The annual value of a house property is the amount of rent which it is reasonably expected to earn
Homi Mistry
Owning a house is a dream come true for most of us. But, with the house come complexities of its taxation. The scheme of taxation of a house property as per the Income tax law is laid out so as to levy tax on its ‘annual value’. The law provides that the annual value of a house property is the amount of rent which the house property is reasonably expected to earn during a given financial year.
Implications of renting out
For example: If Mr A owns a house property that has a potential to earn a rental income of Rs 10,000 per month, the gross annual value of the property will be Rs 120,000. Certain deductions are then allowed from the gross annual value in respect of municipal taxes, interest on housing loan and an ad hoc deduction of 30 percent towards maintenance depending on whether the house is let out or self-occupied, to arrive at the taxable value.
There are two exceptions to this provision of determining the annual value based on potential rent – the first is, in the case of a property which is let out but remained vacant for a part of the year, the actual rent here received/receivable will be considered as the annual value. Continuing the same example, if Mr A’s property was let out but the tenant moved out and it remained vacant for three months during the year before he found a new tenant, the rent received/ receivable for nine months, i.e., Rs 90,000 will be the gross annual value of the property and not Rs 120,000.
The other exception is allowed in case the house property is in the occupation of the owner for his own residence or when the owner cannot occupy the house property owing to his employment, business or profession carried on at any other place where he stays in a rented property, i.e. a self-occupied house property. In such a case, the annual value of such property will be considered as “Nil”. In our example, had Mr A occupied the house throughout the year then its annual value would have been NIL and not Rs 120,000.
To the second exception, there is a condition which says that this exception will not apply if the house or any part of the house is let out for any part of the financial year. This brings in an anomaly. In our example above, if Mr A had used the property for his own residence for 11 months i.e. April to February and then let it out for rent of Rs 10,000 per month starting March, it would be a property which has been ‘let out for any part of the financial year’ and hence would not qualify to be a self-occupied house property. Consequently, the second exception referred to above, would not apply to it.
The property was also not a ‘let out property’ which remained vacant and hence, the first exception aforesaid would also not apply. Thus, technically, the annual value of the property will be Rs 120,000, i.e. the potential rental value. Mr A will receive rent for only 1 month, i.e. Rs 10,000, but would have to pay tax on the full rental value for 12 months i.e. Rs 120,000(subject to the allowable deductions). Thus, taxpayers end up paying tax on a notional rent which they have not actually received and will never receive.
Most taxpayers in such cases, while filing their tax returns, split the tax year into 2 parts – for the first part of the year the house property is treated as a self-occupied house property and for the latter part as a let out property. Accordingly, the annual value for the first part is NIL and rental income for only one month is considered to determine the annual value for the latter part of the year. There is no guidance from the tax authorities on whether such splitting up of the tax year is permitted in determining the taxable value of a house property. The Income Tax Department portal, in the tutorials on Income from house property, states that such a property will be treated as let-out throughout the year and income will be computed accordingly. However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period. However, how far the content of the portal will hold good in a court of law is not clear.
While the first approach seems to be unfair since it taxes notional income which the taxpayer will never receive, the latter approach does not squarely fit into the provisions of the tax laws and can turn out to be litigious. Taxpayers should take a considered view while filing their tax returns in such cases.
(The writer is a Partner with Deloitte India. Mousami Nagarsenkar, Bhavin Rajput and Richa Udaipuri also contributed to this article, and are with Deloitte Haskins & Sells LLP)
