Sometimes, tax is payable on deemed income from unoccupied house

A house owner can claim only up to two properties as self-occupied

Section 23 of the Income-Tax (I-T) Act, 1961, governs how the annual value of a property is determined for calculating income from house property (and thereby arriving at a house owner’s tax liability). This section can be confusing as the rules that apply vary in different scenarios. Property owners need to understand them to avoid being hauled up by tax authorities.  

Let out throughout the year

A property that was let out throughout the financial year is governed by Sections 23(1)(a) and 23(1)(b).

Under Section 23(1)(a), if the property was let out throughout the previous year, its annual value is the expected sum for which it was let out for that year.

Sometimes, the actual rent from the property exceeds the expected sum. In that case, Section 23(1)(b) applies. Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, says, “In that case, the annual value is equivalent to the actual rent received or receivable.”

In other words, if the property was let out throughout the previous year, the taxable rent will be the expected sum, or the actual rent received from the property, whichever was higher.

Ankit Jain, partner, Ved Jain & Associates, says, “The rent should not be lower than a reasonable expected rent for the property for the year. Reasonable expected rent is determined by using municipal valuation or by considering similar properties in that neighbourhood.”

Vacant for part of the year

Such a scenario is governed by Section 23(1)(c). Here, the expected reasonable rent for that part of the year is not included in the taxable rent. Jain says, “Only the rent for the part of the year when the property was let out is considered.”He adds that the taxpayer should maintain records to show that the vacancy was genuine and that the taxpayer made all efforts to find a new tenant for the property.

Self-occupied or unoccupied

In this scenario, Section 23(2) comes into play. If the property, or a part of it, was self-occupied and used for one’s own residential purposes, then the annual value of such a property becomes nil, subject to an upper limit of two houses.

The same happens if the owner lives in a different location. Pratyush Miglani, managing partner, Miglani, Verma & Co says, “If an assessee can’t occupy the property as he lives in a different place due to his job or business, the annual value of the property is deemed nil.”

More than two properties can’t be declared as self-occupied. Jain says, “If there are more than two properties, they will be deemed to be let out even if they are unoccupied. The reasonable expected rent will be considered to be their taxable rent.”

Rented for part of the year, self-occupied for rest

Section 23(3) applies to the scenario where the property was self-occupied for part of the year and rented out for the rest.

Aditya Chopra, managing partner, Victoriam Legalis-Advocates & Solicitors, says, “If a single unit of a property is self-occupied for part of the year and let out for the remaining part, then the expected rent for the whole year shall be taken into account for determining the gross annual value. 

The expected rent for the whole year shall be compared with the actual rent for the let-out period. Whichever is higher shall be adopted as the gross annual value.”

However, municipal tax for the whole year, if paid by the owner, is allowed as deduction.

Portion let out, rest self-occupied

Often, people let out part of the house they are living in. For instance, they may live on the ground floor and let out the first floor.Jain says, “In such cases, the rent for the portion that has been let out is considered as taxable rent. The reasonable expected rent should also be determined and should be apportioned according to the area that was let out.”

When house owner is unable to collect rent

• In such a case, the rent that has not been recovered or realised need not be included in the taxable rent
• However, the taxpayer should ensure that the lease is terminated
• He should also make efforts to compel the defaulting tenant to vacate his property
• These efforts can include possible legal action for vacation or for recovery of arrears, as required

Source: Veda Jain & Associates