Determination of Annual Value under House Property

Calculating Income under the Head "Income from House Properties" seems to be very easy but it too has some technicalities which should be known to us being professionals. I have tried to cover few aspects related to "Determination of Annual Value" in this article related to the Incomes assessed under "House Property"

As per Section 22 which talks about Basis of Charge,

"The annual value of ANY property comprising of buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head "Income from house property".

Now let us decode this provision further and draw some inferences out of the above quoted line

• A house property could be your home, an office, a shop, a building or some land attached to the building like a parking lot (provided it is not being used to carry on your business or profession because in that case it will be considered as Business Premises).
• The Income Tax Act does not differentiate between a commercial and residential property. All types of properties are taxed under the head 'income from house property' in the income tax return.
• When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the 'income from business and profession' head. Expenses on its repair and maintenance are allowed as business expenditure.
• Income from letting out of vacant land will not be taxable under this head. It is, however, taxable under the head "Income from other sources" or "Profits and gains from business or profession", as the case may be.
• Assessee must be the owner of the property. An owner for the purpose of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on someone else's behalf.

Now moving further, This head of Income either categorizes House Property as "Self-occupied" or "Deemed to be let-out"

a. Self-Occupied House Property

• A self-occupied house property is used for one's own residential purposes. This may be occupied by the taxpayer's family – parents and/or spouse and children.
• A vacant house property is considered as self-occupied for the purpose of Income Tax.
• Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
• For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.

b. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes

Section 23: DETERMINATION OF NET ANNUAL VALUE

NET ANNUAL VALUE= GROSS ANNUAL VALUE MINUS MUNICIPAL TAX PAID BY THE OWNER DURING THE PREVIOUS YEAR

i. Determination of annual value for different types of house properties

1. Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]

Where the property is let out for the whole year, then the GAV would be the higher of –

• Expected Rent (ER) and
• Actual rent received or receivable during the year.

Having said so, now how to calculate Expected Rent?

• The Expected Rent (ER) is the higher of fair rent (FR) and municipal value (MV), but restricted to standard rent (SR).
• For example, let us say the higher of FR and MV is X. Then ER = SR, if X>SR. However, if X< sr then x=sr
• Expected Rent (ER) as per section 23(1)(a) cannot exceed standard rent (SR) but it can be lower than standard rent, in a case where standard rent is more than the higher of MV and FR.

Municipal value – This is the value as 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.

Fair rent - Fair rent is the rent which a similar property can fetch in the same or similar locality, if it is let out for a year.

Standard rent – The 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.

From the GAV computed above, municipal taxes paid by the owner during the previous year are to be deducted to arrive at the NAV.

ii. Property taxes (Municipal taxes)

1. Property taxes are allowable as deduction from the GAV subject to the following two conditions:
   1. It should be borne by the assessee (owner); and
   2. It should be actually paid during the previous year.
2. If property taxes levied by a local authority for a particular previous year are not paid during that year, no deduction shall be allowed in the computation of income from house property for that year.
3. However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed as deduction in computation of income from house property for that year.
4. In case of property situated outside India, taxes levied by local authority of the country in which the property is situated is deductible².
5. In respect of self-occupied/unoccupied house property/properties for which "Nil" Annual Value benefit is claimed, deduction of municipal taxes paid is not allowable.

2. Where let out property is vacant for part of the year [Section 23(1)(c)]

Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower than the ER, then the actual rent received or receivable will be the GAV of the property.

3. In case of self-occupied property or unoccupied property [Section 23(2)]

• Where the property is self-occupied for own residence or unoccupied throughout the previous year, its Annual Value will be Nil, provided no other benefit is derived by the owner from such property
• The expression "Unoccupied property" refers to a property which cannot be occupied by the owner by reason of his employment, business or profession at a different place and he resides at such other place in a building not belonging to him.
• No deduction for municipal taxes is allowed in respect of such property/properties as annual value means value determined after deduction of municipal taxes.

4. Where a house property is let-out for part of the year and self- occupied for part of the year [Section 23(3)]