Determination of Annual Value (Section 23):
The process of computation of income under the head “Income from house property” starts with the determination of annual value of the property. The concept of annual value and the method of determination is laid down in section 23.
“The annual value of ANY property comprising of buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head “Income from house property”.
As per the Income Tax Act, the Annual Value of the property is the inherent capacity of the property to earn income and is taxed to the owner. The taxable income could be either the Gross Annual Value (GAV), Net Annual Value (NAV) or Annual Value.
Annual value is the amount for which the property might reasonably be expected to let from year to year.
Gross Annual value:
The Gross Annual Value (GAV), also called the Annual Value, of a property which is used in calculating the tax or rent which should be applied to the property
Municipal Value:
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.
Fair Rental Value:
Fair rent is the rent which a similar property can fetch in the same or similar locality, if it is let out for a year.
Standard Rent:
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.
Expected Rent:
The gross 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 is like a notional rent which could have been derived had the property been let out.
Expected Rent is higher of Municipal Value or Fair Rental Value but shall be limited to Standard Rent.
Example:
Let us understand GAV Calculation with the help of an example where Municipal Value is Rs. 8,64,000, Fair Rental Value is Rs. 10,80,000, Standard Rent Rs. 9,60,000 & Actual rent is Rs. 12,00,000 ( Rs.1,00,000 per month)
Amar owns five houses in India, all of which are let-out. Compute the GAV of each house from the information given below –
Solution:
As per section 23(1), Gross Annual Value (GAV) is the higher of Expected rent and actual rent received. Expected rent is higher of municipal value and fair rent but restricted to standard rent.
Computation of GAV of each house owned by Amar:
Actual rent where the property is vacant :
Where the property or any part of the property is let out but was vacant during the whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable is less than the sum actual rent, then amount so received or receivable shall be the GAV.
If a property is ready to be let, but could not actually be let throughout the previous year, this clause is applicable and GAV in such case shall be NIL.
Annual Value of a property which is partly let out and partly self occupied:
If a property consists of two or more independent residential units, one of which is self-occupied and other units are let out, then income shall be computed as under:
- Municipal valuation / Fair rent / Standard rent, if not given separately, shall be apportioned between the let – out portion and self – occupied portion on built – up floor space or on such other reasonable basis.
- Property taxes, if given on a consolidated basis, can be bifurcated as attributable to each portion or floor or on a reasonable basis.
