Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 23(1)]- Computation of Annual Value’ of a Property – for computing House Property Income

[Section 23(1)]- Computation of Annual Value’ of a Property – for computing House Property Income
[Section 23(1)]- Computation of Annual Value’ of a Property – for computing House Property Income
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) ‘Computation of Annual Value’ of 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.

See also  GST Registration under GST Law

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, in case of the property let out 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.

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.

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.

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’.

(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.

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).

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.

(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.

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