Taxability of rental income from house property in India

If you own a house or flat which is rented or vacant, you need to understand the chargeability of tax on your rental income since you will be required to provide a detailed break-up of your rental income earned.

Let’s understand how you should report such income in your tax returns:

Basics of house property

Properties including your home, office, shop, any building or land attached to such a building will be considered as a house property for the purpose of income tax computation. There is no differentiation between commercial and residential property under the Income Tax Act. Rental income from all such properties is taxed under Income from House Property. However, it is important to note that rental income from vacant land is chargeable under the head “Income from Other Sources”,

An owner is a person who is the legal beneficiary of the property and who exercises the rights of the owner.

There are two types of house properties separated for the purpose of income tax:

Self-occupied house property

A house property occupied by you or your family for residential purposes is considered as a self-occupied house property. A vacant house property will also be considered as self-occupied, in case such house property cannot be occupied by the owner for reasons owing to his employment, business carried out at any other place. This beneficial provision is available to you only in respect of two residential houses owned by you.

Let-out/deemed to be let out house property

A house property which has been rented out for the whole year or part of the year is considered as a let-out house property. Even in cases where no property has been let out, a house property, in excess of two properties owned by you, shall be deemed to be let out as per the provisions of the Income Tax Act.

This development has come from an amendment, before FY20, if you owned two house properties, then only one was considered as self-occupied for the income tax purposes and the other one was assumed to be let-out. The option to choose the self-occupied was given to the taxpayer. However, from FY20 onwards, you can consider 2 houses as self-occupied and others (if any) will be assumed to be let-out for income tax purposes.

Definition of income from house property

Income from house property is charged when any rental income is received/ deemed to be received from the house property owned by you.

The income from house property will be added to your gross total income if the following conditions are fulfilled:

1. You are the beneficial owner of that property.
2. Your property must consist of a house, buildings or land.
3. You do not use the property for the purpose of business or profession.

How to compute the value of rental income

For the income tax purposes, there are two types of value of house property:

Gross annual value (“GAV”)

GAV is the value of the property at which you might let out from year to year. It is more likely the notional rent that you could have earned if the property was rented out.

Do note that even if your property is not let out, the notional rent or deemed rent receivable will be taxable wherein the property is considered to be deemed to be let out.

The annual value is calculated after taking the following 4 factors into consideration:

• Actual rent received or receivable
• Municipal value
• Fair rent
• Standard rent

Net annual value (“NAV”)

NAV of the property is calculated after deducting municipal taxes paid from the gross annual value. It is important to note that municipal taxes can be deducted from the GAV only if they have been paid. You cannot claim deduction of municipal taxes on an accrual basis.

For example, let us compute the NAV of a house property with the following information:

Municipal Value: Rs.6,00,000

Fair Rent: Rs. 5,00,000

Standard Rent: Rs. 8,00,000

Actua Rent: Rs. 9,00,000

Municipal Taxes Paid: Rs. 1,80,000

Computation of NAV should be carried out as per the table below: