| Content
Cases where municipal taxes allowed or disallowed Calculation for annual value of any property Treatment of arrear or unrealized rental income |
Meaning
Rental income means any income received by the taxpayer through the way of rent i.e. allowing another person to use of the taxpayer’s property. As per the section 22 of Income Tax Act, 1956 the annual value of property is taxable under head income from house property if following conditions are satisfied:
- Property means Building and Land appurtenant thereto.
- Assesse must be owner of such property (beneficial not registered).
- Property should not occupy for his own business and profession, which profit is chargeable to tax under head i
Computation of income chargeable under head income from house property:
| Particulars | Amount |
| Gross annual value (GAV) | XXX |
| Less: municipal taxes paid by owner | XXX |
| Net annual value (NAV) | XXX |
| Less: deductions under section 24
i. Standard deduction @ 30% ii. Interest on borrowed capital |
XXX |
| Income chargeable under head of house property | XXX |
What is municipal tax?
Municipal tax means taxes you have to pay if you are the owner or user of a residential property or business premises as a responsibility toward society. It includes services tax like water & sewerage Tax levied by LA. It is claimed from gross annual value of HP.
Cases where municipal taxes allowed or disallowed are:
| · Paid by tenant | Not allowed |
| · Paid by owner | Allowed |
| · Due but not paid (i.e. Municipal Tax payable) | Not allowed |
| · Advance municipal tax paid | Allowed |
| · Municipal tax related to previous year paid in current year | Allowed in current year |
| · Municipal tax paid on let out or deemed to let house property | Allowed |
| · Municipal tax paid on self-occupied property (SOP) | Not allowed |
| · Municipal paid on property outside India, however such property income is taxable in India | Allowed |
Calculation for annual value of any property
There are some cases when assesse is not obtaining any actual annual value of rent then also the it is deemed to be earn The following cases where deemed annual value of any property shall be calculated as:
- The sum for which the property might reasonably be expected to let from year to year (RER).
Computation of reasonable expected rent
| Step 1 | Take higher of following:
· Fair rent or · Municipal rent |
| Step 2 | Take lower of following (If standard rent applicable)
· Step 1 value or · Standard rent |
| RER | Value of Step 2 is RER and it will be gross annual value. |
- Where property or any part of property is let out, then gross annual value shall be computed as under:
| Step 1 | Take higher of the following:
· Reasonable Expected Rent (RER) or · Actual rent receivable(ARR) – unrealized rent |
| Step 2 | Value of above step 1 will be gross Annual value (GAV) |
- Where property or any part of the property is let out and vacant during the whole or any part of previous year then actual rent received or receivable is less than from Reasonable Expected Rent then the GAV shall be actual rent receivable.
Treatment of arrear or unrealized rental income
| Arrear Rent | Unrealized rent |
| Arrear rent is that increased amount of rent held in court which is not paid by the tenant | Unrealized rent is that part of rent from house property that has not been paid by the tenant due to whatever reason |
Section 25A of income tax Act specify that the Amount received in respect of arrears of rent or any subsequent recovery of unrealized rent by the taxpayer shall be treated as income of taxpayer under the head “Income from house property” in the year in which such rent is realized or received even if assessee is no longer the owner of that property.
3. Taxable even if assesse is no more owner of the house in the financial year
| Section 25A |
| Arrear Rent or unrealized rent |
| 1. Taxable in the year of receipt or realised |
| 2. Taxable income should compute after the standard deduction of 30% |
What are the advantages of rental income in India?
- House property is an asset in your name which can be helpful in raising money to tide over certain situations. Banks are often more inclined to lend against tenanted property.
- Your perceived financial security
- Renting a property allows more flexibility than owning the house. In case you are doing a job that faces sudden changes like job relocation
- Good and fixed source of earning
What are the disadvantages of rental income?
- Your tenant may vacate the house at short notice.
- If your tenant failing to pay rent regularly.
- You’re home/flat remaining vacant for several months.
- If your rental agreement does not fix responsibilities like maintenance, upkeep, repainting cost, and other related costs then you could be buying more headaches and that may bring you into a hug loss.
- Your tenant may not vacate when you need the property.
- Property tax in most of the Indian cities account for a tidy sum every year.
