Determination of Annual Value of House Property Income or Rental Income [Section 23] :
This involves three steps:
Step 1 – Determination of Gross Annual Value (GAV).
Step 2 – From the gross annual value computed in step 1, deduct municipal tax paid by the owner during the previous year.
Step 3 – The balance will be the Net Annual Value (NAV), which as per the Income-tax Act, 1961 is the annual value.
(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 –
(a) Expected Rent (ER) and
(b) Actual rent received or receivable during the year
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Illustration
Jayashree owns five houses in Chennai, 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
Fair Rent Standard Rent Actual rent received/ receivable |
80,000
90,000 N.A. 72,000 |
55,000
60,000 75,000 72,000 |
65,000
65,000 58,000 60,000 |
24,000
25,000 N.A. 30,000 |
75,000
80,000 78,000 72,000 |
Solution
| GAV | 90,000 | 72,000 | 60,000 | 30,000 | 78,000 |
(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)]: (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.
(b) The benefit of exemption of one self-occupied house is available only to an individual/HUF.
(c) 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.
(d) No deduction for municipal taxes is allowed in respect of such property.
(4) 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, property taxes for the whole year is allowed as deduction provided it is paid by the owner during the previous year.
(5) In case of deemed to be let out property [Section 23(4)] : (a) Where the assessee owns more than one property for self-occupation, then the income from any one such property, at the option of the assessee, shall be computed under the self -occupied property category and its annual value will be nil. The other self -occupied/unoccupied properties shall be treated as “deemed let out properties”.
(b) This option can be changed year after year in a manner beneficial to the assessee.
(c) In case of deemed let-out property, the ER shall be taken as the GAV.
(d) 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.
(e) Municipal taxes actually paid by the owner during the previous year can be claimed as deduction.
(6) 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 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 –
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(ii) Treatment of unrealised rent [Explanation to section 23(1)]
(1) The Actual rent received/receivable should not include any amount of rent which is not capable of being realised.
(2) However the conditions prescribed in Rule 4 should be satisfied. They are –
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
(iii) Property taxes (Municipal taxes)
(1) Property taxes are allowable as deduction from the GAV subject to the following two conditions:
(a) It should be borne by the assessee (owner); and
(b) It should be actually paid during the previous year.
(2) If property taxes levied by a local authority for a particular previous year is 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) Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise according to the method of accounting regularly employed by the owner, the deduction in respect of such taxes will be allowed only in the year of actual payment.
(5) In case of property situated outside India, taxes levied by local authority of the country in which the property is situated is deductible [CIT v. R. Venugopala Reddiar (1965) 58 ITR 439 (Mad)].
Illustration
Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y.201 5-16. He owns a house in London, which he has let out at £ 10,000 p.m. The municipal taxes paid to the Municipal Corporation of London is £ 8,000 during the P.Y.2015-16. The value of one £ in Indian rupee to be taken at ` 82.50. Compute Rajesh’s taxable income for the A.Y. 2016-17.
Solution
For the P.Y.2015-16, Mr. Rajesh, a British national, is resident and ordinarily resident in India. Therefore, income received by him by way of rent of the house property located in London is to be included in the total income in India. Municipal taxes paid in London is be to allowed as deduction from the gross annual value.
Computation of Income from house property of Mr. Rajesh for A.Y.2016-17
| Particulars | Rs |
| Gross Annual Value (£ 10,000 ´ 12 ´ 82.50)
Less: Municipal taxes paid (£ 8,000 ´ 82.50) Net Annual Value (NAV) Less: Deduction under section 24 (a) 30% of NAV = 30% of Rs 92,40,000 Income from house property |
99,00,000
6,60,000 |
| 92,40,000
27,72,000 |
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| 64,68,000 |