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.

Determination Of Annual Value Under Section 23

Determination Of Annual Value

The measure of charging income-tax under this head is the annual value of the property, i.e., the inherent capacity of a building to yield income. The expression ‘annual value’ has been defined in Section 23(1) of the Income-tax Act as:

  1.  Where the property consists of a house or part of a house which For the purposes of Section 22, the annual value of any property shall be deemed to be:
    1. the sum for which the property might reasonably be expected to let from year to year; or
    2. 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; or
    3.  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.                                                                                Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him, i.e., municipal taxes wil be allowed only in the year in which it was paid.                                                                                                               Explanation : For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.
  2. Where the property consists of a house or part of a house which
    1. is in the occupation of the owner for the purposes of his own residence; or
    2. 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.
  3. The provisions of Sub-section (2) shall not apply if:
    1. the house or part of the house is actually let during the whole or any part of the previous year; or
    2. any other benefit therefrom is derived by the owner
  4. Where the property referred to in Sub-section (2) consists of more than one house:
    1. the provisions of that sub-section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf;
    2. the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined under Sub-section (1) as if such house or houses had been let

Rules made in this behalf – Notification No. 198/2001 dated 2-7-2001

The amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrevocable only if following conditions are satisfied:

  1. tenancy is bonafide;
  2. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
  3. the defaulting tenant is not in occupation of any other property of the assessee;
  4. the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfied the Assessing Officer that legal proceedings would be useless.

For  Computation of Annual Value click here

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