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'Annual Value' as Calculation of Income from House Property


The term annual value is very important as calculation of income from house property depends upon correctly calculated annual value. It takes into consideration not only the rent received but also the expected rent a house can fetch under the given situation and not only once but from year to year.

Definition of Annual Value [Section 23]

1. For the purposes of section 22, 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; 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 ; 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

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 owner in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

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

(a)  is in the occupation of the owner for the purposes of his own residence or

(b)  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:

(a)   the house or part of the house is actually le; during the whole or any part of the previous year ;  or

(b)   any other benefit there from is derived by the owner.

4. Where the property referred to in sub-section (2) consists of more than one house

(a)  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

(b)  the annual value of the house or house, 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 ,f such house or houses had been let.”

Section 23(1) of Income-tax Act has defined the word ‘annual value’, as “the sum for which the property might reasonably be expected to let from year to year”. The annual value is the value which any house can fetch from the market under the prevailing circumstances such as local conditions, the demand for house, municipal valuation, type and standard of construction, rent for similar type of house in the similar type of locality, etc. From the explanation it should be clearly understood that the annual value does not mean the rent derived or rental value of the house but the notional rent at which the house can reasonably be let out. A property can be let out at a rent which is lower than its reasonable rent but its annual value will be its reasonable rent.

The Finance Act 2001 has changed the definition of the, Annual value as under :

In case of a let out house property, section 23(1) has defined this term as follows …

1. Where the house property or any part of it is let out, any sum of money received or receivable in the previous year or from year to year shall be treated as annual value.

2. Where any house property is let out and the rent received or receivable is in excess of the sum referred above { in point (1) }, the sum of money so received or receivable shall be treated as annual value.

3. Where a. let out house property remains vacant during the previous year or during any part of the previous year and due to vacancy the actual rent received or receivable is less than the sum of money referred above in point (1), the sum of money so received or receivable shall be treated as annual value.

Different Types of Rental Values

1. Actual Rent. It is the rent actually received by the owner of the house property from the tenant. In case tenant pays composite rent i.e. rent of building, plant and machinery, furniture etc. and rent is separable, actual rent is reduced by the amount of rent of plant and machinery, furniture. etc. Balance is actual rent of house property. Any amount of local taxes paid by tenant, cost of repairs borne by tenant or any interest on advance deposit are not to be added.

As per explanation attached to section 23(1) for the purposes of calculating Annual Value the actual rent received or receivable shall not include any amount of unrealised rent if it fulfils certain conditions.

2. Real Rental Value [RRV]. In case cogt of common facilitie such as lift and pump maintenance, salary of common gardener and watchman, lighting of common stairs and corridors and water and electricity bills (if included in rent) are borne by the owner and rent includes the cost of these items. Such cost is reduced out of actual rent received and balance is called Real Rental Value (R.R.V.).

In case cost of following facilities is borne by the owner it shall be deducted out of actual rent before comparing it with other rental values.

(a) Lift and pump maintenance charges,

(b) Swimming pool maintenance charges,

(c) Salary of common gardener and watchman,

(d) Lighting of common stairs and corridors

(e) Water and electricity charges (only if it is mentioned that rent includes them).

In case the cost of facilities is charged separately by owner i.e., over and above the rent, it is treated as a separate source of income. The expenses incurred on such facilities are deducted out of amount so collected and balance (Income/Loss) is taxable under the head, “Income from Other Sources.”

In case house property is divided in parts and a part is let out and other part is self-occupied, the fair rental value of the house shall be proportionately increased in following manner

Example : Mr. X owns a house, 2/3rd portion of the house is let out @ 4,000 p.m. and remaining 1/3rd portion is self occupied for 7 months and let out for 5 months. Calculate its fair rental value.

Rent of 2/3rd portion of house                                                                               4,000 p.m.
Fair rental value of full house shall be 4,000 x 3/2                                               6,000 p.m.

3. Municipal Rental Value (MRV). For the purposes of levying local taxes the local authority i.e. Municipal Corporation / Committee etc. conducts a periodical survey of the house properties in their local limits. On the basis of such survey the rental values are fixed which serves as the basis for levying tax. The rental value so fixed is called Municipal Rental Value (M.R.V.).

4. Fair Rental Value [FRV]. It is the rental value a house property can fetch. It is based on the rent prevailing for similar type of accommodation in same or similar type of locality. It is based on the principle that rent prevailing in same locality for similar sized property is almost the same. Such rental value is called Fair Rental Value (F.R.V.).

5. Standard Rent [S. RENT]. The rent fixed under Rent Control Act, where so ever applicable, is called Standard Rent.

6. Expected Rental Value (ERV). The expected rental value shall be determined as under

A. In case Standard Rent has not been fixed

(i) Municipal Rental Value

(ii) Fair Rental Value

(iii) Actual Rent Received.

Whichever higher shall be treated as expected rental value.

B. In case Standard Rent has been fixed

(i) Municipal Rental Value

(ii) Fair Rental Value

(iii) Standard Rent.

In case standard rent has been fixed, the expected rent cannot exceed standard rent. So firstly compare Municipal rental value and fair rent and find out the higher one and the amount so calculated cannot exceed amount of standard rent but if actual rent received is more than standard rent, then actual rental value shall be treated as expected rental value.

In a Supreme Court decision, it has been clearly laid down that the expected rent cannot exceed the standard rent but it can be less than the standard rent. Balbir Singh v/s MCD (1985) 152 ITR 388(SC).

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Annual Value as Calculation of Income from House Property
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Selection of Annual Rental Value (Gross Annual Value) for Let Out House Property
Deductibility of Taxes Levied by Local Authority (i.e. Municipal taxes) while computing Annual Value of House Property Income [Proviso to Section 23(1)]
Selection of Annual Rental Value for Self-Occupied House Property
DEDUCTIONS U/S - 24 Out of Net Annual Value (NAV) of House Property Income
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