The concept of annual value is crucial in determining the taxable income from house property under the Income Tax Act, 1961. Section 23 of the Act lays down the provisions for computing the annual value of a property, which forms the basis for taxation under Section 22. Whether the property is self-occupied, let out, or vacant, different rules apply for determining its annual value.
This blog provides a comprehensive guide to understanding how the annual value of property is determined under the Income Tax Act.
What is Annual Value?
The annual value of a property refers to the amount for which the property might reasonably be expected to be let out from year to year. It is the basis for calculating income from house property for taxation purposes.
Determination of Annual Value (Section 23)
Section 23(1) of the Income Tax Act, 1961 prescribes the following rules for computing the annual value of a property:
1. Let Out Property
The annual value of a property that is let out is the higher of:
(a) The amount for which the property is reasonably expected to be let out (deemed rent); or
(b) The actual rent received or receivable if it is higher than the deemed rent.
If the property remains vacant for part of the year and the actual rent received is lower than the deemed rent, then the actual rent received is considered as the annual value.
Example:
If the reasonable expected rent of a house is ₹10,000 per month and the actual rent received is ₹12,000 per month, the annual value will be ₹1,44,000 (₹12,000 × 12).
If the property was vacant for two months and only ₹1,00,000 was received, then the annual value will be ₹1,00,000.
2. Self-Occupied Property
As per Section 23(2), the annual value of a self-occupied property is considered NIL, provided the owner occupies it for residential purposes or due to employment in another city, resides in a rented house.
Important Points:
If an owner has more than two self-occupied properties, only two properties can be claimed as self-occupied and have an annual value of NIL.
The remaining house(s) will be treated as deemed let out, and their annual value will be determined based on expected rent.
3. Deemed Let Out Property
If a person owns more than two self-occupied houses, the additional houses are deemed to be let out, even if they are not rented. The expected rent for such properties is considered for taxation.
4. Property Held as Stock-in-Trade
If a property is held as stock-in-trade and is not let out, its annual value is NIL for two years from the end of the financial year in which the construction completion certificate is obtained.
Deduction for Municipal Taxes
Municipal taxes paid during the financial year are allowed as a deduction from the annual value. The deduction is permitted only if paid by the owner and not if it is borne by the tenant.
Conclusion
Understanding the determination of annual value is essential for property owners to calculate taxable income correctly and take advantage of relevant deductions. Whether a property is self-occupied, let out, or vacant, knowing these provisions ensures accurate tax computation and compliance with income tax laws.
For professional guidance on tax planning and compliance, consult a qualified chartered accountant like us at +91 9769647582.
Frequently Asked Questions (FAQs)
1. My daughter stays in the USA. She owns a house in India and has let it out. She has asked tenants to pay rent to me. She has not received any rent. Is she still liable to tax?
Yes, rental income is taxed in the hands of the owner. Since your daughter owns the house, she is liable to pay tax on the rental income, even if the rent is received by you.
2. What if she transfers the house to me?
If she legally transfers ownership of the house to you, then you will be considered the owner, and the rental income will be taxable in your hands.
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