What is Annual Value of House Property ?

The Income Tax Act of India has five heads of income, of which “Income from House Property” is one of them. In order to calculate the income from house property, one needs to know the annual value of the property. The annual value of a house property is the basis to calculate income under this head, hence it becomes very important to understand what annual value is, how it is calculated and what it means.

Let us understand the basics with an example.

What is Annual Value of house property ?

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. It is the inherent capacity of the property to earn income.

In order to mathematically calculate annual value, four factors need to be considered.

Municipal Value: The municipal authorities have a host of factors which they consider to arrive at a municipal value of your property on which municipal taxes are then levied. So the municipal value of your property is the value the municipal authorities assign to it.

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.

Standard Rent: Under the Rent Control Act, the standard rent is fixed and it is expected that an owner should not receive rent higher than that specified in the Rent Control Act.

Actual Rent Received or Receivable: The actual rent received by an owner from a tenant, depending on who pays the water, electricity and other bills, is also an important factor in calculating the annual value of a property.

Annual Value of House Property Computation

Here is the formula for the same.

Net Annual Value or Annual Value = 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

If you observe closely, the calculation of the Gross Annual Value is nothing but determination of the sum for which the property might reasonably be excepted to let out from year to year.

There are 4 scenarios in which you need to calculate the annual value. They are :

1. house property which is let throughout the year

2. house property which is let but was vacant during whole or part of previous year

3. house property which is partly self occupied or partly let out

4. house property which is self occupied or could not be self occupied because of employment at other places

Note that the calculation of the Gross Annual Value in scenarios 2, 3 and 4 mentioned above is a bit different than what is shown in the example below (scenario 1).

Example

Let us see an example of scenario 1 where the house property is let out throughout the year.

Ravi owns a house which is let out for a rent of Rs 12,000/- per month. The municipal value of this house is Rs 90,000/-; fair rental value is Rs 1,40,000/-; standard rent is Rs 1,20,000/-. If municipal taxes paid are Rs 20,000/-, what is the annual value of the property ?

Use the formula above for Gross Annual Value.

X = Higher of Municipal Value (Rs 90,000/-) or Fair Rental Value (Rs 1,40,000/-) = Rs 1,40,000/-.

Now compare this value with the standard rent.

Expected Rent = Lower of Rs 1,40,000/- or standard rent (Rs 1,20,000/-) = Rs 1,20,000/-.

So Gross Annual Value = Higher of Actual Rent Received (Rs 12,000/- for 12 months = Rs 1,44,000/-) or Expected Rent (Rs 1,20,000/-) = Rs 1,44,000/-.

Hence, the Gross Annual Value = Rs 1,44,000/-

If you reduce the municipal taxes from this amount, you will get the Net Annual Value.

Net Annual Value = (Rs 1,44,000/-) – (Rs 20,000/-) = Rs 1,24,000/-

Annual Value of house property which is self occupied

When a house is occupied by an owner for his own residence OR it cannot actually be occupied because his employment has forced him to reside elsewhere in a house that does not belong to him, then the annual value of such house property shall be NIL.

However, even if the house is let out for a month and some benefit is derived, the annual value will not be NIL and will be calculated as shown above.

Why is this important to calculate ?

After you have arrived at the annual value of your home, you can apply some standard deductions to it. The value got after applying the deductions is the figure that you will need to charge under “income from house property” head when you file your income tax returns.

This is why it is very important to understand and calculate this.

We shall see how to apply the deductions in a future chapter.