Annual value

Income from house property is not simply the rent received. The Income Tax Act taxes the annual value of the property — a figure that can exist even when no rent is received at all.

Income is taxable under this head if it arises from a property consisting of any building or lands appurtenant thereto, in the hands of its owner (or deemed owner), where the owner does not use the property for his own business or profession. Rent from vacant land is not house property income; nor is income from under-construction property.

For computation, every house property falls into one of three categories — self-occupied, let-out or deemed let-out — and the category decides the annual value.

The rules:

Deductions from annual value, for let-out and deemed let-out property:

1. Municipal taxes levied by the local authority, if actually paid by the owner. Annual value minus municipal taxes is the net annual value.
2. Standard deduction under Section 24(a): 30% of net annual value.
3. Interest on borrowed capital under Section 24(b), for purchase, construction, repair, renewal or reconstruction — no maximum for let-out or deemed let-out property (subject to set-off rules).

Self-occupied property under the old regime. Annual value is nil, so deducting interest (up to Rs 2,00,000) produces a negative figure. The workbook stresses that this is not really a "deduction" but a loss under the head house property set off against salary or other income. Under the new regime no interest is allowed on self-occupied property, so its income is always nil.

Loss set-off. Under the old regime, up to Rs 2 lakh of house property loss can be set off against other heads; under the new regime it cannot, though the loss can be carried forward against future house property income.

Deemed owner. An individual who transfers property to a spouse (otherwise than for adequate consideration and not in connection with an agreement to live apart) or to a minor child is treated as the owner for this computation. A member of a co-operative housing society with the right to a specific unit is also treated as owner.

Net annual value = Annual value − Municipal taxes actually paid
Income from house property = Net annual value × share
                           − 30% standard deduction
                           − Interest on borrowed capital

Illustrative figures.

Mr Deshpande owns three flats.

Flat 3 is not let out, but — as the next section explains — he may treat up to two houses as self-occupied, so Flats 1 and 3 can both be self-occupied and neither is taxed on a notional rent. Only Flat 2 carries an annual value:

Annual value (higher of 3,00,000 and 2,70,000)   3,00,000
Less: municipal taxes paid                         (10,000)
Net annual value                                  2,90,000
Less: 30% standard deduction                       (87,000)
Income from house property (no loan)              2,03,000

Two points drive the answer. The tenant pays Rs 2,70,000, but the annual value is Rs 3,00,000, because for a let-out property the law takes the higher of expected and actual rent. And the Rs 12,000 of municipal tax on Flat 1 is irrelevant — its annual value is nil, so there is nothing to deduct it from.

If he owned a fourth vacant flat, it would have to be deemed let-out, with an annual value equal to its reasonable expected rent.

Chapter 7 (Concepts of Taxation), section 7.6.2 — Income from House Property — covering conditions of chargeability, the three categories, annual value, deductions under Section 24, deemed ownership and the worked examples; the Chapter 13 caselet on four house properties applies it. Expect the three-way rule for annual value and a full computation down to income from house property.

• Let-out: higher of expected rent and actual rent. Deemed let-out: expected rent. Self-occupied: nil.
• Municipal taxes are deducted only if actually paid by the owner.
• The 30% standard deduction is on net annual value, after municipal taxes.
• Rent from vacant land or an under-construction building is not house property income.
• A self-occupied property's "interest deduction" is really a house property loss under the old regime — and nil under the new.
• Terminology is loose in the workbook. One bullet says annual value of let-out or deemed let-out property "is calculated after deduction of municipal taxes", while the computation table deducts municipal taxes from annual value to arrive at net annual value. Follow the table: annual value first, then net annual value.