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  • Writer's pictureShruti Sharma

Section 23 of the Income Tax Act, 1961- Annual value how determined.

Updated: Oct 7, 2022




  • According to section 23(1),

the Annual Value of any property is the amount for which it might be expected to be rented on a yearly basis. Neither the actual rent received nor the property's municipal valuation may be the cause. It is comparable to the hypothetical rent that may have been earned had the property been rented. Four criteria are often taken into account when estimating the annual value. Which are:

  1. Actual Rent Received or Receivable: The annual value of any rental property depends on the actual rent collected or owed. When an agreement between an owner and a tenant is made, the real rent paid or payable is always subject to that agreement. If the tenant agrees to pay the owner's municipal taxes, those taxes should be added to the actual rent received or payable in order to determine the annual value. In the event that the owner agrees to cover a tenant's debt, the rent may be decreased by that sum in the opposite situation.

  2. Municipal Value: Ordinarily, municipal authorities used to assess a house tax on real estate depending on a number of variables, including the type of residence, floor, on-site amenities, etc. This property value that the municipal authority examined is important for determining the annual worth of the property.

  3. Fair Rent of the Property: The fair rental value of the property is the rent that a comparable property in the same or a nearby neighbourhood would have brought in. This is merely the theoretical rent a property would receive after a year of tenancy. e.g. In the case of an apartment, one can estimate the rent based on another similarly situated flat that is already rented out, with a small addition or decrease in rent based on the amenities of both units.

  4. Standard Rent: When a rent is set under the current Rent Control Act, it is regarded as the standard rent, and the owner cannot expect to receive a higher rent than that set under the act. An key consideration in determining annual value is standard rent.

  • When it comes to privately owned or unoccupied property: Section 23(2)

(a) If the property is used solely for personal habitation or was vacant for the whole prior year, its annual value will be zero because the owner receives no benefit from such a property.

The term "Unoccupied Property" refers to a property that the owner cannot occupy because of his employment, business, or profession in another location, and he or she resides at that other location in a building that is not his or her own.

(b) Only a person or HUF is eligible for the benefit of the exemption of one self-occupied dwelling (two self-occupied properties starting in A.Y. 2020-21).

(b) In relation to such property, no deduction for municipal taxes is permitted.

  • When a residential property is both self-occupied and rented out for portions of the year :Section 23(3)

(a) The ER for the entire year must be considered when calculating the GAV for a single unit of a property that is partially self-occupied and partially rented out during the year.

(b) The GAV will be determined by comparing the ER for the entire year to the actual rent for the rental period, whichever is higher.

(c) Municipal taxes for the entire year, provided they were paid by the owner the year before, may be deducted.

  • Section 23(4) states that: When a property is assumed to have been rented out

(a) If the assessee owns more than one residential property for self-occupation (two starting in A.Y. 2020-21), the income from any one of them shall be reckoned under the self-occupied property category and its annual value will be zero at the assessee's discretion.

(b) The remaining abandoned or empty homes are to be regarded as "deemed let out homes."

(c) The assessee might gain from switching this choice each year.

(d) The ER is used as the GAV when determining whether a property has been leased.

  • Regarding real estate held as stock-in-trade Section 23(5),

(a) In some circumstances, property made up of any building or land attached to it may be held as stock-in-trade, and the entire property or any portion of it may not have been rented out for all or a portion of the preceding year.

(a) In these circumstances, the annual value of the relevant property, or portion thereof, shall be NULL.

(c) This benefit would be accessible for a period of up to one year (up to two years - starting in A.Y. 2020-21) following the end of the fiscal year in which the competent authority issues the certificate attesting to the property's completion of construction.

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