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Determining Annual Value of Let-Out Property

For a Let-Out Property (LOP), tax is paid on the Net Annual Value (NAV). But calculating NAV isn't just about the rent you receive. You must compare it with the market and municipal values.

The Computation Chain

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Step 1: Compute Expected Rent (ER)

Expected Rent is the higher of Municipal Value (MV) or Fair Rent (FR), but restricted to Standard Rent (SR).

Formula: Expected Rent = Higher of (MV, FR) but subject to Max of SR

  • Municipal Value (MV): Value determined by municipality for tax.
  • Fair Rent (FR): Rent commanded by similar property in the same area.
  • Standard Rent (SR): Rent limits under Rent Control Act.

Example:

  • MV: ₹1,00,000

  • FR: ₹1,20,000

  • SR: ₹1,10,000

  • Compare MV vs FR: Higher is ₹1,20,000.

  • Compare Result vs SR: Lower is ₹1,10,000.

  • Expected Rent (ER): ₹1,10,000.

Step 2: Determine Gross Annual Value (GAV)

GAV depends on whether there was a Vacancy or Unrealized Rent.

Scenario A: No Vacancy

Rule: GAV = Higher of Expected Rent or Actual Rent Received/Receivable.

Scenario B: Vacancy (Property Empty for Part of Year)

If Actual Rent is lower than Expected Rent solely due to vacancy: Rule: GAV = Actual Rent Received.

(Section 23(1)(c))

Example:

  • ER: ₹1,20,000 (₹10k/pm)
  • Actual Rent: ₹80,000 (Let out for 8 months @ 10k, Vacant 4 months).
  • Since AR < ER due to vacancy → GAV = ₹80,000.

Scenario C: Unrealized Rent (Bad Rent)

Deduct Unrealized Rent (Rule 4 conditions met) from Actual Rent before comparing with ER.

Step 3: Compute Net Annual Value (NAV)

NAV = GAV - Municipal Taxes PAID

Conditions for Deduction:

  1. Taxes must be borne by the Owner. (If tenant pays, no deduction).
  2. Taxes must be actually Paid during the year. (Unpaid taxes not allowed).

Practical Problem: Comprehensive Calculation

Mr. X owns a house in Delhi:

  • Municipal Value: ₹2,00,000
  • Fair Rent: ₹2,40,000
  • Standard Rent: ₹2,20,000
  • Actual Rent: ₹20,000 p.m. (Let out for 10 months, vacant 2 months).
  • Municipal Taxes Paid: ₹10,000.

Solution:

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(Wait, check logic: If vacancy wasn't there, Rent would be 2.4L. 2.4L > 2.2L (ER). So purely due to vacancy, AR dropped. Hence GAV = AR).

Summary

  • Expected Rent (ER) = Higher(MV, FR) capped at SR.
  • GAV = Generally Higher(ER, Actual Rent).
  • Vacancy Exception: If vacancy causes AR < ER, then GAV = AR.
  • Municipal Taxes: Deductible only on payment basis and if paid by owner.
  • NAV: The base value for further deductions (30% Std Ded + Interest).

Quiz Time! 🎯

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