Annual Value is the amount for which the property might be let out on a yearly basis. You can also say that it is the estimated rent that you could get if the property was rented out.

In order to calculate any income from house property, you need to know the annual value of house property. As per Section 23(1)(a) of the Income Tax Act, Annual Value of a home is the sum for which the property might reasonably be expected to be let out from year to year. So it is the notional rent which could be got if the property were to be rented.

How to calculate Annual Value of House Property?

To determine Annual Value of a house property you need to consider four factors such as its Municipal Value, Fair Rental Value, Standard Rent and Actual Rent Received or Receivable.

Municipal Value: Normally municipal authorities use to charge house tax on property based on various factors like type of residential, floor, facilities available in the premises etc. This value of property considered by municipal authority is relevant for deriving annual value of property.

Fair Rental Value: The rent which a similar property in the same or similar locality would have fetched is the fair rental value of the property. This is nothing but notional rent a property can get if it has been let out for a year. e.g. In case of apartment, one can assume approx rent of other similar flat which is already let out with some addition or reduction in rent with reference to facilities of both flats.

Standard Rent: Where a rent is fixed under prevailing Rent Control Act, it would be considered as standard rent and owner cannot expect to get higher rent than fixed as per rent control act. Standard Rent is important factor in deciding annual value.

Actual Rent Received or Receivable: For any rent out property, Actual rent received or receivable is important for annual value. Actual rent paid or payable is always subject to agreement entered by owner and tenant or matter of negotiable between them whereby if tenant agree to pay for municipal taxes on behalf of owner then these taxes should be added in actual rent receive/receivable to derive annual value. There could be vice versa case, where owner has agreed to pay some obligation of tenant, in that case rent will be reduced by that amount.

Annual Value of Let-Out House Property

House property which is let out the Net Annual Value will be calculated as;

Gross Annual Value – Municipal Taxes paid

Where

Gross Annual Value = Higher of Actual Rent Received or Expected Rent

Expected Rent = Higher of Municipal Value or Fair Rental Value but restricted to the Standard Rent

To understand more clearly:

X = Higher of (Municipal Value or Fair Rental Value)

Expected Rent = Lower of (X or Standard Rent)

Gross Annual Value = Higher of Actual Rent Received or Expected Rent

Let us see an example where the house property is let out throughout the year.

Rahul owns a house which is let out for a rent of Rs 13,500 per month. The municipal value of this house is Rs 1,00,000; fair rental value is Rs 1,55,000; standard rent is Rs 1,30,000. If municipal taxes paid are Rs 25,000, then the annual value of the property will be;

Use the formula above for Gross Annual Value.

X = Higher of Municipal Value (Rs 1,00,000) or Fair Rental Value (Rs 1,50,000) = Rs 1,50,000.

Now compare this value with the standard rent.

Expected Rent = Lower of Rs 1,50,000 or standard rent (Rs 1,30,000) = Rs 1,30,000.

So Gross Annual Value = Higher of Actual Rent Received (Rs 13,500  for 12 months = Rs 1,62,000) or Expected Rent (Rs 1,30,000) = Rs 1,62,000.

Hence, the Gross Annual Value = Rs 1,62,000. If you reduce the municipal taxes from this amount, you will get the Net Annual Value.

Net Annual Value = (Rs 1,62,000) – (Rs 25,000) = Rs 1,37,000

There are two types of tax deductions available on income from property apart from the actual municipal taxes paid. The first is standard deduction of 30%. This means 30% of the rental income can be reduced as a standard deduction for repairs, maintenance etc. irrespective of the actual amount spent, if at all, during the financial year.

The second deduction, which is over and above the 30% standard deduction, is to do with interest u/s 24 on mortgage finance if the property is purchased on mortgage for the purpose of acquisition, construction, re-construction, repairs, renovation etc.

Annual Value of Self Occupied House Property

Is the house you are residing in the only property you own? In that case, the annual value will be NIL. However, if you have more than one property in use, all of them with the intention of self-occupation, you can only exercise the option of specifying one property’s annual value as nil. The annual value of the other house properties will be determined on the basis of the expected rent from the property, if it was let out.

Few Points to be Noted

As stated, in case of one self occupied property, the Annual Value is taken as nil. Deduction u/s 24 for interest paid may still be claimed therefrom. The resulting loss may be set off against income under other heads but can not be carried forward.

If more than one property is owned and all are used for self occupation purposes only, then any one can be opted as self occupied, the others are deemed to be let out.

Annual Value of one house away from workplace which is not let out can be taken as NIL provided that it is the only house owned and it is not let out.

If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion of self occupied property or period of self occupation, as the case may be is to be excluded from the annual value.

What is an Annual Value of House Property? How to Calculate?

Leave a Reply

Your email address will not be published. Required fields are marked *

css.php
Read previous post:
How to make payment of TDS on Property through e-TAX payment option?

As per Finance Bill of 2013, TDS is applicable on sale of immoveable property wherein the sale consideration of the...

Close