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Computation of Income of a Property which is Self-Occupied for Residential purposes [Section 23(2), (3) & (4)]

1.   Where the Annual Value of such House shall be Nil [Section 23(2)(a) & (b)]:

 

Where the  property consists of a house or part of a house which— 

 

(a)           is in the occupation of the owner for the purposes of his own residence; or 

 

(b)          cannot actually be occupied by the owner by reason of the fact that owing to his employment,  business or profession carried on at any other place, he has to reside at that other place in a  building not belonging to him, 

 

the annual value of such house or part of the house shall be taken to be NIL. 

 

2.   Where the Annual Value of such House shall not be Nil [Section 23(3)]:

 

The annual value  of self-occupied house shall not be Nil: 

 

(i)            if such house or part of the house is actually let during the whole or any part of the previous  year; or 

 

(ii)           any other benefit therefrom is derived by the owner from such house. 

 

In the above cases, the annual value shall be determined as per provisions applicable for let out  properties i.e. under clause (a), (b) or (c) of section 23(1). 

 

3.   Where assessee has more than Two Houses for Self Occupation [Section 23(4)]:

 

If there are  more than 2 residential houses, which are in the occupation of the owner for his residential purposes  then he may exercise an option to treat any Two of the houses to be self-occupied. The other house(s)  will be deemed to be let out and the annual value of such house(s) will be determined as per section  23(1)(a) i.e. the sum for which the property might reasonably be expected to let from year to year. 

 

In other words, the annual value of two self-occupied houses opted by the assessee can be taken  as Nil. 

 

The assessee in this case, should exercise his option in such a manner that his taxable income is  the minimum. Such option may be changed from year to year.

 

However, if an assessee has a house  property which consists of two or more residential units and all such units are self-occupied, the  annual value of the entire house property shall be taken as Nil as there is only one house property  though it has more than one residential units. 

 

Note :

 

1.            Annual value as per Income-tax is after deduction of municipal taxes, etc. paid, if any. 

 

2.            The benefit of exemption of two self-occupied houses is available only to an individual/HUF. 

 

3.            If the assessee lets out his house to his employer, which in turn allots the same to him, as rent free  accommodation, such house will not be treated as self occupied for the above purpose, because he is not  occupying his own house in the capacity of owner. 

 

 

4.   Deduction in respect of one or Two self-occupied houses where Annual Value is Nil: 

 

Where annual value of one or two self-occupied house is Nil, the assessee will not be entitled to the  standard deduction of 30%, as the annual value itself is Nil.

 

However, the assessee will be allowed  deduction on account of interest (including 1/5th of the accumulated interest of pre-construction  period) as under:— 

 

(a) Where the property is acquired or constructed with  capital borrowed on or after 1.4.1999 and such  acquisition or construction is completed within 5 years of the end of the financial year in which the  capital was borrowed

Actual interest payable subject to  maximum ₹2,00,000 if certificate  mentioned in point 2 in box given below is obtained

(b) In any other case, i.e., borrowed for repairs or  renewal or conditions mentioned in clause (a) are  not satisfied

Actual interest payable subject to  maximum of ₹30,000

 

Note.—

Where the assessee has opted for two houses to be treated as self occupied, the deduction  of amount of interest given above shall in aggregate remain ₹30,000 or ₹2,00,000, as the case may be,  whether assessee has opted for one residential house or two residential houses to be self occupied. 

 

Thus the aggregate of the amount of deduction of interest in the case of first and second self  occupied house shall not exceed ₹2,00,000.  

 

Note :

 

1.            It may be noted that the deduction of interest of ₹30,000 is allowed for purpose of repair or renewal or  reconstruction of house property where as the deduction to the maximum of ₹2,00,000 is allowed only  for acquisition or construction of house property, subject to other conditions being satisfied. Further, if  conditions mentioned in para (a) are not satisfied i.e. capital is borrowed before 1.4.1999 or house is not  completed within 5 years (3 years upto A.Y. 2016-17) of the end of the financial year in which the  capital is borrowed, deduction of interest shall be allowed to the maximum of ₹30,000. 

 

2.            For getting deduction of interest of maximum of ₹2,00,000, it will be necessary to obtain a certificate  from the person to whom such interest is payable specifying the amount of interest payable by the  assessee for the purpose of acquisition/construction of the property or conversion of the whole or any  part of the capital borrowed which remains to be repaid as a new loan. 

 

3.            It may be observed that for let out/deemed to be let out property, the entire interest is allowed as  deduction whereas in case of one or two self-occupied property the interest shall be allowed to the  maximum of ₹30,000 or ₹2,00,000 as the case may be.

 

Amendment made by the Finance Act, 2020 

If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC,  and he/it has a residential house property as per section 23(2), meant for his self-occupation, the  interest on money borrowed for purchase or construction or repairs of house property shall not be  allowed as deduction.

 

5.   Computation of income of House Property which is Partly Let and Partly Self Occupied 

 

In this case the annual value, deductions and the income of the part of the property which is let  shall be computed separately under the let out property and the income of the portion or the part of the  property which is self occupied shall be determined under the "self-occupied property"  category. 

 

E.g. where one unit is let out and the other unit is self occupied, then the whole property cannot be  taken as a single unit. Municipal value or fair rent if not given separately, shall be apportioned  between the let out portion and self occupied portion on built up area basis. 

 

Similarly, where, in a building the ground floor is self-occupied and first floor is let out or viceversa, such a property shall not be treated as a single unit. Instead, income from first floor which is let  shall be computed separately as per let out provisions and the floor which is self-occupied shall be  computed separately as per self-occupied provisions. Municipal tax and interest shall also be  apportioned on the basis of built up/floor area space.

 

 

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