Question 3 OR (a)
Gross annual value of a let-out house property
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 3 OR (a) · 6 marksTaking a suitable example, briefly explain how the Gross Annual Value of a let out property is computed. (6)
Paper note: Set under the Income-tax Act, 1961 for assessment year 2025-26 (previous year 2024-25); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 2 years and every date in the question moves forward by the same 2 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- suitable exampleExamples are asked for: one short example with each point.
- brieflyShort headed points, no long paragraphs.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Expected rent 1½ marks 2 min
- 2 Actual rent, unrealised rent and vacancy 2 marks 3 min
- 3 Example 2 marks 3 min
- 4 From gross to net annual value ½ mark 2 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks. End with step 4 in a line or two.
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Income from a let-out house property is taxed on its annual value, not simply on the rent the owner collects. Under the Income-tax Act, 1961 (section 23(1)) and in DU usage, the figure before deducting municipal taxes is called the gross annual value (GAV); section 21(1) of the Income-tax Act, 2025 defines it in the same way, as the higher of the property's reasonable expected rent and the actual rent. It is worked out in three steps.
Step 1: Expected rent (section 21(1)(a))
The sum for which the property might reasonably be let from year to year. In practice:
- take the higher of the municipal value (the value fixed by the local authority for its taxes) and the fair rent (the rent of similar property in the same locality);
- but where the property is under a rent control law, not more than the standard rent fixed under that law.
So expected rent = higher of municipal value and fair rent, limited to the standard rent.
Step 2: Actual rent received or receivable (section 21(1)(b), (2), (4))
The rent for the period the property was let in the tax year, less rent that cannot be realised (unrealised rent), where the conditions of the rules are met (the tenancy is genuine, the tenant has left or steps have been taken to evict him, the owner has taken reasonable steps to recover, and the tenant does not occupy another property of the owner) (section 21(4)).
- GAV is the higher of the expected rent and the actual rent (section 21(1)).
- Vacancy: if the property was let but vacant for part of the year, and because of the vacancy the actual rent is less than the expected rent, the actual rent is the GAV (section 21(2)). To test whether the fall is due to vacancy, the rent for the full year (less unrealised rent) is compared with the expected rent.
A flat has a municipal value of ₹3,00,000, a fair rent of ₹3,60,000 and a standard rent of ₹3,30,000. It is let at ₹30,000 a month; ₹20,000 of rent could not be realised (the conditions are met).
| Particulars | Case A: let all year | Case B: vacant for 2 months |
|---|---|---|
| Expected rent: higher of ₹3,00,000 and ₹3,60,000, limited to standard rent ₹3,30,000 | 3,30,000 | 3,30,000 |
| Rent for the period let (₹30,000 × 12; ₹30,000 × 10) | 3,60,000 | 3,00,000 |
| Less: Unrealised rent | 20,000 | 20,000 |
| Actual rent received or receivable | 3,40,000 | 2,80,000 |
| Gross annual value | 3,40,000 | 2,80,000 |
In case A the actual rent (₹3,40,000) is higher than the expected rent, so it is the GAV. In case B the actual rent (₹2,80,000) is below the expected rent; for a full year it would have been ₹3,40,000, above the expected rent, so the shortfall is due to the vacancy and the actual rent of ₹2,80,000 is the GAV.
From gross annual value to income
Municipal taxes paid by the owner during the year are deducted to give the net annual value (section 21(3)); the standard deduction of 30% of the net annual value and the interest on borrowed capital then give the income from house property (section 22(1)).
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Expected rent | 1.5 |
| 2 | Actual rent, unrealised rent and vacancy | 2 |
| 3 | Example | 2 |
| 4 | From gross to net annual value | 0.5 |
| Total | 6 |
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