The annual value of a property is the sum for which a property is reasonably expected to be let from year to year. Hence, the annual value of a property is the amount of notional rent which could have been derived, had the property been let. The annual value of a property plays an important role in Income Tax return filing. In this article, we mention the procedure for calculating the annual value of a property.
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
Factors Determining Annual Value of Property
Actual Rent Received
Actual rent received or receivable is an important factor in determining the annual value of a property. The actual rent received could be dependent on various considerations. If the owner of the property agrees to bear certain obligations like water or electricity bill, the rent will be calculated by reducing the rent received by the amount spent by the owner on meeting such obligatory expenses. On the other hand, if the obligatory expenses to be borne by the owner is met by the tenant, then the rent will be computed by increasing the rent paid by the amount spent by the tenant on meeting the obligations of the owner.
Municipal value is 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 is the rent which is a similar property can fetch in the same or similar locality if it is let for a year. Fair rent can be easily ascertained for apartments based on prevailing rentals.
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, standard rent plays an important factor in determining the annual value of the property.
Categories of House Property
Based on the nature of property and utility, the annual value of a property could fall into five different categories as follows:
House property 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.
Annual value of house property held as stock-in-trade which was not let during the whole of the previous year.
Procedure for Calculating Annual Value of Property
The following are the steps involved in calculating the Net Annual Value of house property:
A = Actual Rent Received: For let out property, actual rent received is as per agreement between the owner and the tenant. Any payment by the tenant on behalf of the owner is also included under Actual Rent Received.
B = Fair Rent: It means how much rental income a similar property in the vicinity can fetch with similar facilities and amenities.
C = Standard Rent: Rent fixed under the Rent Control Act: States like Tamilnadu have Rent control act, under which rent specified under the Rent Control Act is fixed even if is a meagre amount.
D = Municipal Value: It is similar to circle rate or guidance value. Rental value is fixed by a local municipal corporation or municipal committee.
After calculating the above-mentioned values, Notional Rental Income from House Property can be calculated as per following formula as mentioned in the income tax act:
Z = Higher of B or D i.e. Higher of Fair Rent Value or Municipal Value.
Y = Expected Rent = Lower of Z or C
Gross Annual Value of Property = Higher of Expected Rent or Actual Rent Received = Higher of Y or A
In most of the cases, Actual rent received will be the Gross Annual Value of Property for the purpose of calculation of Income from House Property.
Net Annual Value is Gross Annual Value minus Municipal taxes like property tax, sewerage tax and so on.
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|
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.
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.