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House property

rajender guptha (CA) (168 Points)

24 September 2014

Incase of let out property :

During the previous year property is kept vacant,

My query is whether the property is taxable or not if taxable what should i consider for gross annual value?

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ramesh kandala (sr.accounts officer) (122 Points)
Replied 24 September 2014

2.3. COMPUTATION OF INCOME FROM “LET-OUT PROPERTY” :

After arriving at Rateable Value and Annual Value, if the property is let-out (given for rent / lease), the following deductions for which the owner is eligible :

1. Repair Charges (restricted to 30% of Annual Value of the Property).

2. Interest on borrowed capital for the purpose of acquisition, construction, re-construction, repairs, renovation etc.

2.3.1. GROSS ANNUAL VALUE [ Sec. 23(1)]

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 which shall be calculated as below
Step 3	Find out which one is higher – amount computed in Step 1 & Step 2
Step 4	Find out Loss because of Vacancy
Step 5	Step 3 minus Step 4 is Gross Annual Value

Step-1: Find out reasonable expected Rent of the Property :

The reasonable expected Rent under will be computed on the basis of 3 factors, namely---

a. Municipal Rental Value (MRV) : For collecting Municipal Taxes, Local Authorities 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 Value are fixed which serves as the basis for levying tax. The Rental Value so fixed is called Municipal Rental Value ( M.R.V.).

b. Fair Rental Value ( FRV ) : Fair Rent of the Property can be determined on the basis of Rent fetched by a similar property in the same or similar 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.)

c. Standard Rent of the Property (SR) : Standard Rent is the maximum rent which a person can legally recover from his tenant under a Rent Control Act. If other words, if a property is covered under this Rent Control Act, its reasonable expected Rent cannot exceed the standard Rent fixed or determined under the Rent Control Act.

The higher of (MRV) and (FRV), subject to maximum of (SR) is reasonable expected Rent.

Step-2: Find out Rent actually received or receivable :
Find out Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy which shall be calculated as below :

Rent of the previous year ( or that part of the pervious year) for which the property is available for letting out

Less : Unrealized Rent of a few conditions are satisfied

Rent received / receivable before deducting Loss due to Vacancy

Xxxx

xxxx

The following points should be noted ---

1. 1. Loss due to vacancy shall not be deducted.
  2. Occupier’s or tenant’s share of municipal tax realized from the tenant cannot be added to Actual Rent received or receivable.
  3. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot be added to rent received or receivable.
  4. A non-refundable security will be added in rent received or receivable on pro rata basis.
  5. A refundable security cannot be included in rent received or receivable.
  6. Advance rent can not be rent received / receivable of the year of receipt.
  7. Commission paid by the owner of a property to a broker for rental income is not deductible.

2.3.2 DEDUCT MUNICIPAL TAX

From Gross Annual Value computed above, deduct Municipal Taxes ( including Service Tax) levied by any local authority in respect of the house property. Municipal Taxes are deductible only if..

these taxes are borne by the owner , and
are actually paid by him during the previous year.

Municipal taxes, levied by local authority but not paid by the assessee during the previous year are not deductible.
The remaining amount left after deduction of Municipal Taxes is Net Annual Value (NAV)

2.3.3. DEDUCTION UNDER SECTION 24

The following 2 Deductions are available under section 24---

a. Standard Deduction ; and

b. Interest on borrowed capital

In other words, no deductions can be claimed in respect of that expenditure which is not specified in Sec. 24. For instance, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of liftman, etc.

A. Standard Deduction [ Sec. 24(a)] : 30% of net annual value id deductible irrespective of any expenditure incurred by the taxpayer.

B. Interest on Borrowed Capital [ Sec. 24(b)] : Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

The following points should be kept in view :-

If capital is borrowed for the purpose of purchasing a plot of land, interest liability is deductible even if construction is financed out of own funds.

Interest on borrowed capital is deductible on “accrual” basis. It can be claimed ad deduction on yearly basis, even if the interest is not actually paid during the year.