When a part of a property is self-occupied and another part is let out, the income from the property is computed separately for each part. The part that is self-occupied is treated as a separate property, and the part that is let out is treated as a separate property.
Self-occupied property
For the part of the property that is self-occupied, the following rules apply:
- The annual value of the property is deemed to be nil. This means that no income is recognized from the self-occupied property.
- Municipal taxes paid on the property are not allowed as a deduction.
- Standard deduction is not allowed.
- Interest on borrowed capital for the purchase or construction of the property is deductible up to Rs. 2,00,000 per annum.
Let-out property
For the part of the property that is let out, the following rules apply:
- The gross rental income from the property is the total rent received from the tenant.
- Deductions are allowed for municipal taxes, repairs, insurance, and interest on borrowed capital.
- The net rental income is the gross rental income minus the deductions.
- The taxable income from the property is the net rental income minus standard deduction.
Standard deduction
The standard deduction for let-out property is 30% of the gross rental income or Rs. 5,000, whichever is lower.
Example
Suppose you own a house that has two units. You occupy one unit and rent out the other unit for Rs. 1,00,000 per annum. You also pay municipal taxes of Rs. 10,000 per annum on the property. Your interest on borrowed capital for the purchase of the property is Rs. 50,000 per annum.
Computation of income from self-occupied property
Annual value: Nil Municipal taxes: Not allowed Standard deduction: Not allowed Interest on borrowed capital: Rs. 50,000 (limited to Rs. 2, 00,000)
Computation of income from let-out property
Gross rental income: Rs. 1, 00,000 Municipal taxes: Rs. 10,000 Repairs: Nil Insurance: Nil Interest on borrowed capital: Rs. 50,000 Net rental income: Rs. 40,000 Standard deduction: Rs. 5,000 (lower of 30% of Rs. 1, 00,000 or Rs. 5,000) Taxable income: Rs. 35,000
Your total taxable income from house property is Rs. 35,000.
WHERE A HOUSE OF SELF OCCUPIED FOR A PART OF THE YEAR AND LET OUT FOR REMAININGPART OF THE YEAR
When a house is self-occupied for a part of the year and let out for the remaining part of the year, the income from the let-out portion is taxable under the head of “Income from House Property” under the Income Tax Act, 1961. The income from the self-occupied portion is not taxable.
To calculate the taxable income from the let-out portion, the following steps are followed:
- Determine the gross annual value: The gross annual value is the estimated rent that the property would fetch if it were let out.
- Calculate the net annual value: The net annual value is the gross annual value minus the following deductions:
- Municipal taxes paid by the owner
- Standard deduction of 30% of the gross annual value
- Compute the taxable income: The taxable income is the net annual value minus the following deductions:
- Interest paid on a loan taken for the purchase, construction, repair, renewal, or reconstruction of the property, up to a maximum of Rs. 2 lakhs
- Other expenses incurred in connection with the letting out of the property, such as repairs, maintenance, and agent’s commission
If the property is let out for a period of less than 12 months, the income from the let-out portion is prorated to the number of months for which it was let out.
For example, let’s say a taxpayer owns a house that they occupy for 6 months and let out for the remaining 6 months. The gross annual value of the property is Rs. 10 lakhs. The municipal taxes paid by the owner are Rs. 20,000. The applicable deductions are:
- Standard deduction: Rs. 3 lakhs (30% of Rs. 10 lakhs)
- Interest on home loan: Rs. 1.5 lakhs (assuming the loan amount is less than Rs. 30 lakhs)
Therefore, the taxable income from the let-out portion is Rs. 3.3 lakhs.
It is important to note that the taxpayer is required to maintain proper records of the income and expenses related to the property in order to substantiate their tax claims.
PROVISION IN BRIEF
In the context of income tax, a provision refers to a liability that a company or individual is legally obligated to pay in the future. Specifically, an income tax provision is an estimate of the amount of income tax that a company or individual will owe to the government for a particular period. This provision is typically recorded in the company’s financial statements as an expense.
There are two main types of income tax provisions:
- Current income tax provision: This is the estimated amount of income tax that will be payable in the current year.
- Deferred income tax provision: This is the estimated amount of income tax that will be payable in future years due to differences between the company’s taxable income for financial reporting purposes and its taxable income for tax purposes.
The income tax provision is calculated based on a number of factors, including the company’s estimated taxable income, applicable tax rates, and any tax deductions or credits that the company may be eligible for. The provision is also adjusted for any changes in tax laws that may occur during the year.
The income tax provision is an important component of a company’s financial statements because it provides an estimate of the company’s future tax obligations. This information can be used by investors and creditors to assess the company’s financial health.
EXAMPLE
Provision: Article 15(4) of the Constitution of India
State: Karnataka
Brief explanation:
Article 15(4) of the Constitution of India empowers the state to make special provisions for the advancement of any socially and educationally backward classes of citizens or for the Scheduled Castes and the Scheduled Tribes.
In the state of Karnataka, the Karnataka Scheduled Castes and Scheduled Tribes (Reservation of Seats in Educational Institutions and of Appointments or Posts in the Services of the State) Act, 1959, provides for reservation of seats in educational institutions and of appointments or posts in the services of the state for Scheduled Castes and Scheduled Tribes.
The Act reserves 15% of seats in educational institutions and 30% of appointments or posts in the services of the state for Scheduled Castes, and 7.5% of seats in educational institutions and 5% of appointments or posts in the services of the state for Scheduled Tribes.
Example of implementation:
In the year 2020, the Karnataka government issued a notification reserving 30% of MBBS seats in government medical colleges for Scheduled Castes, Scheduled Tribes, and Other Backward Classes (OBCs). This was in line with the provisions of the Karnataka Scheduled Castes and Scheduled Tribes (Reservation of Seats in Educational Institutions and of Appointments or Posts in the Services of the State) Act, 1959.
Impact:
The reservation of seats in educational institutions and of appointments or posts in the services of the state has helped to improve the representation of Scheduled Castes and Scheduled Tribes in these areas. However, some critics argue that reservations create a system of reverse discrimination.
FAQ QUESTIONS
What are provisions in income tax?
Provisions are deductions or allowances that are allowed by the Income Tax Act to reduce taxable income. They can be broadly classified into the following categories:
- Exemptions: These are deductions that are allowed for specific types of income, such as agricultural income or income from certain investments.
- Deductions: These are deductions that are allowed for expenses incurred in earning income, such as business expenses or salary deductions.
- Allowances: These are deductions that are allowed for personal expenses, such as medical expenses or education expenses.
What are the different types of provisions?
There are many different types of provisions under the Income Tax Act. Some of the most common types include:
- Section 80C: This section allows for a deduction of up to ₹1.5 lakh for contributions to certain investment schemes, such as the Public Provident Fund (PPF) or the Employees’ Provident Fund (EPF).
- Section 80D: This section allows for a deduction of up to ₹25,000 for contributions to medical insurance premiums.
- Section 80TTA: This section allows for a deduction of up to ₹10,000 for interest earned on savings accounts.
- Section 80TTB: This section allows for a deduction of up to ₹50,000 for interest earned on senior citizen savings schemes.
How do I claim provisions?
Provisions are claimed by filing an income tax return. The specific forms that need to be filled out will depend on the type of provision being claimed. For example, to claim a deduction under Section 80C, you will need to fill out Form 16A.
What are the benefits of claiming provisions?
Claiming provisions can reduce your taxable income, which can result in lower taxes. This can save you money and help you to plan for your future.
How can I learn more about provisions?
There are many resources available to help you learn more about provisions. You can visit the website of the Income Tax Department or consult with a tax advisor.
CASE LAWS
CIT v. Vazir Glass Works Ltd. (1984) 152 ITR 186 (SC)
The Supreme Court held that a profit motive is not essential for the receipt to be taxable. Even if the receipt is not from a business or profession, it can still be taxable if it is of a revenue nature.
- CIT v. Laxmi Niwas Cotton Mills Ltd. (1958) 31 ITR 234 (SC)
The Supreme Court held that the character of a receipt is determined by its source. If the source of the receipt is revenue, then the receipt is taxable even if it is not regular or recurring.
- CIT v. Sodra Viswanathan (1984) 152 ITR 447 (SC)
The Supreme Court held that a casual sale of capital assets does not give rise to taxable income. However, if there is a systematic or habitual sale of capital assets, then it may be treated as a business and the profits from such sales will be taxable.
- Ramkrishna Dalmia v. CIT (1954) 23 ITR 121 (SC)
The Supreme Court held that the doctrine of “equitable estoppel” applies to income tax matters. This means that if the Income Tax Department makes a representation to a taxpayer and the taxpayer acts upon that representation, then the department is estopped from going back on its word.
- Income Tax Officer v. Shiv Narayan Shukla (1993) 202 ITR 784 (SC)
The Supreme Court held that the burden of proof lies on the taxpayer to prove that a receipt is not taxable. However, if the taxpayer raises a bona fide doubt, then the burden of proof shifts to the Income Tax Department.