Published 9 May 2026
Sub-section (4) of section 56 read with section 22 of the Income-tax Act, 1961 -- the separation of rent for the building from rent for furniture / fixtures / services; the Supreme Court of India approach in Sultan Brothers Pvt Ltd v. Commissioner of Income-tax; the 30% standard deduction maximisation strategy; and the practical drafting of the rental agreement
Taxpayer Brief
When a furnished apartment is let out at a single composite rent of (say) rupees one lakh per month covering the building, the furniture, the appliances, and a maintenance / housekeeping service, the income-tax characterisation of the receipt depends on whether the components are separable. Where they are separable, the building portion is taxable under the head Income from House Property with the 30% standard deduction under sub-section (a) of section 24, and the furniture / services portion is taxable under the head Income from Other Sources where actual expenses are deductible. Where they are inseparable, the entire receipt is taxable under one head -- typically Other Sources or Profits and Gains of Business or Profession depending on the dominant nature. The Supreme Court of India in Sultan Brothers Pvt Ltd v. Commissioner of Income-tax (1964) 51 Income Tax Reports 353 laid down the foundational test. This article walks through the framework, the strategic separation discipline, and the rental-agreement drafting that maximises the 30% standard deduction.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Unfurnished apartment with single rent | Low | Pure House Property; 30% standard deduction applies |
Furnished apartment with composite rent | Medium | Separable rent maximises 30% deduction; drafting matters |
Building + furniture + maintenance service bundled | High | Separability test under Sultan Brothers; risk of full Other Sources reclassification |
Service-apartment / hotel-like arrangement | Very High | Risk of Profits and Gains of Business or Profession reclassification under inseparable-letting principle |
1. The Statutory Foundation
Provision | Effect |
|---|---|
Section 22 of the Income-tax Act, 1961 | Charges the Annual Value of property of which the assessee is the owner under the head Income from House Property |
Sub-section (a) of section 24 | 30% standard deduction on Annual Value -- representing all expenses (repairs, collection, insurance) without itemisation |
Section 56 read with sub-section (2) of section 56 | Catches Other Sources income including rent of furniture / fixtures / services where not part of House Property charge |
Common-law principle from Sultan Brothers | Composite rent must be apportioned between the two heads where the components are severable |
2. The Sultan Brothers Test
The Supreme Court of India in Sultan Brothers Pvt Ltd v. Commissioner of Income-tax (1964) 51 Income Tax Reports 353 examined a composite letting of a building together with furniture, fixtures, and equipment. The Court laid down the principle that the income-tax treatment depends on the nature of the letting -- if the building and the other items are inseparable in the sense that the parties intended them to be let together as a single unit, then the entire income is taxable under one head (typically Other Sources). If they are severable -- the parties could have let them separately -- then the rent must be apportioned between the building (House Property) and the other components (Other Sources).
Case Law Reference: Sultan Brothers Pvt Ltd v. CIT (1964) The Supreme Court held -- 'If the lease of the building and the rental of fittings, fixtures and machinery is inseparable, that is to say, the intention of the parties is that they form one composite letting, the entire income falls under section 56. If, on the other hand, the building can be let separately from the fittings, fixtures and machinery, then a part of the rent is attributable to the building and is assessable under section 22.' [VERIFY: confirm Income Tax Reports volume and page citation against the original judgment.] |
3. The Separability Test in Practice
Indicator | Severable (Two-Head Treatment) | Inseparable (Single-Head Treatment) |
|---|---|---|
Drafting of the rental agreement | Single agreement with separately-stated rent for building, furniture, services | Single composite rent without breakdown |
Tenant can survive without the furniture | Yes -- could rent unfurnished alternative | No -- the furniture is integral to the use |
Furniture / fixtures are removable | Yes -- typical residential furniture | No -- built-in / customised |
Services are continuous and integral | Cleaning service is occasional, by appointment | Daily housekeeping, business-class concierge |
Common scenario | Furnished apartment to a long-term resident | Service apartment / executive suite / hotel-style letting |
4. The Strategic Drafting -- Maximising the 30% Deduction
Where the rental income covers both the building and additional components, careful drafting of the rental agreement preserves the 30% standard deduction on the building portion. The drafting should -- (i) state separate rents for the building, the furniture, and any service components; (ii) demonstrate that the components could be unbundled; (iii) preserve evidence of the separability through (for example) the option for the tenant to opt out of the service component.
5. Worked Example -- Furnished Apartment in Bangalore
Mrs. Veena lets out a 3 BHK furnished flat in Whitefield, Bangalore for a composite rent of ₹1,00,000 per month -- ₹12 lakh per year. Of this, the rental agreement specifies: building rent ₹70,000, furniture and appliances ₹20,000, maintenance and housekeeping service ₹10,000.
Computation | Amount |
|---|---|
Annual building rent | ₹8,40,000 |
Less: Section 24(a) 30% standard deduction on building portion | (₹2,52,000) |
Net Income from House Property | ₹5,88,000 |
Annual furniture and appliances rent | ₹2,40,000 |
Less: Actual depreciation / repair expenses on furniture (assumed 30%) | (₹72,000) |
Net Income from Other Sources -- furniture | ₹1,68,000 |
Annual housekeeping and maintenance service | ₹1,20,000 |
Less: Actual cost of housekeeping (assumed 70%) | (₹84,000) |
Net Income from Other Sources -- service | ₹36,000 |
Aggregate net taxable income from the apartment | ₹7,92,000 |
The alternative -- single-rent treatment If Mrs. Veena had taken a single composite rent of ₹12 lakh without breakdown, the assessing officer might have classified it entirely as Other Sources (inseparable letting), with actual expenses (perhaps ₹3 lakh) deductible -- net ₹9 lakh taxable. Under the separated structure, her net taxable is ₹7.92 lakh -- a ₹1.08 lakh saving. The drafting strategy delivers this saving annually for the life of the rental. |
6. Common Drafting Pitfalls
- Single all-inclusive rent in the agreement -- forfeits the separation argument.
- Furniture component included in 'monthly rent' without break-up -- assessing officer can re-characterise.
- Service component bundled at zero or token amount -- creates suspicion of artificial separation.
- No physical separation of components in tenant's experience -- e.g., service is mandatory and pre-paid for the entire lease, regardless of usage.
- Where multiple tenants in the same property pay different rents for different combinations of components -- supports separability argument.
7. The Income-tax Act, 2025 Treatment
The Income-tax Act, 2025 carries forward the same architecture -- the corresponding section to section 22 charges House Property income; the corresponding section to sub-section (a) of section 24 grants the 30% standard deduction; the corresponding section to section 56 catches Other Sources income. The Sultan Brothers principle continues to apply. The 30% standard deduction remains the practical magnet that drives the separation strategy.
8. Practitioner Documentation Discipline
- Rental agreement with separate quantification of building rent, furniture rent, service rent.
- Schedule of furniture and fixtures attached to the agreement -- inventory list with values.
- Service-component break-up -- list of services included; option for tenant to opt out (where commercially possible).
- Tenant correspondence -- emails / letters showing tenant treats the components separately.
- Bank statement / receipt showing rent collection by separate component (where banking systems support this).
- Annual reconciliation -- House Property rent in Schedule HP; Other Sources rent in Schedule OS; supporting working in client file.
9. Key Takeaways
- Composite rent is severable when components could be let separately -- Sultan Brothers (1964) Supreme Court principle.
- Severable composite rent: building portion under House Property with 30% standard deduction; furniture / services under Other Sources with actual expense deduction.
- Inseparable composite rent: entire receipt under Other Sources (or Business if dominant nature); no 30% standard deduction.
- Strategic drafting -- separately quantify each component in the rental agreement; demonstrate separability through optionality and tenant experience.
- The 30% standard deduction on the building portion typically yields a substantial annual saving over the inseparable-letting alternative.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.