Determination of annual value
21(1)
For the purposes of section 20, the annual value of any property shall be deemed to be the higher of the following:—
- (a) the sum for which it might reasonably be expected to let from year to year; or
- (b) the actual rent received or receivable by the owner, if the property or any part of it is let.
21(2)
In case the property or any part of it is let in normal course and was vacant for the whole or any part of the tax year, the annual value of such property shall be computed as per sub-section (1)(b).
21(3)
The annual value of the property shall be reduced by the taxes (including service taxes) levied by a local authority in respect of such property, actually paid during the tax year by the owner, irrespective of when such taxes became payable.
21(4)
The rent which cannot be realised by the owner shall not be included in computing the actual rent received or receivable, subject to the rules as may be made in this behalf.
21(5)
In respect of a property or its part held as stock-in-trade and not let wholly or partly at any time during the tax year, the annual value shall be nil for two years from the end of the financial year in which completion certificate is obtained from the competent authority.
21(6)
The annual value of the property consisting of a house or any part thereof shall be taken as nil, if the owner occupies it for his own residence or cannot actually occupy it due to any reason.
21(7)
The provisions of sub-section (6)––
- (a) shall apply only in respect of two of such houses as specified by the assessee in this behalf;
- (b) shall not apply, if the house or any part thereof is actually let during any time of the tax year, or if the owner derives any other benefit from it.
Section Summary:
Section 21 of the new income tax law deals with the determination of the annual value of a property for tax purposes. The annual value is a key factor in calculating income from house property, which is taxable under the Income Tax Act. This section provides rules for determining the annual value based on factors like rent, vacancy, property taxes, and specific conditions for self-occupied or unsold properties.
Key Changes:
- Clarification on Vacant Properties: Sub-section (2) clarifies that if a property is let out but remains vacant for part or all of the tax year, the annual value will still be computed based on the actual rent received or receivable.
- Exclusion of Unrealized Rent: Sub-section (4) explicitly excludes rent that cannot be realized by the owner from the computation of annual value, subject to prescribed rules.
- Nil Annual Value for Unsold Stock: Sub-section (5) introduces a new provision where the annual value of a property held as stock-in-trade (unsold property) will be nil for two years from the end of the financial year in which the completion certificate is obtained.
- Self-Occupied Property: Sub-section (6) and (7) specify that the annual value of a self-occupied property or a property that cannot be occupied by the owner will be nil, but this benefit is limited to two houses and does not apply if the property is let out or generates any other benefit.
Practical Implications:
- Property Owners:
- Owners of let-out properties must compute annual value based on the higher of the expected rent or actual rent received, even if the property is vacant.
- Owners of unsold properties (stock-in-trade) can benefit from a nil annual value for two years after obtaining the completion certificate.
- Self-occupied properties will have a nil annual value, but this is limited to two houses.
- Real Estate Developers: Developers holding unsold properties can reduce their tax liability by claiming a nil annual value for two years.
- Compliance: Taxpayers must ensure proper documentation of rent received, property taxes paid, and any unrealized rent to comply with the rules.
Critical Concepts:
- Annual Value: The value of a property for tax purposes, calculated as the higher of the expected rent or actual rent received.
- Unrealized Rent: Rent that the owner could not collect from the tenant, which is excluded from the annual value computation.
- Stock-in-Trade: Property held by developers for sale, not for rental purposes.
- Completion Certificate: A document issued by the competent authority certifying that the construction of the property is complete.
Compliance Steps:
- Document Rent Received: Maintain records of rent received or receivable, even if the property is vacant.
- Track Property Taxes: Keep proof of property taxes paid to claim deductions under sub-section (3).
- Exclude Unrealized Rent: Follow prescribed rules to exclude unrealized rent from annual value calculations.
- Specify Self-Occupied Properties: If claiming nil annual value for self-occupied properties, ensure no more than two houses are specified and none are let out or generate other benefits.
- Monitor Completion Dates: For unsold properties, track the date of the completion certificate to claim the two-year nil annual value benefit.
Examples:
Let-Out Property with Vacancy:
- Mr. A owns a property that he lets out for ₹20,000 per month. However, the property remains vacant for 3 months during the year. The annual value will still be computed based on the actual rent received (₹20,000 × 9 months = ₹1,80,000), even though the property was vacant.
Unsold Property:
- A real estate developer completes construction of a residential project in March 2024 and obtains the completion certificate. The unsold units will have a nil annual value for two years (until March 2026), reducing the developer’s tax liability.
Self-Occupied Property:
- Ms. B owns two houses, both of which she occupies for her own residence. She can claim a nil annual value for both properties. However, if she owns a third house and lets it out, the annual value of the third house will be computed based on rent received.
This section simplifies the computation of annual value while introducing new benefits for unsold properties and self-occupied homes, making compliance more straightforward for taxpayers.