CHAPTER IV - TAXATION OF INCOME FROM HOUSE PROPERTY - Revised Discussion Paper – Direct Tax Code (DTC)

1. Chapter VIII of the Discussion Paper on the draft Direct Taxes Code (DTC) deals with the computation of income from house property. "Income from house property" is one of the five heads under which accruals or receipts relating to ordinary sources of income are to be classified. The Discussion Paper states that income from house property, which is not occupied for the purpose of any business or profession by its owner, is to be taxed under this head. The Discussion Paper proposes a new scheme for computation of income from house property in the draft DTC, the salient features of which are:


(a) Income from house property shall be the gross rent less specified deductions.

(b) Gross rent will be higher of (i) the amount of contractual rent for the financial year; and (ii) the presumptive rent calculated at six per cent per annum of the ratable value fixed by the local authority. However, in a case where no ratable value has been fixed, six per cent shall be calculated with reference to the cost of construction or acquisition of the property. If the property is acquired during the financial year, the presumptive rent shall be calculated for the proportionate period of that financial year.

(c) The advance rent will be taxed only in the financial year to which it relates.

(d) The gross rent of one self-occupied property will be deemed to be nil, as at present. In addition, the gross rent of any one palace in the occupation of a ruler will also be deemed to be nil, as at present.

(e) The following deductions will be admissible against the gross rent:-

(i) Amount of taxes levied by a local authority and tax on services, if actually paid.

(ii) Twenty per cent of the gross rent towards repairs and maintenance as against thirty per cent at present.

(iii) Amount of any interest payable on capital borrowed for the purposes of acquiring, constructing, repairing, renewing or re-constructing the property.

(f) In the case of a self-occupied property where the gross rent is deemed to be nil, no deduction for taxes or interest will be allowed.

(g) The income from property shall include income from the letting of any buildings along with any machinery, plant, furniture or any other facility if the letting of such building is inseparable from the letting of the machinery, plant, furniture or facility.

2. The most frequent feedback on computation of income from house property has been the determination of notional rent on presumptive basis (at the rate of 6%) with reference to the cost of construction/ acquisition. The input is that this is inequitable as it discriminates against recent owners as such cost is a function of inflation. The other major issue which has been raised is that, in order to incentivize investment in housing, the deduction for interest on capital borrowed for acquisition or construction of a self occupied house property, up to a ceiling of Rs. 1.5 lakhs, as available in the existing provisions of the Income-tax Act, 1961 should be retained.

3. The determination of notional rent for computing income from house property has been a cause for much litigation. Internationally also, in most jurisdictions, income from house property is taxed on the basis of rent from letting out of property.

3.1 Taking the above factors into account, the following modifications are proposed:
(a) In case of let out house property, gross rent will be the amount of rent received or receivable for the financial year.

(b) Gross rent will not be computed at a presumptive rate of six per cent of the rateable value or cost of construction/acquisition.

(c) In case of house property which is not let out, the gross rent will be nil. As the gross rent will be taken as nil, no deduction for taxes or interest etc., will be allowed. However, in case of any one house property,

which has not been let out, an individual or HUF will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs. 1.5 lakh) from the gross total income. The overall limit of deduction for savings will be calibrated accordingly.