The term annual value has been defined under Section 23(1) of the Income-tax Act, 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.
However, 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:
- 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.
- 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.
- 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.
Types of Rental Values
Now let us discuss 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 Dorne by tenant or any interest on advance deposit are not to be added.
2. Real Rental Value [RRV]
In case cost of common facilities such as lift and pump aintenance, 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."
3. Municipal Rental Value (MRV)
For the purposes of levying local taxes the local authority L.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
The rent fixed under Rent Control Act, where so ever applicable, 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.
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