Income from House Property (ss.22–27) — Law of Taxation Notes

Income from House Property (ss.22–27)

‘X’ transferred a building to a friend on the condition that it would revert to ‘X’ on the friend’s death, and let the friend keep the monthly rent. When the taxman came, whose “house property income” was it? Section 27’s deemed owner rule answers it — and teaches that under this head the law taxes the owner, defined its own way, on the annual value of the property, not the actual rent alone.

The scheme of the head “House Property”

Section 22 — the charge. The annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable — provided the property is not used by him for his own business or profession. Three conditions: (i) there must be a building/land appurtenant; (ii) the assessee must be the owner; (iii) it must not be used for his own business.

Who is the owner (s.27 — deemed owner). The Act deems certain persons to be owners even if not the legal title-holder: an individual who transfers property to a spouse/minor child without adequate consideration; the holder of an impartible estate; a member of a co-operative housing society; a person in possession under a part-performance of a contract (s.53A TPA); and a lessee under a long lease (12+ years).

Annual Value (s.23) — the tax base. House property is taxed not on actual rent but on its annual value — the sum for which the property might reasonably be expected to let from year to year. Steps to compute the Gross Annual Value (GAV):

1. Take the higher of the Municipal Value and the Fair Rent;
2. but restrict it to the Standard Rent (under rent-control law) if that is lower — this gives the Expected Rent;
3. compare the Expected Rent with the Actual Rent Received/Receivable; the GAV is the higher, subject to adjustment for vacancy.

From GAV to Net Annual Value (NAV): subtract municipal taxes actually paid by the owner during the year.

Deductions (s.24): only two:

1. s.24(a) — Standard deduction of 30% of NAV — a flat allowance for repairs and collection, whether or not actually spent.
2. s.24(b) — Interest on borrowed capital — interest on a loan taken to buy/construct/repair the property (for a self-occupied house the deduction is capped, e.g. ₹2,00,000; for a let-out house there is no cap, subject to the head/inter-head set-off limit).

Self-occupied property. The annual value of a self-occupied house is taken as nil, so there is no GAV; the owner may still claim the s.24(b) interest deduction (up to the cap), producing a loss under this head.

The Format (pro-forma)

Learn this skeleton first, then see it applied below. XXXX stands for a figure; amounts in brackets (XXXX) are subtracted.

Format — Computation of Income from House Property (s.22)

🧩 WORKED EXAMPLE — Computing income from a let-out house

Facts. Municipal value ₹1,80,000; fair rent ₹2,00,000; standard rent ₹1,90,000; actual rent received ₹2,40,000; municipal taxes paid by owner ₹20,000; interest on housing loan ₹1,00,000.

Rule. GAV = higher of expected rent and actual rent; NAV = GAV − municipal taxes; then s.24(a) 30% and s.24(b) interest.

Apply.

• Expected rent = higher of MV (1,80,000) and FR (2,00,000) = 2,00,000, capped at standard rent 1,90,000 = 1,90,000
• GAV = higher of expected rent (1,90,000) and actual rent (2,40,000) = 2,40,000
• Less municipal taxes 20,000 → NAV = 2,20,000
• Less s.24(a) 30% of 2,20,000 = 66,000
• Less s.24(b) interest 1,00,000

Conclusion. Income from House Property = ₹54,000. Note the two deductions are the only ones allowed — actual repair bills, insurance, etc. are not separately deductible; the 30% covers them.

🧩 WORKED EXAMPLE — Property reverting to the transferor on the transferee’s death

Facts. ‘X’ transfers a house to ‘Z’ on the condition it reverts to ‘X’ on ‘Z’s death; ‘Z’ collects the monthly rent.

Rule. Under s.27, a transfer that is not absolute (revocable/for life) can make the transferor the deemed owner; the head taxes the owner, not merely whoever pockets the rent.

Apply. Because the property reverts to ‘X’ (the transfer is not out-and-out), ‘X’ remains the deemed owner of the property for tax purposes, even though ‘Z’ enjoys the rent for now.

Conclusion. The house property income is assessed in ‘X’s hands as deemed owner — a classic s.27 problem.

Section 22: “The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him …, shall be chargeable to income-tax under the head ‘Income from house property’.”

In Simple Terms: This head taxes the owner of a building on its annual value (roughly its letting value), not just the rent. Work out GAV, subtract municipal taxes to get NAV, then take only two deductions — a flat 30% (s.24(a)) and loan interest (s.24(b)). A self-occupied house has nil annual value but can still claim capped interest.

flowchart TD
    ROOT["Income from House Property s.22"]:::root
    ROOT --> GAV["Gross Annual Value s.23<br/>higher of expected rent and actual rent"]:::leaf
    GAV --> NAV["Less municipal taxes paid = NAV"]:::leaf
    NAV --> D1["Less 30% standard deduction s.24(a)"]:::sub
    NAV --> D2["Less interest on loan s.24(b)"]:::sub
    D1 --> OUT["= Income from House Property"]:::leaf
    D2 --> OUT
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef sub fill:#F2F2F2,stroke:#555,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

• CIT v Podar Cement (P) Ltd. (1997) — “owner” in s.22 means the person entitled to the income in his own right, not necessarily the registered title-holder.
• East India Housing & Land Development Trust Ltd. v CIT (1961) — rental income from property is taxed under “House Property”, not “Business”, even for a company formed to let property.

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