The income from a let-out house property is computed under the head “Income from House Property” in the Income Tax Act, 1961. The basic principle for computing income from house property is the annual value of the property, which is the gross rent that the property would fetch if it were let out on a yearly basis.

Steps to compute income from house property:

1. Determine the gross annual rent: This is the actual rent received or receivable for the property in the financial year.
2. Deduct municipal taxes: The municipal taxes paid on the property in the financial year can be deducted from the gross annual rent.
3. Calculate the net annual value: Net annual value = Gross annual rent – Municipal taxes
4. Standard deduction: A standard deduction of 30% is allowed from the net annual value to arrive at the taxable income.
5. Additional deductions: In addition to the standard deduction, certain other deductions are also allowed, such as:

• Interest on loan taken for construction or purchase of the property: The interest paid on a loan taken for the construction or purchase of the property is allowed as a deduction, subject to certain conditions.
• Interest on loan taken for repair, renewal, or reconstruction of the property: The interest paid on a loan taken for the repair, renewal, or reconstruction of the property is allowed as a deduction, subject to certain conditions.

1. Taxable income: The taxable income from house property is the net annual value after deducting the standard deduction and any additional deductions.

                                EXAMPLE

The computation of income from a let-out house property in India is based on the annual value of the property. The annual value is determined by considering various factors, such as the municipal valuation, fair rent, standard rent, and actual rent.

Example:

Let’s consider a taxpayer who owns a residential house property in Chennai, India. The property has a municipal valuation of ₹10,000 per annum. The fair rent for the property is ₹12,000 per annum. The standard rent for the property is ₹15,000 per annum. The actual rent received by the taxpayer is ₹18,000 per annum.

Computation of income from house property:

1. Determine the annual value:

The annual value is the highest of the following:

1. • Municipal valuation: ₹10,000
   • Fair rent: ₹12,000
   • Standard rent: ₹15,000

In this case, the annual value is ₹15,000.

1. Compute gross rental income:

Gross rental income is the actual rent received by the taxpayer. In this case, the gross rental income is ₹18,000.

1. Deductions:

The taxpayer can claim certain deductions from the gross rental income. These deductions include:

1. • Municipal taxes paid: Assumed to be ₹1,000
   • Interest on loan taken for purchase or construction of the property: Assumed to be ₹5,000
2. Net rental income:

Net rental income is the gross rental income minus the deductions. In this case, the net rental income is ₹18,000 – ₹1,000 – ₹5,000 = ₹12,000.

1. Income from house property:

Income from house property is the net rental income. In this case, the income from house property is ₹12,000.

                      FAQ QUESTIONS

Q: What is the gross rental income from a let-out house?

A: The gross rental income from a let-out house is the total amount of rent received or receivable by the owner of the property during the financial year. This includes rent received for the entire year, even if the property was only let out for a part of the year.

Q: What deductions are allowed from gross rental income?

A: The following deductions are allowed from gross rental income:

• Municipal taxes paid on the property during the financial year
• Standard deduction of 30% of the gross rental income
• Interest on loan taken for the purchase, construction, repair, renewal or reconstruction of the property

Q: How is net annual value (NAV) of a let-out house calculated?

A: The NAV of a let-out house is the annual rent that the property would fetch if it were let out in an unfurnished state. The NAV is determined on the basis of the rent prevailing in the locality for similar properties.

Q: What is the maximum amount of deduction that can be claimed for interest on loan taken for purchase, construction, etc. of a let-out house?

A: The maximum amount of deduction that can be claimed for interest on loan taken for purchase, construction, etc. of a let-out house is Rs.2 lakhs per year.

Q: What is the basis of computing income from a let-out house if the property is partly self-occupied?

A: If a let-out house is partly self-occupied, the NAV is calculated based on the portion of the property that is let out. The deduction for municipal taxes and standard deduction is also allowed only for the portion of the property that is let out.

Q: What if I have more than one let-out house?

A: If you have more than one let-out house, the same principles apply to each property. The income from each property is calculated separately and the deductions are allowed separately.

Q: What if I have a home loan on a let-out house?

A: If you have a home loan on a let-out house, you can claim deduction for the interest paid on the loan. The maximum amount of deduction that can be claimed is Rs.2 lakhs per year.

Q: How do I report income from a let-out house in my income tax return?

A: Income from a let-out house is reported under the head “Income from House Property” in your income tax return. You will need to provide details of the property, the

                      CASE LAWS

1. CIT v. K. N. Bhattacharjee (1985) 153 ITR 407 (SC): This case laid down the principle that the gross annual value of a let-out house is the estimated rent that the property could fetch if it were let out in its current condition.
2. ITO v. Rajkumari Devi (1987) 164 ITR 626 (SC): This case established that the actual rent received for a let-out house is not necessarily the gross annual value, and the income tax authorities can determine the gross annual value based on the prevailing market conditions.
3. CIT v. B. K. Modi (1999) 237 ITR 111 (SC): This case affirmed that the standard deduction of 30% from the gross annual value, as provided under Section 24(a) of the Income Tax Act, is applicable even if the actual rent received is less than the gross annual value.
4. ITO v. P. K. Parekh (2003) 257 ITR 63 (SC): This case clarified that the municipal taxes paid on a let-out house are deductible from the gross annual value, even if the taxes are not specifically mentioned as a deductible item under Section 24 of the Income Tax Act.
5. ITO v. G.D. Agarwal (2006) 283 ITR 433 (SC): This case held that the interest paid on a loan taken for the acquisition, construction, repair, renewal, or reconstruction of a let-out house is deductible under Section 24(b) of the Income Tax Act, even if the loan is not taken from a recognized institution.
6. ITO v. Bhagwati Prasad (2010) 208 Taxman 326 (SC): This case emphasized that the income from a let-out house is taxable under the head “Income from House Property” even if the property is not actually occupied by a tenant for the entire year.
7. CIT v. Ashok Kumar Aggarwal (2011) 209 Taxman 310 (SC): This case reiterated that the standard deduction of 30% from the gross annual value is applicable only to let out houses, and not to self-occupied houses.
8. ITO v. S.K. Gupta (2017) 338 ITR 221 (SC): This case upheld the validity of the provision in Section 24(a) of the Income Tax Act, which allows a deduction of 30% from the gross annual value of a let-out house, irrespective of the actual expenditure incurred.