Computation of Annual Value /Net Annual Value
Annual Value is the amount for which the property might be let out on a yearly basis. You can also say that it is the estimated rent that you could get if the property was rented out. In order to calculate any income from house property, you need to know the annual value of house property. As per Section 23(1)(a) of the Income Tax Act, Annual Value of a home is the sum for which the property might reasonably be expected to be let out from year to year. So it is the notional rent which could be got if the property were to be rented. So the following article clearly explains the Computation of Annual Value. Computation of Annual Value or Net annual value are the same.
- Computation of Annual Value/Net Annual Value
- Computation of Annual Value – Let-out Property [Section 23(1)]
- Computation of Annual Value – Property occupied by the owner [Section 23(2)]
- Computation of Annual Value – House which is Partly Self-occupied and Partly Let Out:
- Computation of Annual Value – Property owned by co-owners (Section 26)
Computation of Annual Value/Net Annual Value
Net annual value shall be computed in the following manner:
1. Determine the Gross Annual Value
2. Deduct municipal tax actually paid by the owner during the previous year from the Gross Annual Value.
For the purpose of computation of net annual value, properties can be classified into three categories :
(A) Properties let out throughout the year.
(B) Properties occupied by the owner for residential purposes or properties not self-occupied owing to employment at any other place.
(C) Partly let out and partly self occupied property.
Computation of Annual Value – Let-out Property [Section 23(1)]
Gross annual value shall be higher of
- Expected Rent
- Actual rent received or receivable.
The higher of Municipal value and fair rental value shall be Expected rent. Therefore, from these Judgments, it is evident that expected rent shall not exceed the Standard rent.
However, the Supreme Court in Shiela Kaushish v. CIT (1981) 131 ITR 435 (SC) and Amolak Ram Khosla v. CIT (1981) 131 ITR 589 (SC) held that where property let out is governed by the Rent Control Acts, the standard rent fixed or applicable to the area of property, will have to be taken for determining the annual value. Also, it was held in the case of Balbir Singh (Dr.) v. MCD (1985) 152 ITR 388 (SC) that although the expected rent cannot exceed standard rent but it can be lower than standard rent.
Municipal Value: Municipal value is the value determined by the municipal authorities for levying municipal taxes on house property.
Fair rent: Fair rent is the amount which a similar property can fetch in the same or similar locality, if it is let for a year.
Standard Rent: The standard rent is fixed under Rent Control Act. In such a case, the property can not be let for a amount which is higher than the standard rent fixed under the Rent Control Act.
Actual rent received or receivable: Actual rent is rent for let out period. It is the de facto rent (i.e. what should have been the actual rent). For example, if water and electricity bills of tenant are payable by the owner, then de facto rent will be calculated by reducing from the rent received/receivable the amount spent by the owner for those bills. On the other hand, for example, if any obligation of water and electricity bills is met by the tenant, then amount spent by the tenant will be included for the purpose of calculating actual rent received/receivable or de-facto rent. Municipal taxes 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 the de-facto rent.
While computing the net annual value the following deduction are made from the gross annual value :
Municipal Taxes : The taxes including service taxes (fire tax, conservancy tax, education, water tax, etc.) levied by any municipality or local authority in respect of any house property to the extent to which such taxes are borne and paid by the owner, and include enhanced municipal tax finally determined on appeal and payable by assessee – Clive Buildings Cola Ltd. v. CIT (1989) 44 Taxman 160.
However, deduction in respect of municipal taxes will be allowed in determining the annual value of the property only in the year in which municipal taxes are actually paid by the owner.
Where the tax on property is enchanced with retrospective effect by municipal or local authorities and the enhanced tax relating to the prior year is demanded during the assessment year, the entire demand is deductible in the assessment year [C.I.T. v. L. Kuppu Swamy Chettiar (1981) 132 ITR 416 (Mad.)]
Even where the property is situated outside the country taxes levied by local authority is that country are deductible is deciding the annual value of the property. [CIT v. R Venugopala Riddiar (1965) 58 ITR 439 (Mad.)]
While calculating the annual value in accordance with Section 23(1) the following situations may arise:
- If the property is let out throughout the previous year (No unrealised rent and no vacancy)
- If the property is let out throughout the previous year, but the entire rent could not be collected.
- If the entire rent is collected but the property remains vacant.
- If the property remains vacant and the entire rent is not collected.
From the above, it can be summarized that GAV would be calculated as follows:
Step 1: Determine Expected Rent and Actual Rent.
Expected Rent = Higher of Municipal Value or Fair Rent but subject to Standard Rent
Actual Rent = Rent for let out period – Unrealised Rent of relevant previous year
Step 2: If actual rent is more than Expected Rent than Actual rent otherwise expected Rent
Step 3: If property remain vacant and annual value decline due to vacancy then such decline value shall be considered
GAV = According to Step 2 (if no vacancy) and According to Step 3 (if vacancy is there)
Computation of Annual Value – Property occupied by the owner [Section 23(2)]
Where the property consists of one house or part of a house in the occupation of the owner for his own residence, and is not actually let during any part of the previous year and no other benefit is derived therefrom by the owner, the annual value of such a house or part of the house shall be taken to be nil. The only deduction available in respect of such house is towards interest on borrowed capital in terms of
Section 24(1)(vi) but subject to a ceiling of ` 30,000 or ` 2,00,000 as the case may be.. In other words, to this extent there could be a loss from such house.
Concession for one House only:
Where the assessee has occupied more than one house for the purposes of residence for himself and family members, he has to make a choice of one house only in respect of which he would like to claim exemption. Other self-occupied houses will be treated as if they were let out and their annual value will be determined in the same manner as we have discussed in the case of let out property.
In respect of such house, no deduction whatsoever is allowed except interest upto ` 30,000 or `2,00,000 as the case may be on the borrowed capital. In other words, a loss to the maximum extent of ` 30,000 or `2,00,000 can be reported in respect of such houses. If any property is purchased or constructed out of funds borrowed on or after 1st April, 1999, the restriction on the amount of interest deductible in respect of such self-occupied houses shall be relaxed so as to secure a deduction upto ` 2,00,000 provided the purchase/construction is completed within three years [Five years w.e.f. AY 2017-18] from the end of the financial year in which capital was borrowed.
Computation of Annual Value – House which is Partly Self-occupied and Partly Let Out:
In such a case, the procedure for computation of annual value is as follows :
(a) Property let out partially :
When a portion of the house is self-occupied for the full year and a portion is self-occupied for whole year, the annual value of the house shall be determined as under:
- From the full annual value of the house the proportionate annual value for self-occupied portion for the whole year shall be deducted.
- The balance under (i) shall be the annual value for let out portion for a part of the year
(b) House let out during any part of the previous year and self occupied for the remaining part of the year: In this case the benefit of Section 23(2) is not available and the income will be computed as if the property is let out.
(c) Self-occupied House remaining vacant :
If the assessee has reserved only one of the houses (owned by him) for his residence or he is the owner of only one house which is meant for his own residence but could not be occupied by him for residential purposes in the previous year owing to the fact that he had to live at some other place in a house not belonging to him, then he can claim non-occupation or vacancy allowance during the previous year for the period during which house remained vacant. The reason for his living at a different place might be for business or professional purposes or for a salaried employee due to transfer etc. The annual value of the house, which remained vacant in these circumstances, shall be nil.
The above mentioned concession will be granted to the assessee only if he has neither let out the said house nor has derived any benefit from it during the period for which it remained vacant. No deduction, except interest on borrowed capital upto a maximum of ` 2,00,000 where property is acquired or constructed with capital borrowed on or after the 1st day of April 1999 and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed.
Computation of Annual Value – Property owned by co-owners (Section 26)
Where the property consisting of building or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, the share of each such person shall be included in his total income and they shall not be assessed as an association of persons and share of each coowner shall be computed as if each such person is individually entitled to the relief provided in Section 23(2).
Income from property held under trust for charitable or religious purposes is exempt from tax under Section 11.
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