Exemptions under Section 24 for Tax on House Property: A Case Law
Facts of the Case:
The client, referred to as 'A', owns a house property which he rented out for the financial year 2021-22 at a rate of Rs. 25000 per month. He incurred certain expenses during the year, namely municipal tax amounting to Rs. 6000 per annum, a fire insurance premium of Rs. 5000 per annum, and paid land revenue of Rs. 3500. Additionally, he borrowed Rs. 350000 from HDFC, out of which he repaid the principal amount of Rs. 30000 and interest of Rs. 65000 per annum. Our task is to compute the net taxable income for the assessment year 2022-23.
The core issue is determining 'A's net taxable income in accordance with the Indian Income Tax Act, 1961, by calculating the Income from House Property for the assessment year 2022-23.
Rule of Law under Section 24 Tax on House Property:
As per Section 24 of the Income Tax Act, 1961, deductions are allowed from the annual value of a house property. The deductions allowed are:
Standard deduction: A standard deduction of 30% of the Net Annual Value (NAV), which is computed as Gross Annual Value (GAV) minus municipal taxes, is allowed irrespective of any expenditure incurred by the taxpayer.
Interest on borrowed capital: The amount of any interest payable on any loan taken for acquisition, construction, repair, renewal or reconstruction of the property can be claimed as a deduction.
Application of law and Discussion:
To calculate the net taxable income from house property, we need to go through the following steps:
Calculation of Gross Annual Value (GAV): This is the higher of the fair rental value or the actual rent received or receivable for the house property during the year. In 'A's case, the house was let out for Rs. 25000 per month, making the annual rent Rs. 3,00,000 (25000 * 12 months).
Municipal Taxes Paid: These are taxes paid to the local authority and are allowed as a deduction if these have been borne by the owner. In 'A's case, he paid municipal taxes of Rs. 6000.
So, the Net Annual Value (NAV) is calculated as GAV minus Municipal taxes, which comes to Rs. 2,94,000 (3,00,000 - 6,000).
Deduction under Section 24
a. Standard Deduction: 30% of NAV is allowed as a standard deduction irrespective of the actual expenditure. For 'A', this amounts to Rs. 88,200 (30% of 2,94,000).
b. Interest on borrowed capital: 'A' is eligible to claim the deduction of Rs. 65,000, which is the interest part of the home loan.
The total deduction under Section 24 would be Rs. 1,53,200 (88,200 + 65,000).
The Income from House Property is hence NAV minus Deduction under Section 24. For 'A', this is Rs. 1,40,800 (2,94,000 - 1,53,200).
Under the provisions of the Income Tax Act, 1961, for the assessment year 2022-23, the taxable income from the house property of 'A' would be Rs. 1,40,800. It's essential to note that while calculating the taxable income from house property, only the municipal taxes and interest on borrowed capital are considered as deductions, while other expenses like fire insurance premium and land revenue are not considered as per the provisions of the Act.
Please remember that 'A' should ensure that these calculations and the income derived from the house property are correctly reported in the income tax return to avoid any non-compliance.