Definition of Anual Value

Definition of Anual Value

Determination of Annual Value The basis of calculating income from house property is the annual value'. This 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 realised when the property is, in fact, let-out. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value)Where, however, the actual rent is less than the reasonable rent (e.g.in case where the tenancy is affected by fraud, emergency, close relationship or such other consideration), the latter will be the annual value. The municipal value of the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same locality, are all pointers to the determination of annual value.

Gross Annual Value [Section 23 (1)] 

The following four factors have to be taken into consideration while determining the annual value of the property: 

V1. Actual Rent : 

It is the most important factor in determining the annual value of a let-out house property. It does not include rent for the period doring which the property remains vacant. Moreover, it does not include the rent that the taxpayer is unable to realise, if certain conditions are satisfied. Sometimes a tenant pays a composite rent for the property as well as certain benefits provided by the landlord. Such composite rent is to be disintegrated and only that part of it which is attributable to the let-out of the house property is to be considered in the determination of the annual valu'e.

 V. Municipal Valuation 

(Municipal or local authorities charge house tax on properties situated in the urban areas. For this purpose, they have to determine the income earning capacity of the property so as to calculate the amount of house tax to be paid by the owner of the property But this valuation cannot be treated as a conclusive evidence of the rental value of the property, although such valuation is given due consideration by the assessing officer. 

V3. Fair Rental Value : 

It is the rent normally charged for similar house properties in the same locality. Although two properties cannot be alike in every respect, the evidence provided by transactions of other parties in the matter of other properties in the neighborhood, more or less comparable to the property in question, is relevant in arriving at reasonable expected rent. 

V4. Standard Rent: 

Standard rent is the maximum rent which a person can legally recover fromn his tenant under a Rent Control Act. This rule is applicable even if a tenant has lost his right to apply for fixation of the standard rent. This means that ifa property is covered under the Rent Control Act, its reasonable expected rent cannot exceed the standard rent. 

5. Gross Annual Value:

 The gross annual value is the municipal value, the actual rent (whether received or receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the gross annual value cannot exceed the standard rent under thRent Control Act or the actual rent, whichever is higher.

fthe property is let-out but remains vacant during any part or whole of the year and due to such vacancy, the rent received is less than the reasonable expected rent, such lesser amount shall be the. annual value. For the purpose of determining the annual value, the actual rent shall not include the rent which cannot be realised by the owner However, the following conditions need to be satisfied for this: (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 satisfied the assessing officer that legal proceedings would be useless Deduction of Municipal 

Taxes From the annual value as determined above municipal taxes are to be deducted if the following conditions are fulfilled: 

1. The property is let-out during the whole or any part of the previous year. 

2. The municipal taxes must be borne by the landlord. 

3. (If the municipal taxes or any part thereof are borne by the tenant, it will not be allowed. 

4. The municipal taxes must be paid during the year. Deductions Under Section 24 Two deductions will be allowed from the net annual value (which is gross annual value less municipal taxes) to arrive at the taxable income under the head 'income from house property It has to be borne in mind that the deductions mentioned here (Section 24) are exhaustive and no other deductions are allowed. 

The deductions admissible are as under: 

VStatutory Deduction:

 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred. 

VInterest on Borrowed Capital The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. Amount of interest payable for the relevant year should be calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the year or not) However, there should be a clear link between the borrower and the construction/purchase, etc. of the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction. 

VThe following points are to be kept in mind while claiming deduction on account of interest on borrowed capital:

J. In case the property is let-out, the entire amount of interest accrued during the year is deductible. The borrowers may be for construction/acquisition or repairs/renewals. 

UZ. A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction, etc. of the property. In such a case also, the interest on the fresh loan will be allowable.

 3. Interest payable on interest will not be allowed.

 4. Brokerage or commission paid to arrange a loan for house construction will not be allowed S. When interest is payable outside India, no deduction will be allowed unless tax is deducted at source or someone in India is treated as agent of the non-resident.

Money may be borrowed prior to the acquisition or construction of the property. 

In such a case, the period commencing from the date of borrowing and ending on the date of repayment of loan or on March 31 immediately preceding the date of acquisition or completion of construction, whichever is earlier, is termed as the pre-construction period The interest paid/payable for the pre-construction period is to be aggregated and claimed as deduction in five equal instalments during five successive financial deduction is not allowed if the loan is utilised for repairs, renewal or reconstruction. self-occupied house property? years starting with the year in which the acquisition or construction is completed. This