Deductions from House Property Income

Rules for allow ability of unrealized rent (Rule 4)

Unrealized rent means the rent not paid by the tenant and realized by the owner and the same shall be deducted from the actual rent receivable from the property before computing income from that property, provided the following conditions are satisfied-

  1. The tenancy is bonafide.
  2. The defaulting tenant should have vacated the property.
  3. The assessee has taken steps to compel the defaulting tenant to vacate the property.
  4. The defaulting tenant is not in occupation of any other property owned by the assessee
  5. The assessee has taken all reasonable steps for recovery of unrealized rent or satisfies the assessing officer that such steps would be useless.

Taxability of recovery of unrealized rent

  1. Chargeability: Recovery of unrealized rent is chargeable to tax as “Income from House Property”
  2. Year of receipt: Unrealized rent recovered to the extent which has not been included in the annual value earlier is taxable in the financial year in which it is recovered.
  3. Non-Subsistence of ownership: It will be taxable in the hands of individual even if he does not own the property to which such rent pertains.
  4. Deduction: No deduction will be allowed against such receipt.

 Conditions for allowability of Municipal Tax

  1. Municipal Tax includes service tax like water tax and sewerage tax levied by any local authority. It can be claimed as a deduction from the Gross Annual value of the property.
  2. Conditions:
    1. Paid by owner: The Tax shall be borne by the owner and the same was paid by him during the previous year.
    2. Property let out: Municipal Tax can be claimed as a deduction only in respect of let out or deemed to be let out properties (more than one property self occupied)
    3. Year of payment: Municipal Tax relating to earlier previous years, but paid during the current previous year can be claimed as deduction only in the year of payment.
    4. Advance Payment of Municipal Taxes: Advance Municipal Tax paid shall not be allowed as deduction in the year of payment, but can be claimed in the year in which it falls due because
  3. Borne by Tenant: Municipal taxes met by the tenant are not allowed as deduction.
  4. Foreign Bank: For a property situated outside India, Municipal tax levied by foreign local authority can be claimed as a deduction.
  5. Refund of municipal tax paid by the local authority, which was already allowed, as a deduction in computation of annual value, shall not be taxable.
  6. Municipal tax paid by the tenant neither to the actual rent nor to be allowed as deduction.
  7. Repair expenses met by tenant shall not be added to actual rent.

Rules for allowability of interest

  1. Purpose of loan: The loan shall be borrowed for the purpose of acquisition, construction, repairs, renewal, or reconstruction of the House Property.
  2. Accrual basis: The interest will be allowed as a deduction on accrual basis, even though it is not paid during the financial year.
  3. Interest on Interest: Interest on unpaid interest shall not be allowed as deduction.
  4. Brokerage: Any brokerage or commission paid for acquiring the loan will be allowed as a deduction.
  5. Prior period interest: Prior period interest shall be allowed in five equal installments commencing from the financial year in which the property was acquired or construction was completed.

    Note: Prior period interest means the interest from the date of borrowal of the loan up to the end of the financial year immediately preceding the financial year in which acquisition was made or construction was completed.

  6. Interest on fresh loan to repay existing loan: Interest on any fresh loan taken to repay the existing loan shall be allowed as a deduction.
  7. Inadmissible interest: Interest payable outside India without deduction of tax at source and in respect of which no person in India is treated as an agent u/s 163 shall not be an allowable expenditure.
  8. Certificate: The assessee should furnish a certificate from the person, from whom the amount is borrowed, specifying the amount of interest.

Computation of Prior Period Interest

Step 1: Identify the date of borrowal of loan

Step 2: Identify the date of completion/ acquisition

Step 3: Identify the last date of the financial year immediately preceding the date of  Completion/ acquisition

Step 4: Prior Period = Calculated period from Step 1 to Step 3

Step 5: Prior Period Interest = Prior Period as per Ste 4 * Rate of Interest* Amount of loan

Step 6: Allowable prior period interest= Prior period interest as per Step 5 /5

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