Define Annual Value and State the Deductions That Are Allowed from the Annual Value in Computing the Income from House Property
Definition of Annual Value
As per Section 23 of the Income Tax Act, 1961, the “Annual Value” of a house property is the amount for which the property might reasonably be expected to be let out from year to year. It is not necessarily the actual rent received, but the potential earning capacity of the property.
How Annual Value is Determined:
- Municipal Value: The value determined by local municipal authorities.
- Fair Rent: The rent a similar property in the same area can fetch.
- Standard Rent: In case of rent-controlled properties, it is the maximum rent fixed by the Rent Control Act.
The Annual Value is the highest of municipal value or fair rent, but not more than the standard rent. If the property is actually let out, the actual rent received or receivable is compared to this value to determine the Annual Value.
Exceptions:
- If the property is self-occupied for own residence, the annual value is considered NIL.
- If the property is vacant, certain reliefs are available.
Deductions Allowed from Annual Value
After computing the Gross Annual Value (GAV), the following deductions are allowed under Section 24 of the Income Tax Act:
1. Standard Deduction (Section 24(a))
30% of the Net Annual Value is allowed as a standard deduction. This is given irrespective of actual expenses like repair or maintenance.
Formula: Standard Deduction = 30% × Net Annual Value
2. Interest on Home Loan (Section 24(b))
If the taxpayer has taken a loan for purchase, construction, or repair of the house, interest paid on that loan can be claimed as a deduction.
- For a self-occupied house: Maximum deduction allowed is Rs. 2,00,000 per year.
- For a let-out property: Entire interest amount is deductible (no limit).
Computation of Income from House Property
Gross Annual Value (GAV) ₹ XXX Less: Municipal Taxes Paid (₹ XXX) Net Annual Value (NAV) ₹ XXX Less: a) Standard Deduction (30%) ₹ XXX b) Interest on Loan (U/s 24b) ₹ XXX Income from House Property ₹ XXX
Conclusion
Annual Value is the basis for calculating income from house property. From this value, standard deductions and interest on loan are allowed. These deductions help reduce the tax burden on property owners and support housing investments.