The property can be treated as letout declaring the nominal rent from the house property..
Computation of Income From House Property
Gorss Annual Values xxxxxxx
Less: Municipal Taxes xxxxxx
Net Annual Value xxxxxx
Less: Standard Deduction @ 30% XXXXX
Interest on Bank Loan xxxxxx
Taxable House propoerty income.. xxxxxxx
COMPUTATION OF GROSS ANNUAL VALUE.
In respect of a let out house property, the rent received is usually taken as the annual lettable value. When, however, the rent is not indicative of the actual earning capacity of the house, the notional annual value will have to be found and adopted. The standard rent would be the Annual Value in the case of properties, subject to Rent Control Legislation, as mentioned earlier. However, when the actual rent received or receivable is higher than the notional value as calculated above, the higher figure will be taken for the purpose of Income-tax. From the annual value as determined above, municipal taxes are to be deducted if the following conditions are fulfilled: The property is let out during the whole or any part of
the previous year (There is no such deduction in respect of a self-occupied house property). t(viii) Any interest chargeable under the Act, payable out of India on which tax has not been paid or deducted at
source, and in respect of which there is no person in India 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 for pre-construction period Money may be borrowed prior to the acquisition or construction of the property. In such a case, interest paid/ payable before the final completion of construction or acquisition of the property will be aggregated and allowed for five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is
not allowed if the loan is utilized for repairs, renewal or reconstruction.
Example:- The assessee took a loan of Rs. 3,00,000/- in April, 1999 from a Bank for construction of a house on a piece of land which he owns at Meerut. The loan carried interest @ 15% p.a. The construction is completed in April 2001 and the house is given on rent from May 2001. Meanwhile he has already incurred liability of interest ofRs. 90,000/- for F.Y. 1999-2000 and 2000-01. Because of thea bove provision, the assessee can claim a deduction in respect of this interest of Rs. 90,000/- (Over and above the yearlyinterest) in five equal instalments of Rs. 18,000/- each starting from the assessment year 2002-03.
Benefit for vacancy for the period when the property remains vacant (in cases of let out proporties).
If due to vacancy, the annual rent received is lower than the expected rent, then the annual rent realized is taken as the gross annual value. However, this rule will be applicable only, if the decline is only because of the vacancy. Exclusion of unrealised rent from annual value (Expl. to Section 23(1)) Unrealised rent (which the owner could not realize) 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; 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.
Unrealised rent subsequently recovered would be taxable in the year of receipt. It has been mentioned earlier that basic requirement for assessment of property income is the ownership of the property. However, in the cases where unrealised rent is subsequently realised, it is not necessary that the assessee continues to be the owner of the property in the year of receipt also. (Section 25AA)
The Municipal taxes must be borne by the landlord. (If themunicipal taxes or any part thereof are borne by the tenant, the same will not be deductible). The municipal taxes must be paid during the year. (Where
the municipal taxes have become due but have not been actually paid, these will not be allowed. The municipal taxes may be claimed on payment basis i.e., only in the year they were paid even if the taxes belonged to a different year).Amount left after deduction of municipal taxes is net annual value. Other Permissible Deductions from Annual Value in casesof let out properties (Section 24) The following deductions are permissible:
(i) deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the taxpayer (S.24(a)). No other allowance for repairs, maintenance etc. would
be allowable. (ii) interest on borrowed capital (S. 24(b)) Interest on borrowed capital is allowable as deduction onaccrual basis (even if account books are kept on cash basis) if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. The following aspects concerning claim for deduction of interest are to be kept in view: (i) The interest is deductible on ‘payable’ basis i.e. on accrual basis. Hence it should be claimed on yearly basis even if no payment has been made during the year. (ii) For claiming interest, it is not necessary that the lender should have a charge on the property for the principal amount or the interest amount. (iii) In Shew Kissan Bhatter v. CIT (1973) 89 ITR 61 (SC) the Supreme Court has decided that interest payable for outstanding interest is not deductible.(iv) Taxpayer cannot claim deduction for any brokerage or commission paid for arranging loan either as a one time arrangement or on periodical basis till the loan continues. (v) In terms of circular No. 28 dated 20th August 1969, if an assessee takes a fresh loan to pay back the earlier loan, the interest on the fresh loan would be deductible. (vi) Interest on borrowing can be claimed as deduction only
by the person who has acquired or constructed the property with borrowed fund. It is not available to the
successor to the property (if the successor has not utilized borrowed funds for acquisition, etc). In other
words, the relationship of borrower and lender must Income into existence before it can be said that any
amount or any other money is borrowed for the purpose of construction, acquisition, etc., of house property by one person from another and there must be real transaction of borrowing and lending in order to amount to any borrowing. (vii) In case of Central Government employees, interest on
house building advance taken under the House Building Advance Rules (Ministry of Works and Housing) would be deductible on the basis of accrual of interest which would start running from the date of drawal of advance.
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