Income from House Property – Exemption, Relief and Practice Questions

Income is taxable under the head ‘house property’ if it arises from a property consisting of any building or lands appurtenant thereto. For computation of income under this head, a house property is classified into three categories – let-out, self-occupied and deemed let-out house property.

The income from a house property is computed on basis of its annual value. Various factors such as municipal valuation, fair rent, standard rent and actual rent are considered to arrive at annual value. Even if a property is not actually let-out during the year, annual value of a property is computed on notional basis and, accordingly, charged to tax. However, if property is self-occupied or cannot be occupied by the owner due to his employment, business or profession at any other place, then the annual value of any two of such properties is taken as ‘nil‘.

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Table of Contents

1.1 Building and Land Appurtenant thereto

1.2 Ownership of Property

1.3 Use of property

4.1. Income from farm building [Section 2(1A)(c)]

4.2. Rent derived from agriculture land [Section 2(1A)(a)]

4.3. Income from property held under trust [Section 11]

4.4. Palace of an ex-ruler[Section 10(19A)]

4.5. Income of a local authority[Section 10(20)]

4.6. Income of certain institutes[Section 10(23C)]

4.7. Income of a registered trade union[Section 10(24)]

4.8. Income of a political party[Section 13A]

4.9. Self-occupied house property[Section 23(2)]

4.10. House property used for own business or profession

4.11. Income of co-operative society

income from house property

1. Chargeability of income

Any income is taxable under the head ‘Income from house property’ if following conditions are satisfied.

1.1. Building and Land Appurtenant thereto

Income is taxable under this head if it arises from a property which consists of any building or lands appurtenant thereto. Though the word ‘Property’ has a very wide meaning, but for the purposes of chargeability of income under this head, the property must consists of any building or land appurtenant thereto. Income from all other types of properties (i.e., property other than building or land appurtenant thereto) are excluded from the chargeability under the head house property.

Example, if any income is derived from a vacant land then such income shall not be chargeable to tax under the head ‘Income from house property’ as the property does not consist of any building. Such rental income is chargeable to tax under the head ‘profits and gains from business or profession’ or ‘Income from other sources’.

A land is called as land appurtenant to the building if it is indivisible part and parcel of a building for its use and enjoyment by the occupiers and it is not put to any other use and is not yielding any income assessable under this head. Generally, playgrounds, parking lots, garages, backyards, gardens, etc. are treated as land appurtenant to a building.

1.2. Ownership of Property

Income from a building and land appurtenant thereto are chargeable to tax under the head ‘house property’ only in the hands of an owner. If a person, deriving rental income from a property, is not the owner of such property, then the income so derived shall be chargeable to tax either as business income or residual income but not as income from house property.

To become an owner of a property, a person must hold the legal title of the property in his name. He should be able to exercise the rights of the owner, not on behalf of the owner but in his own right. However, in certain situation, inspite of not holding the legal ownership of a property, a person is considered as deemed owner of the property, and, accordingly, income from such property is chargeable to tax in his hands even though he is not the legal owner of such property.

1.3. Use of property

The annual value of a house property is not chargeable to tax under this head if following conditions are satisfied:

(a) The owner of the property utilizes the property for the purpose of carrying on his business or profession; and

(b) Income of such business or profession is chargeable to tax.

Even if an assessee is engaged in the business of letting out of property, the rental income earned from such business is taxable as house property income. However, in certain situations, the rental income earned by the business has been held taxable as business income. Here are a few judgments, where the High Courts had treated the rental income as business income:

(a) Where assessee’s business is to commercially exploit the property by letting out;

(b) Where factory building is given on rent to subsidiary to carry on business activities;

(d) Where letting of property is incidental and subservient to the main business of the assessee;

(e) Where the property is used for the residence of employees;

(f) Where the property is let-out with an objective to carry on the business more efficiently and smoothly.

2. Net Annual Value of a House Property

NAV = GAV – Municipal Taxes paid
Thus, if the municipal tax paid in the previous year by the landlord is more than the gross annual value, then the NAV can be negative.
It may happen where municipal taxes of earlier years are paid during the current year.

Any loss from house property can be set-off from income of other house property.

It is also called as intra-head adjustment.

2. Inter head adjustment (section 71):

The unadjusted loss can be set-off against income under any other head during the current year (no loss can be set-off against winning from lotteries, races, etc.).

The assessee can set off such loss from house property up to a maximum of ` 2,00,000 only.

3. Carry Forward and Set off (section 71B):

If it is not possible to set-off the loss (fully or partly), then it can be carried forward to the next year for being set off against the incomes under the head “income from house property”.

Loss from house property can be carried forward for a maximum period of 8 years for set-off against income from house property.

3. Computation of income from house property

For computation of income from house property, a house property has to be classified into following categories:

(a) Let-out;

(b) Self-occupied; and

(c) Deemed let-out.

The income from such house property is computed in following manner:

Amount (`)
Gross Annual Value	XXX
Less: Municipal Taxes paid by assessee during the year	(XXX)
Net Annual Value (NAV)	XXX
Less: Deduction under section 24
(a) Standard deduction @ 30% of NAV [Section 24(a)]	(XXX)
(b) Interest on Borrowed Capital [Section 24(b)]	(XXX)	(XXX)
Taxable Income from House property		XXX

4. Exemption and relief for house property income

Income-tax Act provides exemption and relief with respect to income derived from house property in following cases:

4.1. Income from farm building [Section 2(1A)(c)]

Any income derived from farm building shall be considered as agriculture income, and consequently exempt from tax, if it is situated on or in the immediate vicinity of the land, situated in India and used for agricultural purposes and used as a dwelling-house, or as a store-house, or as an out-building (out-house).

4.2. Rent derived from agriculture land [Section 2(1A)(a)]

Rent or revenue derived from land, situated in India and used for agricultural purposes is treated as agricultural income which is exempt from tax.

4.3. Income from property held under trust [Section 11]

Exemption under Section 11(1) is available against any income from property held under trust for charitable or religious purposes, provided such income has been applied for the charitable or religious purposes in India.

4.4. Palace of an ex-ruler[Section 10(19A)]

The annual value of any one palace of an ex-ruler is exempt from tax under Section 10(19A) of the Income-tax Act.

4.5. Income of a local authority[Section 10(20)]

Any income of a local authority, which is chargeable to tax under the head ‘house property’, is exempt from tax under Section 10(20) of the Income-tax Act.

4.6. Income of certain institutes[Section 10(23C)]

Income of a university (or other educational institution) or hospital (or other medical institution) is exempt from tax if such university or hospital is covered under Section 10(23C) of the Income-tax Act.

4.7. Income of a registered trade union[Section 10(24)]

Any income chargeable under the head ‘house property’ of a registered trade union is exempt from tax as per Section 10(24) of the Income-tax Act.

4.8. Income of a political party[Section 13A]

Any income of a political party which is chargeable under the head ‘house property’ is exempt from tax under Section 13A of the Income-tax Act.

4.9. Self-occupied house property[Section 23(2)]

If the property is self-occupied or it cannot be occupied by the owner of the property due to his employment, business or profession at any other place then the annual value of any two of such properties can be taken as ‘nil’.

4.10. House property used for own business or profession

If a person carries on business or profession in his own house property then the notional rental value of such property is neither treated as income nor allowed as deduction. However, deduction on account of current repairs, municipal taxes, and insurance premium incurred in connection with such property is allowed under the head business or profession.

4.11. Income of co-operative society

Any income derived by the co-operative society from the letting out of godown or warehouse for storage, processing or facilitating the marketing of commodities, is eligible for deduction under Section 80P of the Income-tax Act.

Further, if gross total income of a co-operative society (not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power), does not exceed Rs. 20,000, the income from house property is fully deductible under Section 80P of the Income-tax Act.

5. Treatment of unrealized rent and its recovery in subsequent years

Meaning of Unrealized Rent	It refers to the amount of rent payable but not paid by the tenant and not realized by the owner from the tenant.
Tax Treatment Of unrealized Rent	The unrealized rent is deducted from the actual rent receivable from the property before computing income from that property, subject to fulfilment of following conditions prescribed under Rule 4 of the Income Tax Rules, 1962:

The defaulting tenant has vacated or the assessee has taken steps to compel the defaulting tenant to vacate the property.
The defaulting tenant is not in occupation of any other property owned by the assessee.
The assessee has taken all reasonable steps for recovery of unrealized rent or satisfies the assessing officer that such steps would be useless.

It is chargeable under the head “Income from House Property”.
It is taxable in the year of actual receipt.
It will be taxable in the hands of assessee, even if he does not own the property to which such rent pertains.
The standard deduction under section 24(a) is allowed @ 30% of such receipt.

6. Practice Questions

Particulars	House I	House II	House III	House IV	House V
Municipal Value	1,20,000	2,40,000	1,10,000	90,000	75,000
Fair Rent	1,50,000	2,40,000	1,14,000	84,000	80,000
Standard Rent	1,08,000	N.A.	1,44,000	N.A.	78,000
Actual rent received/receivable	1,80,000	2,10,000	1,20,000	1,08,000	72,000

Ans.:

House I	House II	House III	House IV	House V
(a)	Municipal Valuation	1,20,000	2,40,000	1,10,000	90,000	75,000
(b)	Fair Valuation	1,50,000	2,40,000	1,14,000	84,000	80,000
(c)	Higher of (a) and (b)	1,50,000	2,40,000	1,14,000	90,000	80,000
(d)	Standard Rent	1,08,000	N.A.	1,44,000	N.A.	78,000
(e)	Expected Rent [Lower of (c) and (d)]	1,08,000	2,40,000	1,14,000	90,000	78,000
(f)	Actual Rent	1,80,000	2,10,000	1,20,000	1,08,000	72,000
(g)	Gross Annual value [Higher of (e) and (f)]	1,80,000	2,40,000	1,20,000	1,08,000	78,000

Q2. Mr. A owns a commercial building let out @ ` 40,000 per month. During the financial year 2021-22, he wants to claim expenses made towards insurance, water, etc. from the rent received. Comment in the light of section 24(a).

Ans: The section 24(a) allows deduction to an extent of 30% of Net Annual Value (NAV) as a standard deduction from the house property used as a let out property or deemed let out property. In the given case, Mr. A is entitled to standard deduction but no other expenditure shall be allowed as deduction towards insurance, repair, ground rent, collection charges, water charges, etc.

Q3. Ms. Jyoti purchased a house property costing ` 49 Lakhs on 1st May, 2021. The property is used exclusively for her residential purpose. For this purpose she obtained loan from DHFL of ` 35 lakhs bearing interest @ 14% p.a. on 1st April, 2021. She does not own any other house.

State with brief reasons the deductions that can be claimed by Ms. Jyoti in respect of interest on loan for Assessment Year 2022-23. What would be the change in your answer if the loan has been taken over for repairs.

[Nov. 2017 Modified, 5 Marks]

Ans:

Interest paid on housing loan = 14% of ` 35,00,000 = ` 4,90,000

Status of house property = Self-occupied

(a) Loan taken for construction or acquisition: If the capital is borrowed on or after April 1, 1999 for acquiring or constructing a property which is self-occupied, the interest on such borrowed capital is deductible up to ` 2,00,000.

(b) Loan taken for reconstruction, repairs or renewal: In this case, the maximum amount of deduction on account of interest is ` 30,000.

Compute the amount of interest allowable under section 24 of the income-tax Act, 1961 in the following cases:

(i) The house was meant for self-occupation from 01.03.2022

(ii) The house was to be let out from 01.03.2022.

Is there any deduction available u/s 80C towards principal repayment in respect of above loans?

Ans:

(i) When the house was meant for self-occupation:

Computation of the amount of interest
allowable under section 24

(a)	Interest for current previous year
` 10,00,000 × 11/100	1,10,000
` 5,00,000 × 15/100 × 6/12	37,500	1,47,500
(b)	Interest for Pre Construction period (1-11-2019 to 31-3-2021)
` 10,00,000 × 11/100 × 17/12 × 1/5	31,167
Total Interest	1,78,667

As per section 24(b), the amount eligible for deduction for interest on borrowed capital (of the current year and pre-construction period) is up to ` 2,00,000. The actual interest (` 1,78,667) is deductible as it is within limit.

(ii) When the house is let out w.e.f. 1-3-2022:

If capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property, then no maximum limit has been prescribed, if the house is let-out.

Therefore, the whole amount of ` 1,78,667 (calculated in first part) is deductible.

Q5. Sanjay commenced construction of a residential house intended exclusively for his residence, on 1-12-2020. He raised a loan of ` 8,00,000 @ 15% interest for the purpose of construction on 1-11-2020. Finding that there was an over run in the cost of construction he raised a further loan of ` 9,00,000 at 14% p.a. on 1-9-2021. What is the interest allowable under section 24 in Assessment year 2022-23, assuming that the construction was completed on 31-3-2022?

[May 2000 Modified, 5 Marks]

Ans:

Computation of the amount of interest
allowable exemption under section 24

(a)	Interest for current previous year
` 8,00,000 × 15/100	1,20,000
` 9,00,000 × 14/100 × 7/12	73,500	1,93,500
(b)	Interest for Pre Construction period (1-11-2020 to 31-3-2021)
` 8,00,000 × 15/100 × 5/12 × 1/5	10,000
Total Interest	2,03,500

As per section 24(b), in case of self-occupied property, the amount eligible for deduction for interest on borrowed capital (of the current year and pre-construction period) is up to ` 2,00,000. Thus, the deduction under section 24 in respect of borrowed capital is ` 2,00,000.

(i) Arrears of Rent ` 30,000

(ii) Unrealized Rent ` 20,000

You are requested to

(a) State, how they should be dealt with as per the provisions of the Act.

(b) Compute the income chargeable under the head “Income from House Property”.

Ans.:

(a) State, how they should be dealt with as per the provisions of the Act.

As per section 25A, the arrears of rent received are taxable in the year in which arrears have been received. However, deduction shall be allowed @ 30% of such arrears and only the balance amount is taxable. The taxability exists irrespective of the fact whether assessee remains the owner of the property in the year of receipt or not.

(b) Computation of Income from House Property

(Assessment Year 2021-22)

Amount (`)
Arrear of Rent received	30,000
Less: Deduction @ 30% u/s 25 A	(9,000)	21,000
Unrealized Rent received	20,000
Less: Deduction @ 30% u/s 25 A	(6,000)	14,000
Taxable Income from House property		35,000

Q7. [Elementary] Amalesh owns a house property which is let-out for ` 6,500 per month. The fair rent of the property is ` 90,000. Municipal taxes paid during the year for each half year is ` 3,200. The tenant has spent ` 10,000 towards repairs of the property during the year. Compute the income from house property for the assessment year 2022-23.

Ans.: Computation of Income from House Property

(Assessment Year 2022-23)

Amount (` )
Gross Annual Value (Note 1)	90,000
Less: Municipal Taxes paid (Note 2)	6,400
Net Annual Value (NAV)	83,600
Less: Deduction under section 24
Standard (30% of ` 83,600)	(25,080)
Taxable Income from House property		58,520

Working Notes:

The GAV of the house property is determined as under:

Step 1: Computation of Expected Rent

(a)	Municipal Valuation	:	NA
(b)	Fair Valuation	:	` 90,000
(c)	Higher of (a) and (b)	:	` 90,000
(d)	Standard Rent	:	NA

Expected Rent = Lower of (c) and (d) = ` 90,000

Step 2: Computation of Gross Annual value

(i) Expected Rent (As per step 1) : ` 90,000

(ii) Actual Rent Received (6,500 × 12) : ` 78,000

Gross Annual Value: The expected rent is higher than the rent received. Thus, the expected rent i.e. ` 90,000 shall be GAV.

The Municipal Taxes paid during the year for eachhalf year is ` 3,200 i.e. ` 6,400 annual.

Q8. Mr. Lal is the owner of a commercial property let out at ` 60,000 per month. The Corporation tax on the property is ` 30,000 annually, 60% of which is payable by the tenant. This tax was actually paid on 15.04.2021. He had borrowed a sum of ` 40 lakhs from his cousin, resident in Singapore (in dollars) for the construction of the property on which interest at 8% is payable. He has also received arrears of rent of ` 80,000 during the year, which was not charged to tax in the earlier years. What is the property income of Mr. Lal for the assessment year 2021-22?

Ans.: Computation of Income from House Property

(Assessment Year 2021-22)

Amount (`)
Gross Annual Value (` 60,000 × 12)	7,20,000
Less: Municipal Taxes (Note 1)	Nil
Net Annual Value (NAV)	7,20,000
Less: Deduction under section 24
Standard (30% of ` 7,20,000)	(2,16,000)
Interest on Borrowed Capital (40,00,000 × 8%) (Note 2)	(3,20,000)	(5,36,000)
Income from House property (Let out portion)		1,84,000
Arrears of rent received
Arrear of Rent received	80,000
Less: Deduction under section 25A
Standard (30% of ` 80,000) (Note 3)	(24,000)
Income from arrears of rent		56,200
Taxable Income from House property		2,40,000

Working Notes:

Municipal taxes paid by tenant (60%) are not deductible. The balance 40%, although paid by assessee, is not deducted because it was paid in FY 2021-22 and not in 2020-21.
It is presumed that the tax has been deducted at source on the amount of interest payable outside India.
As per section 25A, the arrears of rent received are taxable in the year in which arrears have been received. However, deduction shall be allowed @ 30% of such arrears and only the balance amount is taxable.

Q9. Tarun, employed in a private company, commenced construction of a commercial complex in July, 2020. He borrowed ` 50 lakhs from a bank @ 9% per annum. Interest up to 31.03.2021 was ` 2,20,000 and for the period from 01.04.2021 to 31.12.2021 ` 2,30,000; ` 1,40,000 towards interest for the balance three months remained unpaid.

The construction of the building was completed on 31st December, 2021. The building was let out w.e.f. 01.01.2022 for a monthly rent ` 90,000. Municipal tax of ` 1,20,000 was paid by cash on 10.01.2022. He repaid ` 1,90,000 towards principal during the previous year 2021-22, of which he paid ` 1,20,000 up to 31.12.2021. The municipal value of the property is ` 9,00,000.

Compute the income from house property of Tarun for the assessment year 2022-23.

Ans: Computation of Income from House Property

(Assessment Year 2022-23)

Amount (`)
Gross Annual Value (Note 1)	2,70,000
Less: Municipal Taxes paid	(1,20,000)
Net Annual Value (NAV)	1,50,000
Less: Deduction under section 24
Standard (30% of ` 1,50,000)	(45,000)
Interest on Borrowed Capital
Current Year	(3,70,000)
Pre-construction Period (2,20,000 × 1/5)	(44,000)	(4,59,000)
Taxable Income from House property		(3,09,000)

Q10. Mr. Ganesh owns a commercial building whose construction got completed in June 2020. He took a loan of ` 15 lakhs from his friend on 1-8-2019 and had been paying interest calculated at 15% per annum. He is eligible for pre-construction interest as deduction as per the provisions of the Income Tax Act.

Mr. Ganesh has let out the commercial building at a monthly rent of ` 40,000 during the financial year 2021-22. He paid municipal tax of ` 18,000 each for the financial years 2020-21 and 2021-22 on 1-5-2021 and 5-4-2022 respectively.

Compute income under the head ‘House Property’ of Mr. Ganesh for the Assessment Year 2022-23.

[May 2017, 4 Marks]

Ans: Computation of Income from House Property

(Assessment Year 2022-23)

Amount (`)
Gross Annual Value (Actual Rent: ` 40,000 × 12)	4,80,000
Less: Municipal Taxes paid (Note 1)	(18,000)
Net Annual Value (NAV)	4,62,000
Less: Deduction under section 24
Standard (30% of ` 4,62,000)	(1,38,600)
Interest on Loan for current Previous year (` 15,00,000 × 15%)	(2,25,000)
Interest on Loan for pre-construction period (Note 2)	(30,000)	(3,93,600)
Taxable Income from House property		68,400

Working Notes:

Municipal taxes paid on 5-4-2022 are not considered because these are not paid in financial year 2021-22.
The interest for pre-construction period deductible in previous year is determined as under:

(a)	Pre-construction period (PCP)	:	1-8-2019 to 31-3-2020 i.e. 8 Months
(b)	Loan amount	:	` 15,00,000
(c)	Rate of Interest	:	15%
(d)	Total Pre-construction Interest	:	15,00,000 × 15% × 8/12 = ` 1,50,000
(e)	PCP Interest deductible in current Pr. Yr.	:	` 1,50,000 × 1/5 = ` 30,000

Particulars	House 1 Residential (`)	House 2 Commercial (` )
Municipal Value	1,80,000	3,60,000
Standard Rent	1,50,000	3,00,000
Actual Rent	2,40,000	6,00,000
Municipal Tax paid	20,000	30,000
Municipal Tax unpaid	10,000	15,000
Interest on money borrowed paid	60,000	20,000
Interest on money borrowed outstanding	1,00,000	1,60,000
Housing loan principal repaid to bank	50,000	30,000

Ans: Computation of Income from House Property

(Assessment Year 2022-23)

House 1	House 2
Residential	Commercial
Gross Annual Value (Note 1)	2,40,000	6,00,000
Less: Municipal Taxes paid	(20,000)	(30,000)
Net Annual Value (NAV)	2,20,000	5,70,000
Less: Deduction under section 24
Standard (30% of NAV)	(66,000)	(1,71,000)
Interest on Loan	(1,60,000)	(1,80,000)
Taxable Income from House property	(6,000)	2,19,000

Note: Repayment of principal amount of housing loan to bank is deductible from Gross Total Income under section 80C.

Working Notes:

The GAV of both the houses are determined as under:

House 1	House 2
(a)	Municipal Valuation	:	` 1,80,000	` 3,60,000
(b)	Fair Valuation	:	NA	NA
(c)	Higher of (a) and (b)	:	` 1,80,000	` 3,60,000
(d)	Standard Rent	:	` 1,50,000	` 3,00,000
(e)	Expected Rent Lower of (c) and (d)	:	` 1,50,000	` 3,00,000
(f)	Actual Rent	:	` 2,40,000	` 6,00,000
(g)	Gross Annual value Higher of (e) and (f)	:	` 2,40,000	` 6,00,000

Location of Property	Delhi	Chandigarh	Kolkata
Usage	Self-Occupied	Let out	Let Out
Amount (`)	Amount (`)	Amount (`)
Rent Received	NIL	360,000	1,80,000
Fair Rent	2,40,000	30,000	1,50,000
Municipal Value	2,10,000	240,000	1,20,000
Standard Rent	1,80,000	210,000	90,000
Municipal Tax Due	20,000	40,000	30,000
Municipal Tax paid by the assessee	NIL	NIL	20,000
Interest on money borrowed	2,80,000	1,40,000	1,50,000

Note: All the properties were acquired/constructed after 01.04.2013.

Ans: Computation of Income from House Property

(Assessment Year 2022-23)

Delhi	Chandigarh	Kolkata
Self-Occupied	Let out	Let Out
Gross Annual Value (Notes 1 and 2)	NA	3,60,000	1,80,000
Less: Municipal Taxes paid	NA	Nil	(20,000)
Net Annual Value (NAV)	Nil	3,60,000	1,60,000
Less: Deduction under section 24
Standard (30% of NAV)	Nil	(1,08,000)	(48,000)
Interest on Loan	(2,00,000)	(1,40,000)	(1,50,000)
Taxable Income from House property	(2,00,000)	1,12,000	(38,000)

Total taxable Income from House Property = (2,00,000) + 1,12,000 + (38,000) = – 1,26,000

Working Notes:

The NAV of self-occupied property (Delhi) is always taken as nil.
The GAV of both the houses are determined as under:

Chandigarh	Kolkata
(h)	Municipal Valuation	:	` 2,40,000	` 1,20,000
(i)	Fair Valuation	:	` 3,00,000	` 1,50,000
(j)	Higher of (a) and (b)	:	` 3,00,000	` 1,50,000
(k)	Standard Rent	:	` 2,10,000	` 90,000
(l)	Expected Rent Lower of (c) and (d)	:	` 2,10,000	` 90,000
(m)	Actual Rent	:	` 3,60,000	` 1,80,000
(n)	Gross Annual value Higher of (a) and (b)	:	` 3,60,000	` 1,80,000

Q13. X (44 years) owns a residential property in Ranchi. Municipal valuation of the property is Rs. 8,00,000. Rent of similar property in the same locality of Ranchi is Rs. 12,00,000. Standard rent of the property under the relevant Rent Control Act is Rs. 10,00,000. It is let out to A Inc. (a foreign company) on monthly rent of US $ 3,100 (amount is deposited in New York branch of Citibank, with prior permission of RBI). There is no unrealized rent. However, property remains vacant for one month commencing from March 16, 2022 when A Inc. has vacated the property. With effect from April 15, 2022, the same property is let out to B Ltd., an Indian company.

The following expenses are incurred by X during the previous year 2021-22 –

Municipal tax : Rs. 1,70,000 (actually paid).

Collection charges : Rs. 10,000

Interest on borrowed capital : Rs. 3,00,000 (actual amount paid is Rs. 2,30,000).

Fire insurance premium : Rs. 30,000.

Income of X from other sources is Rs. 12,45,000. Amount deposited in New York branch of Citibank is yet to be remitted to India. X has repaid Rs. 90,000 to the bank from whom loan was taken for purchasing the aforesaid property. Besides, he deposits Rs. 40,000 in the provident fund account of Mrs. X.

Find out the net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡. For conversion of rent into Indian currency, the following telegraphic transfer buying/selling rates of US $ adopted by SBI are given –

Buying (1 US $)	Selling (1 US $)
Rs.	Rs.
On April 1, 2021	47	49
On March 31, 2022	45	46

Solution : For converting rental income received in foreign currency into Indian currency, the telegraphic transfer buying rate offered by SBI on the last date of the previous year shall be adopted. This rule is applicable if rent is not remitted up to March 31 of the previous year.

Rs.
Computation of gross annual value
Municipal value (MV)	8,00,000
Fair rent (FR)	12,00,000
Standard rent (SR)	10,00,000
Annual rent (US $ 3,100 × 12 × Rs. 45)	16,74,000
Unrealized rent	Nil
Loss due to vacancy (US $ 3,100 × Rs. 45 × ½)	69,750
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	10,00,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	16,74,000
Step III – Amount computed in Step I or Step II, whichever is higher	16,74,000
Step IV – Loss due to vacancy	69,750
Step V – Gross annual value is Step III minus Step IV	16,04,250
Less: Municipal tax	1,70,000
Net annual value	14,34,250
Less: Deductions under section 24 –
Standard deduction @ 30%	4,30,275
Interest on borrowed capital	3,00,000
Income	7,03,975
Computation of income and tax liability
Income from house property	7,03,975
Income from other sources	12,45,000
Gross total income	19,48,975
Less: Deduction under section 80C (Rs. 90,000 + Rs. 40,000, subject to a maximum of Rs. 1,50,000)	1,30,000
Net income (rounded off)	18,18,980
Tax on net income
Income-tax†	3,58,194
Add: Health and education cess	14,328
Tax liability (rounded off)	3,72,520

Q14. Mrs. X (57 years) owns a commercial property in Chennai. Municipal value of the property is Rs. 9,00,000. Market rent of a similar property in the same locality is Rs. 10,00,000. However, market rent of a similar property in a different locality in Chennai is Rs. 12,00,000. Standard rent of the property owned by Mrs. X is Rs. 12,50,000. This property is let out to a departmental store with effect from May 15, 2021 on monthly rent of Rs. 70,000. During March 10, 2021 and May 14, 2021, the property remains vacant as suitable tenant is not available. Mrs. X could not realize 3 months rent from the tenant during the previous year 2021-22. Most probably the tenant will pay rent before September 2022.

Mrs. X makes the following expenditures in respect of the house property –

Municipal tax at the rate of 15 per cent (amount actually paid by the tenant during the previous year 2021-22 is Rs. 80,000); repairs (incurred by the tenant) : Rs. 75,000; fire insurance premium (paid by Mrs. X) : Rs. 30,000. A loan of Rs. 40,00,000 was taken on April 1, 2013 at the rate of 9 per cent per annum from PNB for construction of the commercial property which was completed on March 1, 2017. Nothing is repaid up to March 31, 2020. During the previous year 2020-21, Mrs. X has repaid Rs. 10,00,000. Further, on March 31, 2022, she pays a sum of Rs. 5,00,000 to PNB on account of housing loan (this repayment of loan according to Mrs. X is qualified for deduction under section 80C). Income of Mrs. X from other sources is Rs. 9,14,000. She deposits Rs. 1,50,000 in public provident fund in November 2021. She has taken medi-claim insurance premium on the life of her mother for which she pays Rs. 34,000 every year.

Find out net income and tax liability of Mrs. X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution :

Rs.
Computation of gross annual value
Municipal value (MV)	9,00,000
Fair rent (FR)	10,00,000
Standard rent (SR)	12,50,000
Annual rent (Rs.70,000 × 12)	8,40,000
Unrealized rent (unrealized rent is not deductible, as there is a possibility of recovering the amount)	Nil
Loss due to vacancy (Rs. 70,000 × 1.5)	1,05,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	10,00,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	8,40,000
Step III – Amount computed in Step I or Step II, whichever is higher	10,00,000
Step IV – Loss due to vacancy	1,05,000
Step V – Gross annual value is Step III minus Step IV	8,95,000
Less: Municipal tax	Nil
Net annual value	8,95,000
Less: Deductions under section 24 –
Standard deduction @ 30%	2,68,500
Interest from borrowed capital (9% of Rs. 30,00,000)	2,70,000
Income	3,56,500
Computation of income and tax liability
Income from house property	3,56,500
Income from other sources	9,14,000
Gross total income	12,70,500
Less: Deductions
Under section 80C (repayment of loan taken for acquiring a commercial property is not eligible for deduction under section 80C)	1,50,000
Under section 80D (mother of Mrs. X is a senior citizen)	34,000
Net income (rounded off)	10,86,500
Tax on net income
Income-tax†	1,38,450
Add: Health and education cess	5,538
Tax liability (rounded off)	1,43,990

Note – Interest of pre-construction period is deductible in 5 years in 5 equal instalments. First instalment is deductible in the year in which construction is completed. In this case, first instalment is deductible in the previous year 2016-17. The fifth instalment is deductible in the previous year 2020-21. Nothing is, therefore, deductible on account of pre-construction period’s interest of the previous year 2021-22.

Q15. X is a doctor. He owns a property in a posh colony in Cochin. The property has four units of equal size. Unit 1 on the ground floor is used by X for his medical profession. Unit 2 on the first floor is let out to a non-resident on monthly rent of Rs. 80,000 with effect from July 1, 2021. This unit remains vacant during May and June 2021 as suitable tenant is not available. The old tenant has occupied Unit 2 since 1986 and after a Court verdict he vacates it on April 30, 2021 without paying rent of 6 months (monthly rent being Rs. 10,000).

Unit 3 on the second floor and Unit 4 on the third floor are converted into one residential unit and is occupied by X for his residential purposes.

Municipal valuation of the entire property is Rs. 3,00,000. Market rent of a similar property is Rs. 7,00,000. Standard rent is Rs. 6,50,000. Municipal tax is levied at the rate of 15 per cent. Entire municipal tax is payable by X. Municipal tax of previous year 2021-22 is paid in two instalments – Rs. 28,000 on March 31, 2022 and Rs. 17,000 on June 1, 2022.

X has taken a loan of Rs. 20 lakh from SBI at the rate of 9 per cent per annum for renovation of second and third floor. This loan was taken in 2020 and nothing is repaid up to March 31, 2022. On March 31, 2022, he repays Rs. 15,00,000. Interest on loan is not paid although it has become due for payment.

Income of X from medical profession is Rs. 33,10,000 (without deducting depreciation of Unit 1 which comes to Rs. 32,000 and municipal tax). X annually pays life insurance premium of Rs. 50,000 on the life of his dependent mother (64 years) and Rs. 1,20,000 in public provident fund. He wants to claim deduction under section 80C in respect of repayment of loan taken from SBI.

Determine the amount of net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Computation of income of Unit 2 which is let out

Rs.
Computation of gross annual value
Municipal value of Unit 2 (Rs. 3,00,000 ÷ 4) (MV)	75,000
Fair rent Unit 2 (Rs. 7,00,000 ÷ 4) (FR)	1,75,000
Standard rent Unit 2 (Rs. 6,50,000 ÷ 4) (SR)	1,62,500
Annual rent Unit 2 (Rs.10,000 × 1 + Rs. 80,000 × 11)	8,90,000
Unrealized rent Unit 2	10,000
Loss due to vacancy (Rs. 80,000 × 2)	1,60,000
Step I – Reasonable expected rent of Unit 2 [MV or FR, whichever is higher, but subject to maximum of SR]	1,62,500
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy (Rs. 8,90,000 – Rs. 10,000)	8,80,000
Step III – Amount computed in Step I or Step II, whichever is higher	8,80,000
Step IV – Loss due to vacancy	1,60,000
Step V – Gross annual value is Step III minus Step IV	7,20,000
Less: Municipal tax of Unit 2 (Rs. 28,000 ÷ 4)	7,000
Net annual value	7,13,000
Less: Deductions under section 24 –
Standard deduction @ 30%	2,13,900
Interest on borrowed capital	Nil
Income from Unit 2	4,99,100

Computation of income of Units 3 and 4 – These two units are used as one residential unit. Gross annual value is nil. Municipal tax is not deductible. Interest on borrowed capital is deductible up to Rs. 30,000. Higher deduction up to Rs. 2,00,000 is applicable only in the case when loan is taken for purchase or construction of a residential purposes. Since loan is taken for renovation of Units 3 and 4, the higher amount of Rs. 2,00,000 is not deductible. Interest of the previous year 2021-22 comes to Rs. 1,80,000. However, amount deductible is only Rs. 30,000. Interest on borrowed capital is deductible on accrual basis. In other words, Rs. 30,000 is deductible even if interest is not actually paid. Income from Units 3 and 4 will be (–) Rs. 30,000.

Computation of income from medical profession –

Rs.
Income	33,10,000
Less: Depreciation	32,000
Less: Municipal tax [(Rs. 28,000 + Rs. 17,000) ÷ 4, municipal tax paid up to due date of submission of return of income is deductible for the previous year 2021-22 under section 43B]	11,250
Income from profession	32,66,750
Computation of income and tax liability –
Income from house property [Unit 1 : Nil, as it is occupied for own business/profession + Unit 2 : Rs. 4,99,100 + Units 3 and 4 : (–) Rs. 30,000]	4,69,100
Income from profession	32,66,750
Gross total income	37,35,850
Less: Deductions under section 80C (deposit of Rs. 1,20,000 in public provident fund, insurance premium on mother’s life is not eligible, repayment of loan is deductible only when it is taken for acquiring or purchasing a property)	1,20,000
Net income (rounded off)	36,15,850
Tax on net income
Income-tax†	8,97,255
Add: Health and education cess	35,890
Tax liability (rounded off)	9,33,150

Q16. X owns House A (75, Nikolson Road, Chennai). Y owns House B (76, Nikolson Road, Chennai). These two Houses – A and B, are identical in size and were constructed in 2019. X and Y are employees of A Ltd. (salary being Rs. 1,85,000 per month in each case). Besides, X and Y get Rs. 80,000 per month as house rent allowance and Rs. 30,000 per month as commission. On April 1, 2021, X and Y reside in a rented accommodation at Chennai for which each pays Rs. 60,000 per month as rent.

House A and House B are given on rent. The following information is available about these houses –

House A	House B
Rs.	Rs.
Municipal valuation (MV)	8,00,000	8,00,000
Fair rent (FR)	10,50,000	10,50,000
Rent (Rs. 70,000 per month)	–	–
Standard rent (SR)	9,00,000	9,00,000
Municipal tax paid in May 2021 by landlords for 2021-22	80,000	80,000
Arrears of municipal tax paid in May 2021 by landlords for 2020-21	12,000	12,000
Interest on capital borrowed for acquisition of these properties	3,30,000	3,30,000

On June 20, 2021, the above properties have been vacated by the tenants. On July 1, 2021, House A is given on rent to A Ltd. for which the company will pay Rs. 80,000 per month. The same house is given as a rent-free perquisite to X for his residence. House rent allowance has been discontinued. On the same day, Y has shifted in his house but he continues to get house rent allowance from the employer.

On March 31, 2022, A Ltd. has given advance rent of 6 months to X (i.e., Rs. 4,80,000). On the same day, A Ltd. has given Rs. 4,80,000 as advance salary to Y.

Employer and employees contribute 15 per cent of salary towards recognized provident fund. Income from other sources of X is Rs. 2,50,000 (FD interest) and Y is Rs. 2,50,000 (from coaching). Find out net income and tax liability of X and Y for the assessment year 2022-23 (X and Y are resident in India and born in 1989). Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Computation of income from house properties –

House A	House B
Rs.	Rs.
Rent of House A (Rs. 70,000 × 3 + Rs. 80,000 × 9)	9,30,000	–
Rent of House B (Rs. 70,000 × 3)	–	2,10,000
Step I – Reasonable expected rent [MV or FR, whichever is higher, but subject to maximum of SR]	9,00,000	9,00,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	9,30,000	2,10,000
Step III – Amount computed in Step I or Step II, whichever is higher	9,30,000	9,00,000
Step IV – Loss due to vacancy	Nil	Nil
Step V – Gross annual value is Step III minus Step IV	9,30,000	9,00,000
Less: Municipal tax (Rs. 80,000 + Rs. 12,000)	92,000	92,000
Net annual value	8,38,000	8,08,000
Less: Deductions under section 24 –
Standard deduction @ 30%	2,51,400	2,42,400
Interest on borrowed capital	3,30,000	3,30,000
Income	2,56,600	2,35,600
Computation of tax and income of X and Y –
X	Y
Rs.	Rs.
Salary (Rs. 1,85,000 × 12)	22,20,000	22,20,000
House rent allowance [see Notes 1 and 3]	1,15,500	8,35,500
Commission (Rs. 30,000 × 12)	3,60,000	3,60,000
Rent-free house	2,90,250	–
PF contribution of employer in excess of 12% of salary	66,600	66,600
Advance salary	–	4,80,000
Gross salary	30,52,350	39,62,100
Less: Standard deduction	50,000	50,000
Salary income	30,02,350	39,02,100
Income from house property	2,56,600	2,35,600
Income from other sources	2,50,000	2,50,000
Gross total income	35,08,950	43,97,700
Less: Deduction under section 80C (15% of Rs. 1,85,000 × 12, but subject to maximum of Rs. 1,50,000)	1,50,000	1,50,000
Net income	33,58,950	42,47,700
Tax on net income
Income-tax†	8,20,185	10,86,810
Add: Health and education cess	32,807	43,472
Tax liability (rounded off)	8,52,990	11,30,280

House rent allowance taxable in the case of X – X gets house rent allowance at the rate of Rs. 80,000 per month for 3 months. The exempt portion of house rent allowance will be determined as follows –
Rs. 92,500 per month (being 50% of Rs. 1,85,000);
Rs. 80,000 per month (being house rent allowance);
Rs. 41,500 per month (being the excess of rent paid of Rs. 60,000 per month over 10% of Rs. 1,85,000).

Rs. 41,500 (being least of the above) is exempt from tax. Rs, 38,500 (i.e., Rs. 80,000 – Rs. 41,500) per month for 3 months is chargeable to tax (amount taxable being Rs. 1,15,500).

Perquisite in respect of rent-free house given to X – With effect from July 1, 2021, the company has taken House A on lease and the same house is given as a perquisite to X. Salary for this purpose is Rs. 2,15,000 (Rs. 1,85,000 + Rs. 30,000) per month. 15% of salary (i.e., Rs. 32,250 per month) or lease rent of Rs. 80,000 per month, whichever is lower is taxable value of the perquisite. For the year ending March 31, 2022, the amount taxable is Rs. 2,90,250 (Rs. 32,250 × 9).
House rent allowance taxable in the case of Y – Y gets house rent allowance at the rate of Rs. 80,000 per month for 12 months. He resides in a rented accommodation up to June 30, 2021. From July 1, 2021 onwards, he uses his own house for residence for which he does not pay any rent. Exemption will be available from house rent allowance only up to June 30, 2021 as follows –

Rs. 92,500 per month (being 50% of Rs. 1,85,000);
Rs. 80,000 per month (being house rent allowance);
Rs. 41,500 per month (being the excess of rent paid of Rs. 60,000 per month over 10% of Rs. 1,85,000).
Rs. 41,500 (being least of the above) is exempt from tax for 3 months. Total exemption is Rs. 1,24,500. Amount taxable is Rs. 8,35,500 (i.e., Rs. 80,000 × 12 – Rs. 1,24,500).

Advance rent of 9 months received by X will be taxable as income from house property in the next year. However, advance salary received by Y is taxable during the current year.

Q17. X (40 years) owns a commercial property in Bangalore. It is let out to different tenants. Municipal valuation of the property is Rs. 25,00,000. Market rent of a similar property is Rs. 32,00,000. Annual rent (if there is no vacancy and no unrealized rent) is Rs.40,00,000. Standard rent is not applicable. Unrealized rent is Rs. 3,20,000 [there are two tenants who have defaulted – A : Rs. 1,20,000 and B : Rs. 2,00,000]. It is not possible to realize anything from A and B. B has also occupied a property owned by Mrs. X. One flat in the property (annual rent being Rs. 60,000) remains vacant for 4 months during the previous year. Another flat (annual rent being Rs. 90,000) remains vacant for 8 months during the previous year.

Annual rent of Rs. 40,00,000 includes Rs. 10,00,000 pertaining to different amenities provided in the building. Rs. 30,00,000 is rent of building and Rs. 10,00,000 is for different amenities which is calculated as follows –

Lift maintenance charges : Rs. 3,50,000.
Electricity charges : Rs. 2,00,000.
Air-conditioning charges : Rs. 3,50,000.
Security guard charges : Rs. 1,00,000.

X has incurred following expenses in respect of the aforesaid property –

Advocate fees and court charges for drafting lease agreements with tenants : Rs. 75,000.
Municipal tax of 2021-22 : Rs. 4,70,000 (however, 10 per cent rebate is obtained for payment before due date).
Arrears of municipal tax of 2020-21 paid during the current year : Rs. 1,20,000 (it includes interest on arrears of Rs. 15,000).
Expenditure on lift maintenance : Rs. 2,10,000 (a payment of Rs. 30,000 is made in cash).
Electricity bill : Rs. 2,40,000.
Air-conditioner maintenance : Rs. 80,000 (an amount of Rs. 40,000 is paid to B Ltd. in which X is a director holding 15 per cent share capital, similar services can be obtained from any other person for Rs. 18,000).
Salary to security guard : Rs. 1,25,000.
Salary of staff for supervising lift maintenance and air-conditioner services : Rs. 2,40,000.
Salary of staff for collecting rent and other charges : Rs. 90,000.
Insurance of building : Rs. 1,17,000.
General repair of building : Rs. 80,000.
Interest on loan taken from a foreign company payable outside India for construction of the property : Rs. 7,50,000 (tax is not deducted by X under section 195).
Interest on the same loan for the previous year 2020-21 : Rs. 2,00,000 (paid during the current year after deducting tax at source).

Besides, the above expenses, X can claim depreciation on lift and air-conditioning system which comes to Rs. 5,07,500.

Assuming that income of X from business is Rs. 9,70,000 and he annually contributes Rs. 1,20,000 in public provident fund, find out net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Annual rent is Rs. 40,00,000. Out of which annual rent of the property is Rs. 30,00,000 and charges for different amenities (like lift, air-conditioning, electricity, security guard) are Rs. 10,00,000. In other words, 75% of the annual rent pertains to rent of building and 25% of rent pertains to charges for different amenities. From the data given in the problem, the following calculation can be made –

Total	Rent of	Charges for
building	different
(75% of total)	amenities
(25% of total)
Rs.	Rs.	Rs.
Annual rent if there is no vacancy and no unrealized rent	40,00,000	30,00,000	10,00,000
Less: Unrealised rent (Rs. 1,20,000 + Rs. 2,00,000)	3,20,000	2,40,000	80,000
Rent after deducting unrealized rent	36,80,000	27,60,000	9,20,000
Less: Loss due to vacancy [(Rs. 60,000 × 4 ÷ 12) + (Rs. 90,000 × 8 ÷ 12)]	80,000	60,000	20,000
Balance	36,00,000	27,00,000	9,00,000

Rs.
Computation of gross annual value
Municipal value (MV)	25,00,000
Fair rent (FR)	32,00,000
Standard rent (SR)	NA
Annual rent	30,00,000
Unrealized rent	2,40,000
Loss due to vacancy	60,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	32,00,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	27,60,000
Step III – Amount computed in Step I or Step II, whichever is higher	32,00,000
Step IV – Loss due to vacancy	60,000
Step V – Gross annual value is Step III minus Step IV	31,40,000
Less: Municipal tax [(90% of Rs. 4,70,000) + (Rs. 1,20,000 – Rs. 15,000)	5,28,000
Net annual value	26,12,000
Less: Deductions under section 24 –
Standard deduction @ 30%	7,83,600
Interest on borrowed capital	Nil
Income	18,28,400

Note – Interest payable outside India is not deductible if proper tax has not been deducted by the taxpayer. Interest of last year (in respect of which tax is deducted during the current year) is not deductible during the current year.

Computation of income from other sources –

Rs.
Amount collected for different amenities (after excluding vacancy and unrealized amount, as calculated above) (Rs. 9,20,000 – Rs. 20,000)	9,00,000
Less: Expenses and depreciation
Legal expenses for drafting agreements (25% of Rs. 75,000)	18,750
Lift maintenance expenditure (Rs. 2,10,000 – cash payment of Rs. 30,000 to be disallowed)	1,80,000
Electricity	2,40,000
Air-conditioner maintenance (Rs. 80,000 – excess payment to B Ltd., i.e., Rs. 22,000)	58,000
Security guard	1,25,000
Supervisor salary	2,40,000
Salary of staff for collecting rent and other charges (25% of Rs. 90,000)	22,500
Depreciation	5,07,500
Income from other sources	(–) 4,91,750
Computation of income and tax liability –
Income from house property	18,28,400
Business income	9,70,000
Income from other sources	(–) 4,91,750
Gross total income	23,06,650
Less: Deduction under section 80C	1,20,000
Net income	21,86,650
Tax on net income
Income-tax†	4,68,495
Add: Health and education cess	18,740
Tax liability (rounded off)	4,87,230

Q18. X (66 years) is the owner of a residential house whose construction was completed on July 31, 2014. It has been let out for residential purposes from October 1, 2014. The following information is available from the records supplied by X –

Rs.
Municipal tax (levied by Pune Municipal Corporation @ 17.5 per cent)	1,70,000
Market rent of a similar property in Mumbai	26,00,000
Market rent of a similar property in Pune	8,00,000
Annual rent (if there is no vacancy or unrealized rent)	11,75,000
Standard rent under the Pune Rent Control Act	10,50,000
Unrealized rent due from the new tenant (the defaulting new tenant has still occupied the property and no action has been taken to compel him to vacate the property)	1,00,000
Loss due to vacancy (the old tenant has vacated the property on February 1, 2021 and the current tenant has occupied it with effect from April 11, 2021) –
– Loss for 2021-22	31,507
– Loss for 2020-21	1,90,000
Municipal taxes paid during 2021-22 (including Rs. 70,000 paid by the tenant and Rs. 20,000 paid by X as penalty for giving incorrect information pertaining to municipal tax to municipal authorities)	1,90,000
Interest on loan taken for the construction of the house. Interest is paid to B Ltd., an Indian company, without deducting tax at source	4,00,000
Arrears of rent pertaining to 2019-20 recovered on May 10, 2022	80,000
Legal expenditure for recovering arrears of rent	32,000

Taking into consideration the following information, find out net income and tax liability of X for the assessment year 2022-23 (ignore section 115BAC pertaining to alternative tax regime‡) –

The tenant has deducted a sum of Rs. 25,000 from the rent payable to X for the year 2021-22 on account of poor maintenance of building.
For the previous year 2020-21, X has not claimed deduction of Rs. 50,000 paid by him on March 31, 2020 on account of municipal tax. He wants to claim deduction of the from the income of 2021-22.
During the previous year 2021-22, X has paid arrears of interest of Rs. 30,000. This interest pertains to housing loan which he has taken from B Ltd.
Income of X from other sources is Rs. 16,07,000.
He wants to claim deduction of Rs. 1,40,000 on account of payment of life insurance premium (sum assured is Rs. 70,00,000) (policy was taken in 2009-10).

Solution : Computation of gross annual value –	Rs.
Municipal value (Rs. 1,70,000 ÷ 17.5 × 100) (MV)	9,71,429
Fair rent (FR)	8,00,000
Standard rent (SR)	10,50,000
Annual rent (Rs. 11,75,000 – Rs. 25,000)	11,50,000
Unrealized rent (not to be considered as the tenant has not been asked to vacate the property)	Nil
Loss of 2021-22 due to vacancy	31,507
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	9,71,429
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	11,50,000
Step III – Amount computed in Step I or Step II, whichever is higher	11,50,000
Step IV – Loss due to vacancy	31,507
Step V – Gross annual value is Step III minus Step IV	11,18,493
Less: Municipal tax (Rs. 1,90,000 – Rs. 70,000 – Rs. 20,000)	1,00,000
Net annual value	10,18,493
Less: Deductions under section 24 –
Standard deduction @ 30%	3,05,548
Interest on borrowed capital	4,00,000
Income	3,12,945
Computation of income and tax liability
Income from house property	3,12,945
Income from other sources	16,07,000
Gross total income	19,19,945
Less: Deduction under section 80C	1,40,000
Net income (rounded off)	17,79,950
Tax on net income
Income-tax†	3,43,985
Add: Health and education cess	13,759
Tax liability (rounded off)	3,57,740

Municipal tax is always deductible on payment basis. Municipal tax paid on March 31, 2021 is deductible from the gross annual value of the previous year 2020-21. It cannot be claimed as deduction from the gross annual value of the previous year 2021-22.
Interest on borrowed capital is deductible under section 24(b) on accrual basis. In other words, amount pertaining to arrears of interest of an earlier year, cannot be claimed as deduction during the current year, even if it is paid in the current year.

Q19. X (29 years) owns a property in Trivandrum. The property has two units – Unit A and Unit B and both are of identical size. Municipal valuation of the entire property is Rs. 6,10,000. Market rent is Rs. 7,20,000. Standard rent is Rs. 9,00,000. Unit A is let out throughout the year on monthly rent of Rs. 47,000. Unit B is self-occupied up to May 31, 2021. X has vacated Unit B on May 31, 2021, as he has got a rent-free furnished house from his employer A Ltd. Unit B is let out on August 15, 2021 on monthly rent of Rs. 49,000. Taking into consideration the following information, find out net income of X and tax liability thereon (after deducting TDS) for the assessment year 2022-23 (ignore section 115BAC pertaining to alternative tax regime‡) –

Unit A is let out to DEF Ltd. DEF Ltd. pays Rs. 42,300 (i.e., Rs. 47,000 – 10 per cent TDS under section 194-I). DEF Ltd. has given an interest-free refundable deposit of Rs. 10,00,000. It is deposited in fixed deposit with SBI, Chennai and X gets annual interest of Rs. 1,29,500.
X is employed by A Ltd. on salary of Rs. 85,000 per month. Besides, he gets special allowance of Rs. 10,000 per month. With effect from June 1, 2021, he has been allotted a rent-free furnished house at Chennai by A Ltd. House is owned by subsidiary company of A Ltd. for which A Ltd. has to pay a nominal rent of Rs. 10,000 per month (rent of 2021-22 is not paid so far). Furniture in the house is owned by A Ltd. (it was purchased in 1998 for Rs. 30,000).
Municipal tax of the property owned by X is Rs. 82,000 for the previous year 2021-22. It is, however, paid by the employer company, A Ltd.
X has a brought forward house property loss of Rs. 75,000. This loss pertains to the previous year 2018-19 of the property mentioned above. It was possible to set off this loss during 2018-19 against salary income. However, X has not claimed the adjustment in 2018-19. He wants to claim deduction of Rs. 75,000 from the property income of the previous year 2021-22.
X pays life insurance premium of Rs. 40,000 on an insurance policy taken by Mrs. X on her life. Sum assured of the policy taken in 2009 is Rs. 3,60,000. Till the previous year 2020-21, Mrs. X has paid insurance premium and availed deduction under section 80C. He also pays Rs. 72,000 as tuition fee of his daughter’s school.
Tax deducted by A Ltd. on salary income under section 192 is Rs. 2,95,000.
X Ltd. maintains unrecognized provident fund.

Solution : Computation of income from house property –

Unit A	Unit B
Rs.	Rs.
Municipal value (MV)	3,05,000	3,05,000
Fair rent (FR)	3,60,000	3,60,000
Standard rent (SR)	4,50,000	4,50,000
Annual rent (Rs. 47,000 × 12, *Rs. 49,000 × 10, as Unit B is available for letting out from June 1, 2021)	5,64,000*	4,90,000**
Unrealized rent	Nil	Nil
Loss due to vacancy (Rs. 49,000 × 2.5 months, i.e., from June 1, 2021 to August 15, 2021)	Nil	1,22,500
Municipal tax	41,000	41,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	3,60,000	3,60,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	5,64,000	4,90,000
Step III – Amount computed in Step I or Step II, whichever is higher	5,64,000	4,90,000
Step IV – Loss due to vacancy	Nil	1,22,500
Step V – Gross annual value is Step III minus Step IV	5,64,000	3,67,500
Less: Municipal tax	41,000	41,000
Net annual value	5,23,000	3,26,500
Less: Deductions under section 24 –
Standard deduction @ 30%	1,56,900	97,950
Interest on borrowed capital	Nil	Nil
Income	3,66,100	2,28,550

Computation of salary income –
Basic salary (Rs. 85,000 × 12)	10,20,000
Special allowance (Rs. 10,000 × 12)	1,20,000
Rent-free furnished house [see Note 3]	1,02,500
Municipal tax paid by employer (being an obligation of employee met by employer)	82,000
Standard deduction	(–)50,000
Salary income	12,74,500
Computation of net income and tax –
Salary	12,74,500
Income from house property (Rs. 3,66,100 + Rs. 2,28,550)	5,94,650
Income from other sources (being bank interest)	1,29,500
Gross total income	19,98,650
Less: Deduction under section 80C	1,12,000
Net income	18,86,650
Tax on net income
Income-tax†	3,78,495
Add: Health and education cess	15,140
Tax liability	3,93,635
Less: Prepaid tax –
– Tax deducted by employer under section 192	2,95,000
– Tax deducted by DEF Ltd., tenant, under section 194-I (10% of Rs. 47,000 × 12)	56,400
Net tax liability (rounded off)	42,230

Refundable deposit – Refundable deposit is not taken into consideration to find out gross annual value.
Municipal tax – Municipal tax paid by employer, is taxable in the hands of X as a perquisite. At the same time, municipal tax paid (which is included as perquisite) is taken as payment by X and, consequently, it is deductible.
Perquisite in respect of rent-free house – Rent-free house is provided with effect from June 1, 2021. During the previous year 2021-22, the perquisite is provided for 10 months. Salary of X from June 1, 2021 to March 31, 2022 is Rs. 9,50,000 [i.e., (Rs. 85,000 + Rs. 10,000) × 10]. 15% of Rs. 9,50,000 is Rs. 1,42,500. Actual rent paid/payable by employer for 10 months is Rs. 1,00,000. Value of unfurnished house is Rs. 1,00,000 (i.e., 15% of salary or actual rent, whichever is lower). Value of furniture for 10 months is Rs. 2,500 (i.e., 10% of Rs. 30,000 × 10 ÷ 12). The aggregate amount is Rs. 1,02,500.
Brought forward loss – Loss from house property for the year 2018-19 can be set off against any income including salary income of the previous year 2018-19. There is no option available to the taxpayer in respect of this rule. If salary or any other income is sufficient to adjust loss from house property, then it cannot be carried forward and adjusted against income of any other year.

Q20. X (40 years) is an Indian but now he is a citizen of USA. During the previous year 2021-22, he is in India for 300 days. During April 1, 2011 and March 31, 2020, he is in India for 600 days. He is resident in India for the previous years 2018-19 and 2019-20.

He has two businesses — Business A (chemical manufacturing business) and Business B (business of letting out of properties on rent in India and outside India). From Business, A he has generated income of Rs. 7,00,000 in India and Rs. 5,00,000 outside India. The following information is available from the records of X pertaining to Business B –

(All figures in INR)
House properties	House properties
in India	outside India
Number of properties	6	9
Gross annual value of these properties	46,72,000	83,70,000
Municipal tax actually paid in 2021-22	6,00,000	12,50,000
Repair expenses	14,000	15,90,000
Insurance	80,000	4,15,000
Interest on capital borrowed for repairing properties	50,000	60,000
Charges for lift, electricity, air-conditioning and security services collected (in addition to rent) from tenants (a)	25,12,972	37,65,000
Amount actually spent for this purpose (b)	15,00,000	22,00,000
Depreciation admissible in respect of lift and air-conditioning system (c)	7,10,000	12,80,000

Business A and Business B are controlled partly from India and partly from outside India. Rent of 9 properties situated outside India is received outside India. Later on approximately 30 per cent rent is remitted to India. X is employed by a foreign company. During the previous year 2021-22, he has received salary of Rs. 36,00,000 out of which Rs. 10,00,000 pertains to services rendered in India. As per agreement with the employer Rs. 10,00,000 is accrued outside India and paid outside India. X pays insurance premium of Rs. 20,000 in India (sum assured : Rs. 2,00,000) and Rs. 2,50,000 outside India (sum assured : Rs. 30 lakh).

Find out net income and tax liability of X in India for the assessment year 2022-23. Ignore double taxation relief available under section 90. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : During the previous year 2021-22, X is in India for 300 days. During last 7 years he is not in India for at least 730 days. Consequently, X is resident but not ordinarily resident in India for the assessment year 2022-23.

Indian income is chargeable to tax in India. Foreign income is taxable if it is a business income and arises from a business which is controlled wholly or partly from India. Business A is controlled from India as well as from outside India. Even income generated and received outside India pertaining to Business A is taxable in India.

Business B consists of letting out of properties in India and outside India. It also includes the business of providing services (like lift, electricity, air-conditioning, security, etc.) to tenants. Income from letting out of properties cannot be taken as business income, as it is taxable under the head, “Income from house property”. However, income from the incidental business of providing different services to the tenants can be taken as business income.

Computation of income of Business A and Business B –

Indian income	Foreign income
Rs.	Rs.
Computation of business income –
Business A	7,00,000	5,00,000
Business B (the activity of providing incidental services to tenants) [(a) – (b) – (c)]	3,02,972	2,85,000
Total	10,02,972	7,85,000
Computation of house property income –
Gross annual value	46,72,000	83,70,000
Less: Municipal tax	6,00,000	12,50,000
Net annual value	40,72,000	71,20,000
Less: Deductions –
Standard deduction	12,21,600	21,36,000
Interest on borrowed capital	50,000	60,000
Income	28,00,400	49,24,000

Salary (for rendering service in India) (after standard deduction)	9,50,000
House property income	28,00,400
Business income (Rs. 10,02,972 + Rs. 7,85,000)	17,87,972
Gross total income	55,38,372
Less: Deduction under section 80C	1,50,000
Net income (rounded off)	53,88,370
Tax on net income
Income-tax†	14,29,011
Add: Surcharge @10%	1,42,901
Tax and surcharge	15,71,912
Add: Health and education cess	62,876
Tax liability (rounded off)	16,34,790

Q21. X (53 years) owns a house property. It is situated at Nariman Point, Mumbai. The following information is available –

Rs.
Municipal valuation	33,20,000
Market rent of a similar property at Nariman Point, Mumbai	60,00,000
Market rent of a similar property at Andheri (East), Mumbai	38,00,000
Standard rent	57,00,000
Municipal tax of 2021-22	4,50,000
Municipal tax of 2021-22 paid in 2021-22	3,92,000
Municipal tax of 2020-21 paid in 2021-22	3,00,000
Advance municipal tax for next 5 years paid in 2021-22	18,00,000
Repair expenses (10 per cent is borne by tenant)	90,000
Insurance	80,000

The above property is let out on monthly rent of Rs. 5,70,000 up to June 30, 2021. Tenant has vacated the property on June 30, 2021 without paying one month rent. The property is lying vacant during July and August 2021 as no suitable tenant is available. X occupies the property for his own residence from September 1, 2021. Till September 1, 2021, he resides in a rented accommodation for which he pays rent of Rs. 80,000 per month. Construction of the property was completed in April 2020. A loan of Rs. 90,00,000 was taken to finance construction of the property. This loan was taken from an Indian private limited company.

Interest liability pertaining to the period ending March 31, 2020 is Rs. 24,80,000. Interest liability for the previous year 2021-22 is Rs. 11,50,000. Every year interest is paid on due dates. However, tax is not deducted under section 194A.

X is a businessman (turnover : above Rs. 5 crore). His business income for the previous year 2021-22 is Rs. 77,90,000 (an interest liability of Rs. 2,00,000 is paid to A Ltd. without deducting tax at source under section 194A). X deposits Rs. 2,00,000 in a fixed deposit account with SBI, Nariman Point, Mumbai for the purpose of claiming deduction under section 80C. After litigation with the tenant, X recovers on March 20, 2022, one month’s unrecovered rent from the tenant with interest of Rs. 24,000 (total amount recovered is Rs. 5,94,000). Litigation expenditure is Rs. 12,500.

Find out the net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Computation of income of X –

Rs.
Computation of gross annual value
Municipal value (MV)	33,20,000
Fair rent (FR)	60,00,000
Standard rent (SR)	57,00,000
Rent of the property from April 1, 2021 to August 31, 2021 (i.e., the period for which the property is available for letting out during the previous year 2021-22) (Rs. 5,70,000 × 5)	28,50,000
Unrealized rent (rent is ultimately recovered during the previous year)	Nil
Loss due to vacancy (Rs. 5,70,000 × 2)	11,40,000
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	57,00,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	28,50,000
Step III – Amount computed in Step I or Step II, whichever is higher	57,00,000
Step IV – Loss due to vacancy	11,40,000
Step V – Gross annual value is Step III minus Step IV	45,60,000
Less: Municipal tax (Rs. 3,92,000 + Rs. 3,00,000 + Rs. 18,00,000)	24,92,000
Net annual value	20,68,000
Less: Deductions under section 24 –
Standard deduction @ 30%	6,20,400
Interest on borrowed capital (1/5 of Rs. 24,80,000 + Rs. 11,50,000)	16,46,000
Income	(–)1,98,400
Computation of income and tax liability
Income from house property	(–)1,98,400
Business income [Rs. 77,90,000 + disallowance of 30% of Rs. 2,00,000 under section 40(a)(ia) on account of non-deduction of tax under section 194A]	78,50,000
Income from other sources –
– Interest recovered : Rs. 24,000
– Less: Proportionate legal expenditure : Rs. 505 (i.e., Rs. 12,500 × Rs. 24,000 ÷ Rs. 5,94,000)	23,495
Gross total income	76,75,095
Less: Deduction under section 80C	1,50,000
Net income (rounded off)	75,25,100
Tax on net income
Income-tax†	20,70,030
Add: Surcharge @10%	2,07,030
Tax and surcharge	22,77,033
Add: Health and education cess	91,081
Tax liability (rounded off)	23,68,110

Note – Disallowance under section 40(a)(ia) is applicable only in the case of business income. If interest, pertaining to house property, is paid without deduction of tax at source, disallowance provisions of section 40(a)(ia) are not applicable.

Q22. X (63 years) is a joint finance officer in A Ltd., Mumbai. He gets Rs. 70,000 per month as salary. He owns two houses, one of which is let out to the employer-company which in turn provided the same to X as rent-free accommodation. X contributes 10 per cent of his salary towards recognized provident fund. The following information is available from the records of X –

House I	House II
Rs.	Rs.
Fair rent (FR)	4,00,000	16,00,000
Annual rent	4,12,000	20,70,000
Municipal valuation (MV)	3,70,000	14,00,000
Standard rent (SR)	3,50,000	15,50,000
Municipal taxes paid	41,000	1,60,000
Repairs	6,000	12,000
Insurance, land revenue, ground rent, etc.	20,000	40,000
Interest on capital borrowed by mortgaging House I (funds are used for construction of House II)	48,000	—
Unrealised rent of the previous year 2019-20	—	1,70,000
Unrealised rent of 2020-21	—	65,000
Nature of occupation	Let out to A Ltd.	Let out to Y
for business
Date of completion of construction	March 2003	April 2005

Determine the net income of X for the assessment year 2022-23. Also find out net tax liability after deducting the amount of tax deducted at source. Ignore section 115BAC pertaining to alternative tax regime‡. The following additional information is available –

On December 15, 2021, X takes a loan of Rs. 50,000 from a bank to pay municipal tax of financial year 2021-22 pertaining to House II. Interest of this loan of Rs. 3,000 for the period ending March 31, 2022 is paid on March 31, 2022.
On April 1, 2020, he took a similar loan of Rs. 40,000 from another bank to pay municipal tax of financial year 2020-21 of House II. This loan is repaid on April 30, 2021. X wants to claim deduction under section 80C.
Rent of House I paid by A Ltd. for the financial year 2021-22 is Rs. 4,12,000. However, amount actually received by X is Rs. 3,70,800 (i.e., Rs. 4,12,000 – 10 per cent TDS under section 194-I).
House II is a commercial property. Annual rent of House II given above is inclusive of service tax/GST of Rs. 2,70,000. However, service tax/GST collected by X during 2021-22 is not paid till date. Tax is not deducted at source by the tenant of House II.
A Ltd. has deducted tax at source of Rs. 1,70,000 from salary under section 192.
Income of X from other sources is Rs. 6,08,000.
He deposits Rs. 70,000 to public provident fund account during the previous year.

Solution :	Rs.
Basic salary (i.e., Rs. 70,000 × 12)	8,40,000
Perquisite in respect of rent-free house [see Note 1 infra]	1,26,000
Gross salary	9,66,000
Less: Standard deduction	50,000
Salary	9,16,000
Property income – House I (let out for residence)
Step I – Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR]	3,50,000
Step II – Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy	4,12,000
Step III – Amount computed in Step I or Step II, whichever is higher	4,12,000

Other particulars relating to the property are as follows:

Fair Rental Value	3,70,000
Municipal Value	3,80,000
Standard Rent	3,20,000
Annual Municipal Tax (50% paid)	57,000
Interest on loan taken for construction of property for the year 2020-21	30,000
Annual insurance premium	5,000

Ans: Computation of Income from House Property

(Assessment Year 2022-23)

Amount (`)
I	Ground Floor (Let out)(1/2 portion of house)
Gross Annual Value (Actual Rent)	1,60,000
Less: Municipal Taxes paid (28,500 × 1/2)	(14,250)
Net Annual Value (NAV)	1,45,750
Less: Deduction under section 24
Standard (30% of ` 1,45,750)	(43,725)
Interest on Borrowed Capital (Pre-construction Period)
(30,000 × ½ × 1/5)	(3,000)
Income from House property (Let out)	99,025
II	First Floor (Self-occupied))(1/2 portion of house)
Net Annual Value (Note 1)	Nil
Less: Deduction under section 24
Interest on Borrowed Capital (Pre-construction Period)
(30,000 × ½ × 1/5)	(3,000)
Income from House property (Self-occupied)	(3,000)
Taxable Income from House property (after intra head adjustment-Note 2)		(96,025)

Working Notes:

The NAV of self-occupied property is always taken as nil.
As per section 70, the loss from one house property can be set-off against income from another property.
The GAV of both the houses are determined as under:

Whole Property	Ground Floor
(a)	Municipal Valuation	:	Rs. 3,80,000	Rs. 1,90,000
(b)	Fair Valuation	:	Rs. 3,70,000	Rs. 1,85,000
(c)	Higher of (a) and (b)	:	Rs. 3,80,000	Rs. 1,90,000
(d)	Standard Rent	:	Rs. 3,20,000	Rs. 1,60,000
(e)	Expected Rent Lower of (c) and (d)	:	Rs. 3,20,000	Rs. 1,60,000
(f)	Actual Rent	:	Rs. 1,60,000
(g)	Gross Annual value Higher of (e) and (f)	:	Rs. 1,60,000

Gross Annual value: The Actual rent received and Expected rent both are equal. Thus, Rs. 1,60,000 shall be GAV.

Section 23 of the Income-tax Act, the annual value of the any property shall be deemed to be—

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.

Explanation— For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realize.

Q24. Mr. Raphael constructed a shopping complex. He had taken a loan of ` 25 Lakhs for construction of the said property on 01-08-2019 from SBI @ 10% for 5 years. The construction was completed on 30-06-2020. Rental income received from shopping complex ` 30,000 per month being let out for the whole year. Municipal Taxes paid for shopping complex ` 8,000. Arrears of rent received from shopping complex ` 1,20,000.

Interest paid on loan taken from SBI for purchase of house for use as own residence for the period 2021-22 is ` 3 lakhs.

You are required to compute Income from House property of Mr. Raphael for A.Y. 2022-23 as per Income Tax Act, 1961.

[Nov. 2015, 8 Marks]

Ans: Computation of Income from House Property

(Assessment Year 2022-23)

Amount (`)
I	Self-occupied residential house
Net Annual Value (Note 1)	Nil
Less: Deduction under section 24
Interest on Borrowed Capital (Subject to max. limit: Note 2)	(2,00,000)
Income from House property (self-occupied)	(2,00,000)

† 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 limited period up to 2 year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.