### [Annual Rental Value, Income From House Property, Gross Annual Value, Net Annual Value, Computation of Income From House Property]

**Define annual value. How would
you determine the annual value of the house used by the assessee as let-out and
self-occupied residence in computing taxable income from house property?**

**Annual Value (Section 23)**

The Annual Value
of a house property is the inherent capacity of the property to earn income and
it has been defined as the amount for which the property may reasonably be
expected to be let out from year to year. It is not necessary that the property
should actually be let out. It is also not necessary that the reasonable return
from property should be equal to the actual rent realized when the property is,
in fact, let out.

**Computation
of annual value: **

Computation
of Annual Value for the determination of Income from House property requires
three steps.

Ã˜ STEP 1 Determine the **Gross Annual Value**(GAV)

Ã˜ STEP 2 Determine the value of Municipal taxes

Ã˜ STEP 3 Compute the Net Annual Value

**STEP 1- Determine
the Gross Annual Value (GAV):**

Calculation
of GAV based on the following factors:

1) Fair Rental Value (FRV): The amount of rent which a similar property (similar
to the house property the GAV of which is to be determined) in the same
locality would fetch.

2) Municipal Rental Value (MRV): The value of the house property under consideration
as determined by the Municipal authorities for the purpose of levying Municipal
taxes.

3) Standard Rental Value (SRV): The maximum amount of rent which a person can
recover from his tenant, legally, as determined by the Rent Control Act.

4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is
higher, subject to the Standard rent.

5) Unrealised rent:
The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in
the actual amount of rent receivable from the house property if all the following
for conditions are satisfied:

a)
Tenancy is in good-faith.

b)
The defaulting tenant has vacated or steps must have been taken to vacate such
tenant.

c)
The defaulting tenant doesn't continue to occupy any other property of the
assessee.

d)
Assessee has taken all the reasonable steps to proceed against the defaulting
tenant legally or he must satisfy the assessing officer that if such steps are
taken, it will be of no use.

6) Actual rent receivable (ARR): The amount of rent which is equal to the difference
between the Rent receivable and the unrealised rent.

7) Unoccupied property: The House property which cannot be occupied by its owner because of
his employment, business or profession being in some other place and he resides
at that place in a property not owned by him.

It
should be noted that the procedure for the determination of Gross Annual Value
is not the same in all the cases. It varies according to the given situation.
Various situations and the respective procedures for computation of GAV are
given below:

1) **Property is let-out throughout the
previous year** (Section 23(1) (a)/ (b)):
GAV = ERV or ARR, whichever is higher.

2) **Let out property is vacant for a part
of the year** (Section 23(1) (c)):
If the ARR < ERV only because the property
was vacant for a part of the year, GAV = ERV. If the ARR < ERV for any other reason, GAV = ERV.
If the ARR > ERV even though it was vacant
for a part of the year, GAV = ARR. In all
the cases, ARR is computed for the let-out period only and the ERV is for the whole
year as usual.

3) **Self-occupied or Unoccupied property** (Section 23(2)): The
gross annual value of two self-occupied house property is Nil.

4) **Let out for a part of the year and
self-occupied for a part of the year** (Section
23(3)): GAV = Higher of ERV
(calculated for the whole year) and ARR (calculated for let out period only)

5) **Deemed to be let out property** (Section 23(4)): This case arises when the assessee has more than two Self-occupied
properties in a previous year. In such case, only two of such properties are
treated as self-occupied and the remaining shall be treated as Deemed to be let
out properties. Here, GAV = ERV.

6) **A portion of the property is let out
and the remaining portion is self-occupied:** GAV is calculated separately for self-occupied part and the let out
part. The values of FR, MV, SR and Municipal taxes are apportioned on the given
basis.

Thus,
there is a scope for charging tax on Notional rent too. This happens when the
GAV determined according to the above steps is the ERV.

Now
that the Gross Annual Value of the house property is determined, the next step
is to determine the value of Municipal taxes paid that is deductible from the
Gross Annual Value.

**STEP 2 -
Determine the value of Municipal taxes:**

The
municipal tax or the property tax paid is allowed as a deduction from the Gross
Annual Value if the following two conditions are satisfied.

(a) The
property is let out during the whole or any part of the previous year,

(b) The
Municipal taxes must be borne by the landlord. If the Municipal taxes or any
part thereof are borne by the tenant, it will not be allowed.

(c) The
Municipal taxes must be paid during the year. Where the municipal taxes become
due but have not been actually paid, it will not be allowed.

**STEP 3 - Compute
the Net Annual Value:**

Gross
Annual Value ++++++

Less:
Municipal Taxes __++++++__

Net
Annual Value __++++++__