BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Computation of 'Annual Value' of a House Property [Section 23(1)]

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 4 factors which are normally taken into consideration. These are:

Actual Rent Received or Receivable
Municipal Value
Fair Rent of the Property
Standard Rent

1. Computation of Annual Value of a Property [Section 23(1)]

As per the Income Tax 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:

Gross Annual Value is determined as follows -

Step-1	Find out reasonable expected rent of the property
Step-2	Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
Step-3	Find out which one is higher—amount computed in Step-1 or Step-2.
Step-4	Find out loss because of vacancy
Step-5	Step-3 minus Step-4 is Gross Annual Value

Computation of 'Annual Value' of a Houes Property [Section 23(1)]

Step II : Determine the Net Annual Value :

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:

House property which is let throughout the previous year.
House property which is let and was vacant during the whole or any part of the previous year.
House property which is part of the year let and part of the year self-occupied.
House property which is self-occupied for residential purposes or could not actually be self occupied owing to employment at any other place.

(A) Annual Value for House Property which is Let throughout the Previous Year.

Step-1 : Determine Gross Annual Value

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.

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 :

Mr. Dust own 6 Houses in Mumbai, 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.

Solution :

Particulars	I	II	III	IV`	V	VI
Gross Annual Value	2,40,000	3,60,000	4,80,000	3,60,000	5,40,000	4,80,000

Note :

In case of House-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 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:

the municipal taxes have been borne by the owner, and
these have been actually paid during the previous year.

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) Annual Value for 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:—

the sum for which the property might reasonably be expected to let from year to year i.e. the expected rent; or
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
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:

the sum for which the property might reasonably be expected to let from year to year; or
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:

The property is let;
It was vacant during the whole or part of the previous year;
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) Annual Value for 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.

(D) Annual Rental Value for Self-Occupied House Propery

1. Only one House under own Occupation.

Annual value is taken as nil.

2. More than one house under own occupation.

Annual value of one house is taken as NIL and other house/houses are deemed to be let.

3. House Property consists of various independent units and one is under own occupation and others are let out.

Annual value of one unit is taken as NIL and other unit/units are treated as let out.

4. If house property is partly let out and partly self-occupied, it is to be treated as

if units are inseparable and it is treated as one house then no benefit of self-occupation shall be allowed;
if units are separable, each unit or part is to be treated as a separate house and it shall get respective treatment.

5. House property is let out for part of the year and under own occupation for part of the year.

Wholeproperty is treated as let out house property and no benefit of self- occupancy shall be allowed. But actual rent is taken only for number of months house , property is actually let out. As such it gets the same treatment as is for unrealised rent.