What is Annual Value of House Property :
For calculating Income from house property, first step would be to derive Annual Value. It is always a difficult task to calculate annual value as there are total four factors which need to be considered for calculating annual value. I have explained in best possible simple way that What is Annual Value of House Property.
As per Section 23(1)(a) of the Income Tax Act, the annual value of any property shall be the sum for which the property might reasonably be expected to be let from year to year. It is like notional rent which you can earn if you have let out the property. As mentioned there are four factors to take into account for deciding annual value.
A. Actual Rent received or Receivable:
For any rent out property, Actual rent received or receivable is important for annual value. Actual rent paid or payable is always subject to agreement entered by owner and tenant or matter of negotiable between them whereby if tenant agree to pay for municipal taxes on behalf of owner then these taxes should be added in actual rent receive/receivable to derive annual value. There could be vice versa case, where owner has agreed to pay some obligation of tenant, in that case rent will be reduced by that amount.
B. Municipal value:
Normally municipal authorities used to charged house tax on property based on various factors like type of residential, floor, facilities available in the premises etc.This value of property considered by municipal authority is relevant for deriving annual value of property.
C. Fair Rent of the property:
This is nothing but notional rent a property can get if it has been let out for a year. e.g. In case of apartment, one can assume approx rent of other similar flat which is already let out with some addition or reduction in rent with reference to facilities of both flats.
D. Standard Rent:
Where a rent is fixed under prevailing Rent Control Act, it would be considered as standard rent and owner cannot expect to get higher rent than fixed as per rent control act. Standard Rent is important factor in deciding annual value.
Above given terminologies provide good understanding regarding what is Annual Value of House Property.