The annual value of the house refers to the gross rental income from the house property in particular income year. It is the amount for which the property might be let out on a yearly basis. In order to calculate any income from house property, you need to know the annual value of house property. For assessment purpose, annual value is the higher of actual rental value and the municipal value of the house property, according to section 2(3)(a) of the ITO, 1984 ‘Annual Value’ shall be deemed to be in relation to any property let out –
- The sum for which property might reasonably be expected to let from year to year and any amount received by letting out furniture, fixture, fittings etc or,
- Where the annual rent in respect thereof is in excess of the sum referred to in paragraph the amount of the rent
So, ‘Actual Rental Value’ and ‘Municipal Value’ are the most significant factors in the computation of annual value. Municipal value is the value specified by the municipal authority and the actual rental value may not always equal to the actual rental amount termed by the assessee from the house property rather it will depend on the following two situations:
(a) If the tenant bears any owner’s expenses: If the tenant bears any expenses which are supposed to be borne by the owner like repair and maintenance of the house, an actual rental value will be increased by the same amount because the owner indirectly receives such extra benefits from the tenants.
(b) If the owner bears tenant’s expenses: If the owner of the house bears any expense which is supposed to be borne by the tenant like water and gas bill, actual rental value will be decreased by the same amount because the owner indirectly provides such extra benefit to the tenants out of the amount received from then as rent.