of house property cannot be brought to tax under any other head of income. If three conditions given by section 22† are satisfied, rental income of a house property is taxable under the head “Income from house property”. This rule is applicable even if the property is held by the owner as his stock-in-trade.

66.4-4 treatment of 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—

66.4-4a 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”.

Provisions illustrated

The following illustrations are given to have better understanding—

1. 1. X owns a property. It is given on rent to Y. Y annually pays Rs. 1,00,000 as rent of the property and Rs. 20,000 for different services like lift, security, air-conditioning, etc. In this case, Rs. 20,000 is not taxable in the hands of X as income from house property. Rs. 20,000 would be taxed in the hands of X after deducting his actual expenditure for providing different services (lift, security, air-conditioning, etc.) as income from other sources or as business income.
   2. A owns a property. It is given on rent to B. B annually pays Rs. 1,50,000 as rent of the building as well as the charges for different services (like lift, security, etc.) provided by A. In this case, one has to split up the annual payment of Rs. 1,50,000 into rent of the building and charges for different services. The amount, which relates to rendition of the services (after deducting actual expenditure) is taxable either as business income or as income from other sources. The sum, which is attributable to the use of the property, is to be assessed in the form of annual value under section 22 under the head “Income from house property”. This rule is applicable even if it is difficult to split up the annual payment of Rs. 1,50,000. In other words, in such a case it is not legally correct to assess the entire amount of Rs. 1,50,000 (less expenditure) as business income or as income from other sources.

66.4-4b 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 – If there is letting of machinery, plant and furniture and also letting of the building and the two lettings are inseparable (in the sense that letting of one is not acceptable to the other party without letting of the other), then 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.

Provisions illustrated

The following illustrations are given to have a better understanding—

1. 1. X owns an air-conditioned furnished lecture hall. It is let out, annual rent being Rs. 5,00,000 (it includes rent of building and rent of air-conditioner and furniture). In this case, letting of lecture hall is not separable from the letting of air-conditioner/furniture. This income (after excluding expenditure) is taxable as business income or as income from other sources.
   2. X owns an air-conditioned furnished lecture hall. It is let out, annual rent being Rs. 3,00,000 for building and Rs. 2,00,000 as rent of air-conditioner and furniture. In this case, letting of lecture hall is not separable from the letting of air-conditioner/furniture. This income (after excluding expenditure) is taxable as business income or as income from other sources. This rule is applicable even if from the agreement one can find out rent of building and rent of air-conditioner/furniture separately.

66.4-4c 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 of other assets and the two lettings are separable (in the sense that letting of one is generally acceptable 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.

Provisions illustrated

X gets Rs. 20,000 per month as rent from Y for letting out of a building and a car [the two lettings are separable in the sense that Y was given an option to take on rent either the building (at Rs. 16,000) or the car (at Rs. 4,000) or both]. The rent of the building is taxable under the head “Income from house property” and the rent of car is taxable either as business income or income from other sources.

66.4-5 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 [for detailed discussion, see problem 73-P1].

66.4-6 PRINCIPLE OF MUTUALITY† AND SECTION 22 – Tax levied under section 22 is tax on income from house property and it is not a tax on house property. A club owns a house property and it provides recreational and refreshment facilities exclusively to its members and their guests. Its facilities are not available to non-members. The club is run on ‘no profit no loss’ basis. The members pay for all their expenses and are not entitled to any share in the profit. Surplus, if any, is used for maintenance and development of the club. The business of club is governed by principle of mutuality. It is not only the surplus from the activities of the business of the club that is excluded from the levy of income-tax, even the annual value of the club’s house property as contemplated in section 22 will be outside the purview of the levy of income-tax—Chelmsford Club v. CIT [2000] 109 Taxman 215 (SC).

Dive Deeper:
Income from House Property – Exemption, Relief and Practice Questions

2. When property income is not charged to tax

a. In the following cases, rental income is not charged to tax :

b. income from farm house [sec. 2(1A)(c) read with sec. 10(1)] ;

c. annual value of any one palace of an ex-ruler [sec. 10(19A)] ;

d. property income of a local authority [sec. 10(20)] ;

e. property income of an approved scientific research association [sec. 10(21)] ;

f. property income of an educational institution and hospital [sec. 10(23C)] ;

g. property income of a trade union [sec. 10(24)] ;

h. house property held for charitable purposes [sec. 11] ;

I. property income of a political party [sec. 13A] ;

j. property used for own business or profession [sec. 22] ; and

k. one self-occupied property [sec. 23(2)].

3. What is the basis of computing income from a let out house property

68. Income from a let out house property is determined as under :		Rs.
Gross annual value [see para 68.1]		xxxx
Less : Municipal taxes [see para 68.2]		xxxx
Net annual value		xxxx
Less : Deduction under section 24 [see para 68.3]
–	Standard deduction [see para 68.3-1]	xxxx
–	Interest on borrowed capital [see para 68.3-2]	xxxx
Income from house property		xxxx

68.1 Gross annual value [Sec. 23(1)] – 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 68.1-1]
Step II	Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy [see para 68.1-2]
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 [see para 68.1-3]

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.

68.1-1 Step I – Find out REASONABLE EXPECTED RENT [SEC. 23(1)(a)] – 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 [seepara 68.1-1a]; or

b. fair rent of the property [seepara 68.1-1b],

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’ [see para 68.1-1c] determinable under the Rent Control Act.

68.1-1a 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. It cannot, however, be considered to be a conclusive evidence. In some big cities (like Delhi, Mumbai, Chennai and Kolkata) municipal authorities determine net ratable value after deducting 10 per cent of the gross ratable value on account of repairs and an allowance for service taxes (such as sewerage tax and water tax). The net municipal valuation, therefore, requires an adjustment for determining expected rent for income-tax purposes.

68.1-1b 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. Though two properties cannot be alike in every respect, the evidence afforded by transactions of other parties in the matter of other properties in the neighbourhood, more or less comparable with the property in question, is relevant in arriving at reasonable expected rent.

68.1-1c 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. The Supreme Court has observed in a few cases† that a landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent under the Rent Control Act. This rule is applicable even if a tenant has lost his right to apply for fixation of the standard rent. This rule is also applicable to the owner himself. In other words, if a property is covered under the Rent Control Act, its reasonable expected rent cannot exceed the standard rent (fixed or determinable) under the Rent Control Act.

68.1-1d PROVISION 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—see Dr. Balbir Singh v. MCD [1985] 152 ITR 388 (SC). In other words, standard rent is the maximum amount of reasonable expected rent. In the case of E, Rs. 51,000 (being higher of municipal valuation and fair rent) is the reasonable expected rent. Since this amount is lower than the maximum ceiling (i.e., standard rent: Rs. 63,000), it is taken as reasonable expected rent.

68.1-2 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 [see para 68.1-2a]	xxxx
Rent received/receivable before deducting loss due to vacancy	xxxx

The following points should be noted—

1. 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. Occupier’s (i.e., tenant’s) share of municipal tax realised from the tenant cannot be added to actual rent received/receivable, as it is the occupier’s duty to pay municipal tax—CITv. Gillanders Arbuthnot & Co. Ltd. [1983] 142 ITR 598 (Cal.).
   4. 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—CITv. Parbutty Churn Law [1965] 57 ITR 609 (Cal.).
   5. A non-refundable deposit will be included in rent received or receivable on pro ratabasis.
   6. A refundable deposit cannot be included in rent received or receivable.
   7. Advance rent cannot be rent received/receivable of the year of receipt.
   8. Commission paid by the owner of a property to a broker for rental income is not deductible.
   9. 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 of the property.

68.1-2a WHEN UNREALISED RENT SHALL BE EXCLUDED [EXPLN. TO SEC. 23(1)] – Unrealised rent (which the owner could not realise) shall be excluded from rent received/receivable only if the following conditions are satisfied—

a. the tenancy is bona fide;

b. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

c. the defaulting tenant is not in occupation of any other property of the assessee; and

d. 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.

68.1-3 Computation with the help of illustrations – To have better understanding, the following problems are given—

Problems

68.1-3P1 X, Y, Z, A and B separately own the following properties—

(Rs. in thousand)
	H1	H2	H3	H4	H5
	X	Y	Z	A	B
Municipal value (MV)	105	105	105	105	105
Fair rent (FR)	107	107	107	107	107
Standard rent under the Rent Control Act (SR)	NA	88	88	135	135
Actual rent	103	112	86	114	97
Unrealized rent (conditions mentioned in para 68.1-2a are satisfied)	1	2	1	2	1
Period of the previous year (in months)	12	12	12	12	12
Period during which the property remains vacant	Nil	Nil	Nil	Nil	Nil

Find out the gross annual value for the assessment year 2022-23.

Solution : In this case gross annual value shall be determined as follows—

(Rs. in thousand)
	X	Y	Z	A	B
Computation of gross annual value
Step I – Reasonable expected rent of the property [MV or FR,
whichever is higher, but subject to maximum of SR]	107	88	88	107	107
Step II – Rent received/receivable after deducting unrealized
rent but before adjusting loss due to vacancy	102	110	85	112	96
Step III – Amount computed in Step I or Step II, whichever is higher	107	110	88	112	107
Step IV – Loss due to vacancy	Nil	Nil	Nil	Nil	Nil
Step V – Gross annual value is Step III minus Step IV	107	110	88	112	107

 

68.1-3E1 Find out the gross annual value in the following cases for the assessment year 2022-23—
(Rs. in thousand)
	X	Y	Z
Municipal value (MV)	95	60	60
Fair rent (FR)	96	54	55
Standard rent under the Rent Control Act (SR)	94	78	79
Actual rent	93	106	78
The entire rent is realised. Properties are let out throughout the previous year. Find out the gross annual value for the assessment year 2022-23.

68.1-3P2 X owns a house property (municipal valuation: Rs. 1,45,000, fair rent: Rs. 1,36,000, standard rent: Rs. 1,24,000). It is let out throughout the previous year (rent being Rs. 8,000 per month up to November 15, 2021 and Rs. 14,000 per month thereafter). X transfers the property to Y on January 31, 2022. Find out the gross annual value of the property in the hands of X for the assessment year 2022-23.

Solution : Computation of gross annual value

	Rs.
Municipal value from April 1, 2021 to January 31, 2022 (Rs. 1,45,000 ÷ 12 × 10) (MV)	1,20,833
Fair rent from April 1, 2021 to January 31, 2022 (Rs. 1,36,000 ÷ 12 × 10) (FR)	1,13,333
Standard rent from April 1, 2021 to January 31, 2022 (Rs. 1,24,000 ÷ 12 × 10) (SR)	1,03,333
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum
of SR]	1,03,333
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy
(Rs. 8,000 × 7½ + Rs. 14,000 × 2½)	95,000
Step III – Amount computed in Step I or Step II, whichever is higher	1,03,333
Step IV – Loss due to vacancy	Nil
Step V – Gross annual value is Step III minus Step IV	1,03,333
68.1-3E2 In problem 68.1-3P2, find out gross annual value in the hands of Y for the assessment year 2022-23.

68.1-3P3 Find out the gross annual value in the case of the following properties let out throughout the previous year for the assessment year 2022-23—

(Rs. in thousand)
	X	Y	Z	A	B
Municipal value (MV)	60	60	60	112	112
Fair rent (FR)	68	68	68	117	117
Standard rent under the Rent Control Act (SR)	62	62	70	115	115
Annual rent	67	67	73	121	110
Unrealised rent of the previous year 2021-22 which could not be realised and
conditions of rule 4 are satisfied [see para 68.1-2a]	2	6	5	50	40
Loss due to vacancy	1	1	1	1	–
Solution :
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	62	62	68	115	115
Step II – Rent received/receivable after deducting unrealized rent but
before adjusting loss due to vacancy	65	61	68	71	70
Step III – Amount computed in Step I or Step II, whichever is higher	65	62	68	115	115
Step IV – Loss due to vacancy	1	1	1	1	–
Step V – Gross annual value is Step III minus Step IV	64	61	67	114	115

The following points should be noted—

1. 1. Unrealised rent shall be deducted from rent received/receivable only if conditions of rule 4 are satisfied [seepara 68.1-2a]. Conversely, if these conditions are not satisfied, then unrealised rent shall not be deducted from rent received or receivable.
   2. If the conditions of rule 4 are satisfied, unrealised rent of the current previous year is deductible. In other words, unrealised rent of the earlier year(s) is not deductible.

68.1-3E3 Recalculate gross annual value in problem 68.1-3P3 after taking into consideration the following additional information— 1. In the case of X, the defaulting tenant has not vacated the property, nor have steps been taken to compel the tenant to vacate the property. 2. In the case of Y, the defaulting tenant has occupied another property of Y. 3. Z has not taken any step to institute legal proceedings for the recovery of unpaid rent, though Z agrees that legal proceeding will not be useless. 4. A has rented out another property owned by him to defaulting tenant with effect from March 1, 2022. 5. B satisfies all the conditions of rule 4.

68.1-3P4 Find out the gross annual value in the case of the following properties for the assessment year 2022-23 (there is no unrealised rent)—

(Rs. in thousand)
	X	Y	Z	A	B	C	D
Municipal value (per annum)(MV)	60	61	60	80	80	140	140
Fair rent (per annum) (FR)	65	66	64.5	78	78	150	150
Standard rent under the Rent Control Act (per annum) (SR)	59.5	59	63	85	76	120	120
Annual rent	72	57	72	72	NA	96	144
Property remains vacant (in number of month)	(1)	(1½)	(5)	(3)	(12)	(10)	(10)
Loss due to vacancy	6	7.125	30	18	–	80	120
Solution :
Computation of gross annual value
Step I – Reasonable expected rent of the property [MV or
FR, whichever is higher, but subject to maximum of SR]	59.5	59	63	80	76	120	120
Step II – Rent received/receivable after deducting un-
realized rent but before adjusting loss due to vacancy	72	57	72	72	Nil	96	144
Step III – Amount computed in Step I or Step II, whichever
is higher	72	59	72	80	76	120	144
Step IV – Loss due to vacancy	6	7.125	30	18	76	80	120
Step V – Gross annual value is Step III minus Step IV	66	51.875	42	62	Nil	40	24

 

68.1-3E4 Recalculate the gross annual value in the case of A if his property remains vacant throughout the previous year 2021-22 and, consequently, the figure of annual rent is not available. Also recalculate gross annual value in the cases of c and D if their properties remain vacant for one month only.

68.1-3P5 Find out the gross annual value in the following cases for the assessment year 2022-23 (there is no unrealised rent)—

		X	Y
		Rs.	Rs.
Municipal value (per annum) (MV)		61,000	61,000
Fair rent (per annum) (FR)		1,08,000	30,000
Standard rent under the Rent Control Act (per annum) (SR)		60,000	60,000
Rate of rent
–	old tenant (from April 1, 2021 to June 30, 2021) (per month)	5,000	2,000
–	new tenant (from July 1, 2021 to December 31, 2021) (per month)	9,000	2,500
Period when the property remains unoccupied because suitable tenant		January 1, 2022 to	January 1, 2022 to
was not available		March 31, 2022	March 31, 2022
Actual rent received/receivable (if there is no vacancy)		96,000	28,500
Loss due to vacancy		27,000	7,500
Solution : Computation of gross annual value
Step I – Reasonable expected rent of the property [MV or FR, whichever
is higher, but subject to maximum of SR]		60,000	60,000
Step II – Rent received/receivable after deducting unrealized rent but
before adjusting loss due to vacancy		96,000	28,500
Step III – Amount computed in Step I or Step II, whichever is higher		96,000	60,000
Step IV – Loss due to vacancy		27,000	7,500
Step V – Gross annual value is Step III minus Step IV		69,000	52,500

 

68.1-3E5 In problem 68.1-3P5, assume that the property of X remains vacant throughout the previous year 2021-22. However, the property of Y remains vacant from April 1, 2021 to January 31, 2022 and it is let out from February 1, 2022 onwards (rent being Rs. 10,000 per month). Recalculate the gross annual value for the assessment year 2022-23 (other figures remain the same).

68.1-3P6 Find out the gross annual value in respect of the following properties for the assessment year 2022-23—

(Rs. in thousand)
	X	Y	Z	A	B
Municipal value (MV)	140	180	180	140	231
Fair rent (FR)	145	185	185	145	262
Standard rent (SR)	142	175	175	142	241
Actual rent if property is let out throughout the previous year 2021-22	168	168	168	168	252
Unrealised rent of the previous year 2021-22	14	42	1	70	42
Unrealised rent of the previous year 2020-21	3	4	5	6	7
Period when the property remains vacant (in number of months)	(½)	(1)	(1)	(3)	(5)
Loss due to vacancy	7	14	14	42	105
Solution :
Computation of gross annual value
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	142	175	175	142	241
Step II – Rent received/receivable after deducting unrealized rent of the current previous year but before adjusting loss due to vacancy (unrealized of earlier years is not considered)	154	126	167	98	210
Step III – Amount computed in Step I or Step II, whichever is higher	154	175	175	142	241
Step IV – Loss due to vacancy	7	14	14	42	105
Step V – Gross annual value is Step III minus Step IV	147	161	161	100	136

 

68.1-3E6 In problem 68.1-3P6 recalculate the gross annual value in the case of A if property is let out (rent being Rs. 48,000 per annum) only for 10 months, vacant for 2 months and rent of 4 months could not be realised (other figures remain the same).

68.2 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.

Municipal taxes, levied by local authority but not paid by the assessee during the previous year, are not deductible. If property is situated in a foreign country, municipal taxes levied by foreign local authority are deductible (if such taxes are paid by the owner).

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

68.3 Deduction under section 24 – The following two deductions are available under section 24—

a. standard deduction [seepara 68.3-1] ; and

b. interest on borrowed capital [seepara 68.3-2].

The list of allowance of section 24 is exhaustive—Indian City Properties v. CIT [1965] 55 ITR 262 (Cal.), CIT v. H.G. Gupta & Sons [1984] 149 ITR 253 (Delhi). In other words, no other deduction can be claimed. For instance, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of liftman, etc.

68.3-1 STANDARD DEDUCTION [SEC. 24(a)] – 30 per cent of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.

68.3-2 Interest on borrowed capital [Sec. 24(b)] – 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 :—

• • If capital is borrowed for the purpose of purchasing a plot of land, interest liability is deductible even if construction is financed out of own funds.
  • 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.
  • Deduction is available even if neither the principal nor the interest is a charge on property.
  • Interest on unpaid interest is not deductible.
  • No deduction is allowed for any brokerage or commission for arranging the loan.
  • Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is allowable as deduction—Circular No. 28, dated August 20, 1969. This rule is applicable even if the first loan was interest-free loan.
  • Any interest chargeable under the Act, in the hands of recipient and payable out of India, on which tax has not been paid or deducted at source, and in respect of which there is no person who may be treated as an agent, is not deductible, by virtue of section 25, in computing income chargeable under the head “Income from house property”.
  • Interest on borrowed capital (according to rules given in this para and para 68.3-2a) is deductible fully without any maximum ceiling (in the case of a let out property).
  • Transaction of allotment of a property to an assessee on instalment basis does give rise to relationship of borrower and lender between the assessee and the estate officer and as such interest paid by the assessee on instalments constitutes interest on borrowed capital.

68.3-2a 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 previous 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 instalment 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 repayment of loan, whichever is earlier.

Problems

68.3-2P1 X takes a loan of Rs. 40,000 @ 15 per cent per annum for constructing a house on June 10, 2016. Construction of the house is completed on January 20, 2022.

Date of repayment of loan is (a) January 16, 2027, or (b) June 30, 2023, or (c) October 31, 2019.

Solution :  If date of repayment of loan is January 16, 2027 or June 30, 2023, then pre-construction period ends on March 31, 2021 (being March 31 immediately prior to the date of completion of construction/acquisition). Interest on Rs. 40,000 @ 15 per cent per annum from June 10, 2016 to March 31, 2021 is Rs. 28,849. Amount of instalment deductible in first 5 years is Rs. 5,770 (i.e., Rs. 28,849/5).

If date of repayment of loan is October 31, 2019, then pre-construction period ends on October 31, 2019 (being March 31, immediately prior to completion of construction or date of repayment of loan, whichever is earlier). Interest on Rs. 40,000 @ 15 per cent per annum from June 10, 2016 to October 31, 2019 comes to Rs. 20,341 (instalment deductible in first 5 previous years being Rs. 4,068). The table given below highlights the interest deductible in different previous years :

	Previous years
	Ending	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28
	on March
	31, 2022
	Rs.	Rs.	Rs.	Rs.	Rs.	Rs.	Rs.
If date of repayment of loan is January 16, 2027 :
Current year’s interest	6,000*	6,000	6,000	6,000	6,000	4,767	Nil
Pre-construction period’s interest	5,770	5,770	5,770	5,770	5,770	Nil	Nil
Total deduction	11,770	11,770	11,770	11,770	11,770	4,767	Nil
If date of repayment of loan is June 30, 2023
Current year’s interest	6,000*	6,000	1,479	Nil	Nil	Nil	Nil
Pre-construction period’s interest	5,770	5,770	5,770	5,770	5,770	Nil	Nil
Total deduction	11,770	11,770	7,249	5,770	5,770	Nil	Nil
If date of repayment of loan is October 31, 2019 :
Current year’s interest	Nil	Nil	Nil	Nil	Nil	Nil	Nil
Pre-construction period’s interest	4,068	4,068	4,068	4,068	4,068	Nil	Nil
Total	4,068	4,068	4,068	4,068	4,068	Nil	Nil

Note – Interest is calculated on the basis of number of days. While the day of borrowing is included, the day of repayment of loan is excluded.

68.3-2E1 [P5.12]** X takes a loan on January 3, 2018 of Rs. 1,60,000 @ 18 per cent per annum for construction of a commercial house property. Construction of the property is completed on July 17, 2021. Loan is repaid on November 30, 2021. Calculate the amount of interest which is deductible for the assessment years 2022-23 and 2023-24.

4. How to compute taxable income from self-occupied property

69. 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 [see para 66.3].
  • 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 taxpayer) 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 68 (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 –

69.1 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	69.1-1
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	69.1-2
When  a  part  of  the property (being independent residential unit) is self-occupied and the other part is let out	69.1-3
When such property is self-occupied for a part of the year and let out for the other part of the year	69.1-4

69.1-1 A HOUSE PROPERTY FULLY UTILISED THROUGHOUT THE PREVIOUS YEAR FOR SELF-RESIDENTIAL PURPOSES [Sec. 23(2)(a)] – Where the property is in the occupation of the owner for his own residence, the annual value of such house shall be taken to be nil, under section 23(2)(a), 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.

p Examples – The following are some of the examples where the above conditions are satisfied—

1. 1. X owns a property. Throughout the previous year 2021-22, it is used by him (and his family members) for own residence purposes. No part of the property is let out or put to some other use.
   2. Y owns a property. He sells the property on December 1, 2021. Between April 1, 2021 and December 1, 2021 it is used by Y and his family for residential purpose. It is neither let out nor put to any other use.
   3. Z purchases a property on June 1, 2021. Since then it is occupied by Z for his residential purposes. Neither it is let out nor it is put to some other use.
   4. A owns a house property. During the previous year 2021-22, he retains exclusive control over possession of house owned by him, though he may not be actually present in house, when he is away from it, he is still in constructive possession of his residential house.

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 69.1-1a]
Income from one self-occupied property	xxxx

69.1-1a INTEREST ON BORROWED CAPITAL [SEC. 24(b)]  – Interest on borrowed capital [of the current year and pre-construction period] is deductible as explained in para 68.3-2. 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.

The following points should be noted—

1. 1. 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).
   2. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before April 1, 1999 but, if the aforesaid three conditions are satisfied, the higher deduction of Rs. 2,00,000 would be available.
   3. There is no stipulation regarding the construction/acquisition of the residential unit being entirely financed by the loan taken on or after April 1, 1999. It may be so in part. However, the higher deduction of Rs. 2,00,000 towards interest can be claimed only in relation to that part of the loan which has been taken and utilised for construction/acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry deduction of interest up to Rs. 30,000 only (as stated in para given below).

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. In other words, in the following two cases, interest on borrowed capital is deductible up to Rs. 30,000—

Case 1	If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of a house property.
Case 2	If capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.

Problems

69.1-1P1 X owns a house property. It is used by him throughout the previous year 2021-22 for his (and his family members) residence. Municipal value of the property is Rs. 1,66,000, whereas fair rent is Rs. 1,76,000 and standard rent is Rs. 1,50,000. The following expenses are incurred by X: repairs: Rs. 20,000, municipal tax : Rs. 16,000, insurance: Rs. 2,000; interest on capital borrowed to construct the property: Rs. 1,66,000; interest on capital borrowed by mortgaging the property for daughter’s marriage: Rs. 20,000 (in either case capital is borrowed before April 1, 1999). Income of X from business is Rs. 7,10,000. Find out the net income of X for the assessment year 2022-23.

Solution :	Rs.
Gross annual value	Nil
Less: Municipal tax	Nil
Net annual value	Nil
Less: Interest on borrowed capital (maximum: Rs. 30,000)	– 30,000†
Property income	– 30,000
Business income	7,10,000
Net income	6,80,000

 

69.1-1E1 Recompute the income in problem 69.1-1P1 if capital is borrowed (a) for construction of the property on April 1, 1999 and construction is completed on December 2, 1999; or (b) on April 1, 1999 for repairs of the property and repair is completed on December 2, 1999.

69.1-1P2 X owns two residential houses – one at Mumbai and another at Bengaluru. These properties are used by X and his family for own residential purposes throughout the previous year (not let out, not put to any other use). Acquisition of these properties was partly financed by taking housing loan from banks. Find out income from these properties for the assessment year 2022-23 under the following different situations (construction in all cases completed within 3-4 years of taking loan) –

Different situations	Mumbai property		Bengaluru property
	When loan was taken	Interest liability of the previous year 2021-22 (including pre-construction period interest) Rs.	When loan was taken	Interest liability of the previous year 2021-22 (including pre-construction period interest) Rs.
Situation 1	2011-12	2,60,000	2013-14	3,10,000
Situation 2	2013-14	1,90,000	2015-16	1,70,000
Situation 3	2012-13	2,80,000	2010-11	90,000
Situation 4	2015-16	2,10,000	1997-98	40,000
Situation 5	1997-98	2,10,000	2014-15	40,000
Situation 6	2016-17	2,70,000	1999-00	20,000
Situation 7	2015-16	1,60,000	1997-98	80,000
Situation 8	2018-19	4,90,000	1997-98	27,000
Situation 9	1997-98	25,000	1997-98	21,000
Situation 10	2008-09	1,10,000	2002-03	63,000

Solution :

In the case of one or two self-occupied properties, annual value is nil. Interest liability is deductible up to Rs. 30,000. If, however, capital is borrowed on or after April 1, 1999 for acquisition/construction of a property (and a few conditions as given above are satisfied), interest liability is deductible in aggregate up to Rs. 2,00,000. In view of this legal position, computation of deductible interest and income under the head “Income from house property” will be as follows –

	Interest deductible for Mumbai property Rs.	Interest deductible for Bengaluru property Rs.	Aggregate interest deductible under section 24† Rs.	Income from two self-occupied properties Rs.
Situation 1	2,00,000	2,00,000	2,00,000	(–) 2,00,000
Situation 2	1,90,000	1,70,000	2,00,000	(–) 2,00,000
Situation 3	2,00,000	90,000	2,00,000	(–) 2,00,000
Situation 4	2,00,000	30,000	2,00,000	(–) 2,00,000
Situation 5	30,000	40,000	70,000	(–) 70,000
Situation 6	2,00,000	20,000	2,00,000	(–) 2,00,000
Situation 7	1,60,000	30,000	1,90,000	(–) 1,90,000
Situation 8	2,00,000	27,000	2,00,000	(–) 2,00,000
Situation 9	25,000	21,000	30,000	(–) 30,000
Situation 10	1,10,000	63,000	1,73,000	(–) 1,73,000

 

69.1-1E2 Recompute the taxable income in Situation 10 in the above problem if interest liability of Mumbai property pertains to loan taken by X for the purpose of reconstruction of the property.

69.1-2 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) 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 69.1-1.

69.1-2a OTHER POINTS – The following points should also be kept in view—

p Some nexus between the fact of residing in a building not belonging to the assessee and his employment, business or profession must be shown before the benefit of section 23(2)(b) can be availed in respect of residential house which is not occupied by the assessee. Examine the case given below—

X owns a house but he resides with his father in the same town in a house two miles away. He is a bachelor and, therefore, for his own convenience resides with his father. His own house is lying vacant. Since X has not left his house vacant on account of business compulsion but on account of personal convenience, he will not be entitled to the benefit of section 23(2)(b). Gross annual value in this case cannot be taken as equal to zero. Income from house property shall be calculated as if the house is deemed to be let out.

Section 23(2)(b) would apply in all those cases where officials and dignitaries, under the Constitution of India and even otherwise had to reside in official residences instead of their own residences by reason of their office — CIT v. Justice Avadh Behari Rohtagi [1985] 21 Taxman 409 (Delhi).

69.1-3 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 69.1-1
2. Let out units	See para 68
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 69.1-2

 

_________________________

†For exception, see para 66.2-2e.

† See para 66.

†For principle of mutuality, kindly refer to para 6.1-1.

†Sheila Kaushish v. CIT [1981] 7 Taxman 1 (SC), Amolak Ram Khosla v. CIT [1981] 7 Taxman 51 (SC).

*Although the construction of the property is completed on January 21, 2022 (i.e., during 2021-22), the interest of the entire financial year 2021-22 is treated as current year’s interest. Interest prior to the year 2021-22 (i.e., the year in which construction is completed) is pre-construction period’s interest. The same rule is applicable if the construction is completed on March 31, 2022.

**The number given in brackets represents a similar solved Problem No. of another book entitled “Students’ Guide to Income-tax – Problems & Solutions”, November 2021 edition. This book includes many more solved problems focusing on contemporary issues.

†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 [see problem 69.4-P1 for how to exercise the option in order to reduce the tax bill].

• If an individual/HUF opts for the alternative tax regime under section 115BAC, deduction under section 24(b) (e., interest liability pertaining to one or two self-occupied properties) is not available.

† If X opts for the alternative tax regime, deduction of Rs. 30,000 will not be available.

† Interest on borrowed capital (pertaining to self-occupied properties) is not available, if the assessee opts for the alternative tax regime.