Annual Value of House Property [Section 23(1)]

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As per section 23(1)(a) the Annual Value of any property shall be the sum for which the property might reasonably be expected to be let from year to year. It may neither be the actual rent derived nor the municipal valuation of the property. It is something like notional rent which could have been derived, had the property been let.

Table of Contents

1. Factors for determining Annual Value of House Property

In determining the annual value there are 4 factors which are normally taken into consideration. These are:

  1. Actual Rent Received or Receivable
  2. Municipal Value
  3. Fair Rent of the Property
  4. Standard Rent
Annual Value of House Property
Annual Value of House Property

(1) Actual Rent Received or Receivable from House Property:

Actual rent received/receivable is an important factor in determining the annual value of a property though this is not the only decisive factor. The actual rent could be dependent upon various considerations. There could be circumstances where the owner agrees to bear certain obligations of the tenant e.g. the water and electricity bills of the tenant may be payable by the owner. In this case, the de  facto rent (i.e. what should have been the actual rent) will be calculated by reducing from the rent  received/receivable the amount spent by the owner on meeting the obligation of water and electricity bills of  the tenant as we have to tax rent from house property under this head and not the amount recovered for other  services provided in the nature of electricity and gas bills. On the other hand, if any obligation of water and electricity bills of the owner is met by the tenant, the de facto rent will be computed by adding to the rent received/receivable, the amount spent by the tenant in discharging the obligation of the landlord.

Example:

If the  tenant who is in the business of selling gas cylinders, besides giving rent of ₹5,000 p.m. gives 5 gas cylinders  every month free to the landlord and the value of each gas cylinder provided free of cost is ₹400, then de-facto rent shall be ₹5,000 + ₹2,000 (value of 5 gas cylinders) = ₹7,000 p.m. 

It may, however, be observed that the municipal taxes of the house property are to be borne by the occupier who in the case of let out property is the tenant. Therefore, if such municipal taxes are borne by the tenant the rent received/receivable should not be increased to calculate de facto rent. Further where repair expenses are borne by the tenant, the rent received/receivable should not be increased to calculate de facto rent (i.e. what should have been the actual rent). 

Any deposit received from the tenant for property is a capital receipt and thus, it cannot be treated as income. Further while determining the actual rent, no notional interest on such deposit should be considered.

(2) Municipal Value of House Property:

This is the value as determined by the municipal authorities for levying municipal taxes on house property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual letting value of such house property, which is determined by it based upon many considerations. 

(3) Fair Rent of the House Property:

Fair rent is the rent which a similar property can fetch in the same or similar locality, if it is let for a year. 

(4) Standard Rent of House Property:

The standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent fixed under the Rent Control Act. Therefore, this is also an important factor in determining the annual value. 

2. Computation of Annual Value of House Property [Section 23(1)] 

The Income-tax Act has used the term ‘Annual Value’ only in this chapter. As per the Act the annual value is the value after deduction of municipal taxes, if any, paid by the owner. But for sake of convenience, the annual value may be determined in the following two steps: 

Step I: Determine the gross annual value. 

Step II: From the gross annual value computed in step I, deduct municipal tax actually paid by the owner during the previous year. 

The balance shall be the net annual value which, as per Income-tax Act is the annual value. 

The annual value has to be determined for different categories of properties. These could be:

  1. House property which is let throughout the previous year.
  2. House property which is let and was vacant during the whole or any part of the previous year.
  3. House property which is part of the year let and part of the year self-occupied.
  4. House property which is self-occupied for residential purposes or could not actually be self occupied owing to employment at any other place.

(1) Annual Value for House Property which is Let throughout the Previous Year.

Step-1 : Determine Gross Annual Value

According to section 23(1), the annual value of any property shall be deemed to be— 

(a) the sum for which the property might reasonably be expected to let from year to year (i.e. expected rent);  or 

(b) where the property or any part of the property is let and the actual rent received or receivable by the  owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or  receivable i.e. the actual rent. 

It may be observed from the above that for calculating Gross Annual Value of the property which is let, we  have to first calculate expected rent as per clause (a) above and then compare the same with the actual rent  received or receivable as per clause (b). If the actual rent so received or receivable as per clause (b) is more than  the expected rent computed as per clause (a), the Gross Annual Value shall be the actual rent so received or  receivable. On the other hand if the actual rent so received or receivable is less than the expected rent then the  Gross Annual Value shall be expected rent so computed. 

In other words, the gross annual value of the house property let for the whole year shall be higher of the  following two: 

(a) Expected rent; 

(b) Actual rent received or receivable.

How to calculate Expected Rent:

The higher of the following two is taken to be the expected rent:

(i) Municipal Valuation;

(ii) Fair Rental value.

To conclude : First step is to calculate the Gross Annual Value which will be higher of Municipal Value or Fair Rental Value, but it cannot exceed the standard rent. However if the actual rent received or receivable exceeds such amount then the actual rent so received/receivable shall be the Gross Annual Value.

Example :

Mr. Dust own 6 Houses in Mumbai, details of which are as under :

ParticularsIIIIIIIV`VVI
Municipal Value2,00,0002,40,0003,60,0004,20,0004,80,0004,50,000
Fair Rental Value2,40,0003,00,0004,00,0004,20,0005,00,0005,00,000
Standard RentN.A.2,40,0005,00,0003,00,000N.A.4,80,000
Actual Rent / Annual Rent1,80,0003,60,0004,80,0003,60,0005,40,0004,20,000

Compute the Gross Annual Value of the above Houses.

Solution :

ParticularsIIIIIIIV`VVI
Gross Annual Value2,40,0003,60,0004,80,0003,60,0005,40,0004,80,000

Note :

In case of House-III, the Standard Rent will not be considered because it is more than the maximum of other Two factors.

Step-2 : Taxes levied by any local authority in respect of the property i.e. Municipal taxes to be Deducted:

Municipal taxes, etc. levied by local authority are to be deducted from the gross annual value calculated as above, if the following conditions are fulfilled:

  1. the municipal taxes have been borne by the owner, and
  2. these have been actually paid during the previous year.
  • Municipal taxes, etc. due but not paid shall not be allowed as deduction.
  • However, municipal taxes, etc. paid during the previous year are allowable even if they relate to past years or future years.
  • The deduction of municipal taxes for future years shall be allowed if the assessee follows cash system of accounting.
  • Even where the property is situated outside the country, taxes levied by local authority in that country are deductible in deciding the annual value of the property.

The value arrived at after deducting the municipal taxes, if any, may be referred to as the Net Annual Value (Annual value as per Income-tax Act).

From such net annual value, deductions as permissible u/s 24(a) & (b) are allowed and the balance is the income under the head ‘Income from house property’.

(2) Annual Value for House Property which is Let and was Vacant during the Whole or Part of the Previous Year :

According to section 23(1), the annual value of such house property shall be deemed to be:—

(a) the sum for which the property might reasonably be expected to let from year to year i.e. the expected rent; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable i.e. the actual rent; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a) the amount so received or receivable i.e. the actual rent, if any:

From the perusal of the above, the following two situations may emerge :

Situation-1 : Where the property is let and was vacant for part of the year and the actual rent received or receivable is more than the sum determined under clause (a) in spite of vacancy period. [This situation falls under clause (b) above]

In this case, clause (c) shall not be applicable as it will be applicable only when actual rent received or receivable is less than the sum referred under clause (a). Hence the Gross Annual Value in this case shall be:

  1. the sum for which the property might reasonably be expected to let from year to year; or
  2. actual rent received or receivable,
    whichever is Higher.

Situation 2 : Where the property is let and was vacant for whole or part of the year and the actual rent received or receivable owing to such vacancy is less than the sum determined under clause (a).[This situation falls under clause (c) above]

The annual value of the property shall be determined under this situation if all the following 3 conditions are satisfied:

  1. The property is let;
  2. It was vacant during the whole or part of the previous year;
  3. Owing to such vacancy, the actual rent received or receivable is less than the value determined under section 23(1)(a)

In this case, both clause (a) and clause (b) shall not be applicable but clause (c) shall be applicable and the Gross Annual Value shall be the actual rent received or receivable.

(3) Annual Value for House Property which is Part of the Year Let and Part of the Year Occupied for Own Residence:

Where a house property is, part of the year let and part of the year occupied for own residence, its annual value shall be determined as per the provisions of section 23(1) relating to let out property.

In this case, the period of occupation of property for own residence shall be irrelevant and the annual value of such house property shall be determined as if it is let for part of the year.

Hence, the expected rent as per section 23(1)(a) shall be taken for full year but the actual rent received or receivable shall be taken only for the period let and the gross annual value shall be higher of these two.

(4) Annual Value of House property which is Self-Occupied for Residential Purposes or could not actually be self occupied owing to employment at any other place.

(A) Where the Annual Value of such House Property 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. 

(B) Where the Annual Value of such House Property 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). 

(C) Where Assessee has more than Two Houses for Self Occupation [Section 23(4)]:

If there are more than  two 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. 

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

(D) 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 borrowedActual 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 satisfiedActual 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.

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.   

3. Can Annual Value (Net Annual Value) be Negative ?

The Annual Value (NAV) can be Negative only when the Municipal Taxes paid by the Owner are more than the Gross Annual Value.

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