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Determination Of Annual Value (Section 23)

Written by: Posted on: 13 January, 2023
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DETERMINATION OF ANNUAL VALUE  (SECTION 23)


(1) Determination of annual value for different types of house properties

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 

  1. Expected Rent (ER) and
  2. Actual rent received or receivable during the year
  • 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, ER = X.
  • 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 is the value determined by the municipal authorities for levying municipal taxes on house property.
  • Fair rent means rent which similar property in the same locality would fetch. The standard rent (SR) is fixed by the Rent Control Act
 

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

ILLUSTRATION 1

Ramesh owns five houses in India, all of which are let-out. Compute the GAV of each house from the information given below –

Particulars House I House II House III House IV House V
Municipal Value 75,000 78,000 70,000 30,000 60,000
Fair Rent 80,000 80,000 70,000 33,000 55,000
Standard Rent N.A 98,000 60,000 N.A 58,000
Actual Rent Recieved/Recievable 68,000 95,000 64,000 38,000 52,000

SOLUTION

As per section 23(1), Gross Annual Value (GAV) is the higher of Expected rent and actual rent received. Expected rent is higher of municipal value and fair rent but restricted to standard rent. 

Computation of GAV of each house owned by Ramesh

  Particulars House I House II House III House IV House V
(i) Municipal Value 75,000 78,000 70,000 30,000 60,000
(ii) Fair Rent 80,000 80,000 70,000 33,000 55,000
(iii) Higher of (i) & (ii) 80,000 80,000 70,000 33,000 60,000
(iv) Standard Rent N.A 98,000 60,000 N.A 58,000
(v) Expected Rent [Lower of (iii) & (iv)] 80,000 80,000 60,000 33,000 58,000
(vi) Actual Rent recieved/recievable 68,000 95,000 64,000 38,000 52,000
  GAV [Higher of (v) & (vi)] 80,000 95,000 64,000 38,000 58,000

(ii) 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, than the actual rent received or receivable will be the GAV of the property.    

(iii) In case of self-occupied property or unoccupied property (Section 23(2))   

(a) 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.

(b) The benefit of “Nil” Annual Value is available only for upto two self-occupied or unoccupied house properties i.e. for either one house property or two house properties owned by the assessee.

(c) The benefit of “Nil” Annual Value in respect of upto two self-occupied house properties is available only to an individual/ HUF.

(d) No deduction for municipal taxes is allowed in respect of such property/properties as annual value means value determined after deduction of municipal taxes

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

(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining part of the year, then the ER for the whole year shall be taken into account for determining the GAV.

(b) The ER for the whole year shall be compared with the actual rent for the let out period and whichever is higher shall be adopted as the GAV.

(c) However, municipal tax for the whole year is allowed as deduction provided it is paid by the owner during the previous year.   

(v) In case of deemed to be let out property (Section 23(4))   

(a) Where the assessee owns more than two properties for self-occupation, then the income from any two such properties, at the option of the assessee, shall be computed under the self-occupied property category and their annual value will be nil.

(b) The other self-occupied/ unoccupied property/properties shall be treated as “deemed let out property/properties”.

(c) This option can be changed year after year in a manner beneficial to the assessee.

(d) In case of deemed let-out property, the ER shall be taken as the GAV.

(e) The question of considering actual rent received/ receivable does not arise. Consequently, no adjustment is necessary on account of property remaining vacant or unrealized rent.

(f) Municipal taxes actually paid by the owner during the previous year, in respect of the deemed let out properties, can be claimed as deduction.      

(vi) In case of a house property held as stock-in-trade (Section 23(5))   

(a) In some cases, property consisting of any building or land appurtenant thereto may be held as stock-in-trade, and the whole or any part of the property may not be let out during the whole or any part of the previous year.

(b) In such cases, the annual value of such property or part of the property shall be NIL   

(c) This benefit would be available for the period upto two years from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority.   

(vii) In case of a house property, a portion let out and a portion self-occupied    

(a) Income from any portion or part of a property which is let out shall be computed separately under the “let out property” category and the other portion or part which is self-occupied shall be computed under the “self-occupied property” category.

(b) There is no need to treat the whole property as a single unit for computation of income from house property.

(c) Municipal valuation/ fair rent/ standard rent, if not given separately, shall be apportioned between the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such other reasonable basis.

(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion or floor or on a reasonable basis.

Notional income instead of real income

Thus, under this head of income, there are circumstances where notional income is charged to tax instead of real income. For example –

  • Where the assessee owns more than two house properties for the purpose of self- occupation, the annual value of any two of those properties, at the option of the assessee, will be nil and the other property(s) would be deemed to be let-out and income therefrom has to be computed on a notional basis by taking the Expected Rent (ER) as the GAV.

  • In the case of let-out property throughout the previous year, if the Expected Rent (ER) exceeds the actual rent received or receivable, then ER is taken as the GAV.

  • In the case of let-out property which is vacant for part of the year, if the actual rent received or receivable for let out period is less than the Expected Rent (ER) for whole year not owing to vacancy, then ER for whole year is taken as the GAV.

  • In case of a house property held as stock-in-trade by assessee (which is not let out), income has to be computed on a notional basis by taking the Expected Rent (ER) as the GAV after 2 years from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority.

 

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