House Property consists of any building and land attached to that building. The land may be in the form of a courtyard or compound or parking, as part of the building. Any income generated from such House Property shall be taxable under the head Income from House Property. It will be taxable under the hands of the legal owner of the property. This article covers the treatment of composite rent, arrears of rent, and tax treatment when unrealised rent is subsequently realised.
Composite Rent
Meaning of composite rent
Rent received for a house as well as for facilities provided with the house like lift, gas, water, electricity, etc. the total amount so received is called ‘composite rent‘. Where the assesses receives composite rent from its tenant towards the building as well as services/amenities, such rent should be split up.
Example: Provision of fully furnished house on rent having furniture and AC.
Taxability of composite rent
- The only portion of rent attributable to the house is taxable as “Income from House Property”
- The portion attributable to facilities is taxable as Income from Other Sources.
- When composite rent consists of rent for building and rent for other assets (Like furniture) and the two rents are:
- Inseparable: Then such income is taxable as business income or income from other sources
- Separable: Then the rent of building is taxable as Income from house property and rent of other assets is taxable as Income from other sources.
Unrealised Rent
Meaning of unrealised rent
- It is the rent of the property pertaining to the previous year, which the owner of the property could not recover from the tenant.
- To be able to deduct unrealised rent from your rental income, there are four conditions:
- The tenancy is bonafide
- The defaulting tenant has vacated or steps have been taken to compel him to vacate the property
- The defaulting tenant is not in occupation of any other property of the assessee and
- The assessee has taken all the reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.
- Unrealised rent will not be allowed as a deduction from actual rent received or receivable if the above mentioned conditions are not fullfiled.
Taxability of unrealised rent
- It shall be deemed to be the “Income from House Property” in respect of the financial year in which such rent is received or realized.
- Amount to the extent it has not been included in the annual value earlier will be charged to tax. Further, 30% of such rent shall be allowed as a deduction.
- It will be taxable even if the house is not owned by you in the year of recovery/receipt of unrealised rent.
Arrears of Rent
Any amount received as arrears of rent, not charged to income-tax for any previous years, then amounts so received after allowing deduction of 30% of such amount, will be taxable under the head “Income from House Property”. Further, arrears of rent shall be chargeable to tax in the previous year in which it is received. Whether the property is owned by the assessee in the year of receipt or not.
Gross Annual Value
Gross annual value is determined in following three steps:
- Compute reasonable expected rent of the property
Reasonable expected rent will be higher of the following :
1. Municipal value of the property; or
2. Fair rent of the property. - Calculate the actual rent of the property.
It is the actual annual rent of is let-out property during the previous year. While computing actual rent, rent pertaining to the vacancy period or unrealised rent is not to be deducted.
- Compute gross annual value.
Gross annual value will be higher of the amount computed at step 1 or step 2 above.
Annual Value of House Property
Manner of computation of income from house property in case of a Let-out property :
| Particulars | Amount | |
| Gross annual value | XXXX | |
| Less: Municipal taxes paid during the year | XXXX | |
| Net Annual Value (NAV) | XXXX | |
| Less: Deduction under section 24 | ||
| Deduction under section 24(a) @ 30% of NAV | XXXX | |
| Interest on borrowed capital under section 24(b) | XXXX | XXXX |
| Income from house property | XXXX |
FAQ
The income or receipt can be taxed as ‘Income from House Property’ only when you own the property and you are entitled to legally receive income from such property.
Such a property will be treated as been let-out throughout the year and income will be computed accordingly. However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period.
Standard rent means the rent which is calculated and prescribed by competent authority.
Fair value means market value of the property. So if the fair value is not available or cannot be ascertained, fair market value of similar property in the same location shall be taken as the fair value of the property in question.
Hi @Dixita
Amount received as arrears of rent after allowing deduction of 30% of such amount, will be taxable under the head “Income from House Property”. Provided, , the amount should not be charged to income-tax for any PY (earlier years).
Further, arrears of rent shall be chargeable to tax in the previous year in which it is received. Whether the property is owned by the assessee in the year of receipt or not.
So the amount that you received shall be chargeable to tax for the FY 2020-21under the head income from house property.
Hope this helps
Hi @Izzah ,
Unrealised rent can be deducted from actual rental income subject to fulfilment of following conditions:
If all the conditions are satisfied, then only you can subtract the unrealised rent from actual rental income.
Hope it helps!