How to calculate gross annual value of house property for ITR filing Read below to find out how to calculate GAV of a house if it is applicable to you
If you have rental income (actual or deemed) from house property, then it is important to understand the concept of Gross Annual Value or commonly known as GAV of the house property.The GAV of self-occupied properties is nil as per the income tax laws. The income tax laws allow a taxpayer to declare up to two of his house properties as self-occupied. However, if any house property is put on rent or if the number of properties is more than two and is lying vacant, then one is required to calculate GAV.
How to calculate GAV of house property
GAV is to be calculated if the house is either deemed to be let out or is actually on rent. The calculation of GAV is a three-step process which is as follows:
1. Firstly, one must find out what is the municipal value of the property. Municipal value is the amount calculated by the municipality where the house is situated. The metric used for this calculation is proprietary to the respective municipality. Also, calculate the fair rent of the house. It is the rental value of a house property with similar properties in the same locality. Once both the values are known, compare them and take the higher value of either municipal rent value or fair rent.
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2. Secondly, check if the said house property is covered under the Rent Control Act. If it is, then standard rent has to be taken into consideration. After this, one must calculate the reasonable expected rent which will be lower of either step 1 value or standard rent. The value arrived at here is called the expected rent.
This expected rent has to be compared with the actual rent received. In a deemed to be let out house, there is no scope of any actual rent since the house is vacant.
3. The last step is the calculation of GAV, which will be higher of the reasonable expected rent or actual rent received. In case of deemed to let out property, the GAV is the expected rent.
Let us take an example of Mr. X who has put his house property on rent and has to calculate its GAV and pay the income tax. For calculating GAV, Mr. X has to first gather some data.
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Firstly, he has to note down the rental value of his house according to the local municipality, which is the municipal rent. Then he has to find out what rental value other people who have put up a similar house on rent are getting. This is the fair value. And lastly, he should check if his property is covered under the Rent Control Act and value assigned. This is called the standard rent. In this case, he found out that his house's area was covered by the Act. Now using these three values, Mr. X has to use the formula (as mentioned in the steps above) to calculate the reasonable expected rent of his house. To arrive at the GAV, Mr. X has to take the higher of reasonable expected rent and the actual rent.
Here's a table explaining the example above.
Important things to know about GAV calculation:
Normally, if the house is either deemed to be let out or is actually let out, GAV needs to be calculated.
GAV calculation will have the benefit of unrealised rent: It may so happen that the landlord of the property might not receive the full rent as promised by his tenant. There could be multiple questions as to why this happened, and it is a debatable topic too.
For instance, it could happen that the landlord got manipulated by the tenant who promised to pay the rent as soon as he receives his salary but later ran away. It could also happen that the landlord failed to create a rental agreement with the tenant, and now the tenant is denying any rent payment and is illegally occupying the house. There could be other reasons too.
Pallav Pradyumn Narang, Partner, CNK, a Delhi- based CA firm, said "The Income Tax Act allows unrealised rent to be deducted while calculating the Actual Rent received/ receivable. Unrealised rent is the rent of the property which the owner of the property could not recover from the tenant, i.e., rent not paid by the tenant.” For example: you have given a flat on rent for Rs 15,000 a month. This tenant defaults on four months rent payment out of his total stay of 12 months. These four months’ rent, which is Rs 60,000 (Rs 15,000*4), will be allowed as a deduction from his actual rent, subject to certain conditions mentioned under the rules governing treatment of unrealised rent. This means that your actual rent received and GAV will be Rs 1,20,000 subject to the expected rent.
Having said that the landlord might be asked by the Assessing Officer (AO) about such unrealised rent. So, at that time he will have to prove that he took the necessary legal steps and exhausted all reasonable options to recover the rent. According to the Income Tax Act, the tenancy should have been bonafide, i.e., genuine.
For proving a tenancy to be bonafide, a rental agreement is a must. If the agreement is for more than 11 months, then it must also be registered. The defaulting tenant has to either vacate the property upon the landlord's request or the landlord must take some steps which forces the defaulting tenant to leave the property. The landlord may also prove genuine reason by showing that he has started legal proceedings against the defaulting tenant. There might be other steps which the landlord took and it is up to the satisfaction of the AO if those steps would be deemed genuine or not.
Completion certificate (CC): "GAV for the properties held as inventory i.e., stock-in-trade shall be nil provided the property or any part of it is not let out during the whole or any part of the previous year. However, if two years have passed from the end of the financial year in which the certificate of completion (CC) was issued by the competent authority, then GAV will have to be calculated," said Abhishek Y. Bhavsar, an Ahmedabad-based chartered accountant.
For example: say Mr. A is a property builder and started building three houses in April 2017. The construction of all three was over by December 2018 and the completion certificate (CC) was also given by the authorities at that time. In 2019, entire units of houses 1 and 2 were sold. But due to various reasons, Mr. A could find a buyer for house 3 and the property has been vacant. By March 2021 too, house 3 could not be sold. Two financial years have passed since Mr. A got the CC, hence the deemed rental provisions will apply on the third house (post-March 2021 onwards) and, accordingly GAV must be calculated for the property and income tax will be paid accordingly.
So, in this scenario wherein all 3 properties were held as stock-in-trade, GAV for the third property shall be computed only if two years from the end of the financial year in which the CC was given has passed. "On the remaining 2 houses if GAV is applicable shall be computed as per Sec 23(1)," said Bhavsar.
Pre-construction phase of the house: If at any time during the construction phase, any part of the building was let out, then GAV needs to be calculated. For example: suppose you are a promoter of real estate company which has multiple projects on-going. Now let us say a housing project is near about complete and the landlord has decided to put one of the completed units in the said project on rent. This is when the construction of the entire respective project is not yet complete. Herein GAV needs to be calculated for that particular rented out property and accordingly income tax has to be paid.
When are you not required to calculate GAV
The below-mentioned situations do not require the calculation of GAV: An individual owns maximum of two houses during the relevant financial year.The construction of the house property is not yet completed. The houses are being used as inventory, i.e., stock in trade for business purposes.
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This story originally appeared on: India Times - Author:Faqs of Insurances
