Annual Value of a House Property and its computation on the basis of House is Let out , Vacant , partly Let & partly self-occupied under Section 23(1)(a), (b) & (c) for A.Y. 2022-23 & 2023-24 has been described in details with examples.
1. What is Annual Value?
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. In determining the annual value there are four factors which are normally taken into consideration. These are:
Actual rent received or receivable:
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. E.g. 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 defacto 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. |
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, which is determined by it based upon many considerations. + Fair rent of the 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.
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. Therefore, this is also an important factor in determining the annual value.
2. Computation of Annual Value of a 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:
(A) House property which is let throughout the previous year.
(B) House property which is let and was vacant during the whole or any part of the previous year.
(C) House property which is part of the year let and part of the year self-occupied.
(D) House property which is self-occupied for residential purposes or could not actually be self-occupied owing to employment at any other place.
(A) House property which is Let throughout the previous year
Step 1: Determine the 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.
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 thereof (or even not fixed but provision thereof is applicable to the area in which the property is situated) will have to be taken for determining the bona fide annual value. From these judgments, it is clear that in case of the property governed by the Rent Control Act, its annual value under section 23(1)(a) cannot exceed the standard rent (fixed or determinable) under the Rent Control Act.
Although the expected rent as per section 23(1)(a) cannot exceed standard rent but it can be lower than standard rent. [Balbir Singh (Dr.) v MCD (1985) 152 ITR 388 (SC)].
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:
R owns six houses in Delhi, details of which are as under:
| Particulars | I | II | III | IV | V | VI |
| Municipal Value | 2,00,000 | 2,40,000 | 3,60,000 | 4,20,000 | 4,80,000 | 4,50,000 |
| Fair Rental Value | 2,40,000 | 3,00,000 | 4,00,000 | 4,20,000 | 5,00,000 | 5,00,000 |
| Standard Rent | N.A. | 2,40,000 | 5,00,000 | 3,00,000 | N.A. | 4,80,000 |
| Actual Rent/Annual Rent | 1,80,000 | 3,60,000 | 4,80,000 | 3,60,000 | 5,40,000 | 4,20,000 |
Compute the gross annual value of the above houses.
SOLUTIONS:
| Gross Annual Value | 2,40,000 | 3,60,000 | 4,80,000 | 3,60,000 | 5,40,000 | 4,80,000 |
| In case of 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 (including taxes levied for services) 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:
(a) the municipal taxes have been borne by the owner, and
(b) these have been actually paid during the previous year.
Therefore, deduction for municipal taxes, etc. levied by any local authority is allowed if they are borne and actually paid by the owner. It must be noted that the taxes are allowed as deduction only in the previous year in which these are paid. 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. [CIT v R. Venugopala Reddiar (1965) 58 ITR 439 (Mad)].
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’.
EXAMPLE:
X owns three houses in Delhi, particulars of which are as under:
| Particulars | I House | II House | III House |
| Rs. | Rs. | Rs. | |
| No. of residential units | 2 | 1 | 3 |
| Municipal value | 1,20,000 | 72,000 | 60,000 |
| Fair Rental Value | 1,50,000 | 75,000 | 75,000 |
| Standard rent | 1,30,000 | 80,000 | 72,000 |
| Rent per unit per annum | 70,000 | 84,000 | 21,000 |
| Municipal taxes | Rs.12,000 (due but not paid) | Rs.8,000 for last year paid in this year, and Rs.9,000 of current year due but not paid. | Rs.60,000 (It includes Rs.54,000 paid as advance for next 9 years) |
Compute the annual value of the above three houses for the assessment year 2022-23.
SOLUTION:
| Particulars | I House | II House | III House |
| Rs. | Rs. | Rs. | |
| Gross Annual Value i | 1,40,000 | 84,000 | 72,000 |
| Less: Municipal Taxes | – | 8,000 | 60,000 |
| Net Annual Value | 1,40,000 | 76,000 | 12,000 |
(B) 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)
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 gross actual value in the above two cases shall be determined as under:
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.
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.
EXAMPLE:
Municipal value of a house is Rs.90,000, Fair rent, Rs.1,40,000, Standard rent Rs.1,20,000. The house property has been let for Rs.12,000 p.m. and was vacant for one month during the previous year 2021-22. Municipal taxes paid during the year were Rs.40,000. Compute the annual value for assessment year 2022-23.
SOLUTION:
Step I: Compute Gross Annual Value (which shall be higher of the following two)
| (a) | Expected rent which shall be municipal value (Rs.90,000) or fair rent (Rs.1,40,000) but limited to standard rent (₹1,20,000) | 1,20,000 |
| (b) | Actual rent received or receivable ₹12,000 x 11 | 1,32,000 |
| # Gross annual value shall be | Rs.1,32,000 | |
| Step II | Less: Municipal Taxes paid | 40,000 |
| Net annual value | 92,000 |
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).
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.
EXAMPLE: (Take the just above EXAMPLE)
Assume the property was vacant for 3 months. Determine the annual value for the assessment year 2022-23.
SOLUTIONS:
| (a) | Expected rent (as determined above) | Rs. 1,20,000 |
| (b) | Actual rent received/receivable (12,000 x 9) | Rs. 1,08,000 |
As the actual rent received or receivable owing to vacancy is less than the sum determined under clause (a), it will fall under situation 2 i.e. section 23(1)(c) and therefore net annual value shall be determined as under:
| Rs. | |
| Actual rent receives or receivable | 1,08,000 |
| Less: Municipal Taxes paid | 40,000 |
| Net annual value | 68,000 |
(C) 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.
EXAMPLE:
R has a house property in Delhi whose Municipal Value is Rs.1,00,000 and the Fair Rental Value is Rs.1,20,000. It was self-occupied by R. from 1.4.2021 to 31.7.2021. W.e.f. 1.8.2021, it was let out at Rs.9,000 p.m. Compute the annual value of the house property for the assessment year 2022-23 if the municipal taxes paid during the year were Rs.20,000.
SOLUTION:
The gross annual value shall be higher of the following two:
| Rs. | Rs. | |
| (a) Expected rent (Municipal value Rs.1,00,000 or FRV Rs.1,20,000 whichever is higher) | 1,20,000 | |
| (b) Actual rent received/receivable for let out period i.e. 9,000 x 8 | 72,000 | |
| # Gross annual value | 1,20,000 | |
| Less: Municipal taxes | 20,000 | |
| Net annual value | 1,00,000 |
EXAMPLE: (Take just above Example)
Determine the annual value assuming that the standard rent is fixed at Rs.1,08,000.
SOLUTION:
Gross annual value shall be higher of the following two:
| Rs. | Rs. | |
| (a) Expected rent shall be limit to standard rent | 1,08,000 | |
| (b) Actual rent received or receivable | 72,000 | |
| # Gross annual value | 1,08,000 | |
| Less: Municipal taxes | 20,000 | |
| Net annual value | 88,000 |
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