How The Annual Value Of Your House Is Determined
Sure, you invested in another property to earn more money. But, similar to your other incomes, the money you earn as rent would be subject to taxes, depending on the actual value of the property. Mind you, even if your property is not let out for a part during a year, you will have to pay taxes based on the notional rent receivable. But how does one arrive at the actual value of a property?
According to Section 23(1)(a) of the Income Tax (I-T) Act, the annual value of your property is the amount it is expected to earn you when let-out from year-to-year. Based on four factors, the annual value of a property is arrived at.
For the purpose of charging local taxes, municipal bodies evaluate your property. While assigning a value to your property, municipalities take into account a lot of factors. These include the location, the size, the amenities, etc. For instance, a 1BHK apartment in a housing society that is close to the city is expected to fetch more rent than a similar unit in the suburb.
Actual rent received or receivable
This is the amount you receive from your tenant on an annual basis. However, your actual income would be calculated on the basis of who pays the utility bills of the rented unit.
You might be getting less in rent for your property than others who have rented out similar properties in the same area. This means you are not earning what is known as “fair” amount as rent. The rent that similar properties with similar amenities in similar areas earn is the fair rental value.
Areas where the Rent Control Act is in place, a standard rate is fixed. Landlords of such property have to stick to this amount, irrespective of the market value of their properties. For instance, properties in Delhi's Connaught Place fetch owners meagre annual amount because buildings in the area fall under the ambit of the Rent Control Act.
Now, the annual value of your property will be the highest among these amounts—the rent received or receivable, the fair market value or the municipal valuation.
Sample this. Your municipality has valued your property at Rs 1.20 lakh annually while its fair market value is Rs 3 lakh. You, on the other hand, are earning Rs 2.80 lakh annually as the rent from the property. As the fair market value of your property is the highest amount of the three, the actual rental value of your property is Rs 3 lakh, and based on this amount you will have to pay taxes on your house property.