Annual Value (AV) is the foundation of computing Income from House Property. Before you calculate any deductions, you need to determine AV — it's the deemed annual earning capacity of your property, whether you actually receive rent or not. Get this wrong and the entire computation goes off track.
Three scenarios, three rules. For a let-out property, AV = higher of Expected Rent (ER) or Actual Rent received/receivable. In practice, Expected Rent = higher of Municipal Value and Fair Rent, capped at Standard Rent (if Rent Control Act applies). If you collect more rent than ER, Actual Rent wins. Now, vacancy exception: if the property was vacant (wholly or partly) and because of that vacancy the Actual Rent fell below ER, AV = Actual Rent. The vacancy must be the direct cause — if you're charging below-market rent for personal reasons, this clause won't save you. For a Self-Occupied Property (SOP), AV = Nil. This applies when you live there yourself, or when your job or business forces you to work in another city and you stay in a rented place there. From AY 2020-21 onwards, you can treat up to two houses as SOP. If you own three or more and none is let out, the extra house(s) are treated as deemed let-out — AV is computed as if they were rented.
Municipal taxes are deducted from Gross AV to arrive at Net Annual Value (NAV), but only when actually paid by the owner in that year. Accrual doesn't count. If the tenant pays them, no deduction for you. One more provision worth noting for exams: if a builder holds unsold flats as stock-in-trade and they're unlet, AV = Nil for 2 years from the date of the completion certificate — after that, normal AV rules apply even if flats remain unsold. This comes up as a 2-mark theory snippet surprisingly often. This section is almost always the entry point for any House Property problem in the exam — nail it here and the rest flows.
Example 1 — Let-out property with vacancy
Mr. Sharma owns a house in Pune (PY 2025-26). Municipal Value: ₹1,80,000 p.a. | Fair Rent: ₹2,10,000 p.a. | Standard Rent: ₹1,92,000 p.a. | Agreed rent: ₹18,000/month. Property was vacant for 3 months (tenant left). Municipal taxes paid by owner: ₹18,000.
| Step | Calculation | Amount |
|---|---|---|
| Expected Rent (ER) | Higher of MV ₹1,80,000 & FR ₹2,10,000 = ₹2,10,000; cap at SR | ₹1,92,000 |
| Actual Rent received | 9 months × ₹18,000 | ₹1,62,000 |
| Vacancy check | AR < ER — is it due to vacancy? Yes → GAV = AR | ₹1,62,000 |
| Less: Municipal taxes paid | Owner paid in PY | (₹18,000) |
| Net Annual Value (NAV) | | ₹1,44,000 |
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Example 2 — Three self-occupied houses: which two to pick?
Ms. Iyer owns three houses (all self-occupied, none let out) in PY 2025-26:
- House A (Chennai): ER = ₹1,20,000 | Municipal taxes = ₹10,000
- House B (Bengaluru): ER = ₹1,50,000 | Municipal taxes = ₹12,000
- House C (Hyderabad): ER = ₹90,000 | Municipal taxes = ₹8,000
She may choose any two as SOP → AV = Nil for those two.
Optimal choice: Pick Houses A and B (highest ER) as SOP.
- House A AV = Nil
- House B AV = Nil
- House C (deemed let-out): GAV = ER = ₹90,000 | Less taxes = ₹8,000 → NAV = ₹82,000
Wrong choice (picking A & C as SOP): House B becomes deemed let-out → NAV = ₹1,50,000 − ₹12,000 = ₹1,38,000 — nearly ₹56,000 more in taxable income!
Always choose the two houses with highest ER as SOP.
📖 Bare Act text — Section 23, Income Tax Act 1961
(click to expand)
(1) For the purposes of section 22, the annual value of any property shall be deemed to be—
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable: Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
(2) Where the property consists of a house or part of a house which—
(a) is in the occupation of the owner for the purposes of his own residence; or
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.
(3) The provisions of sub-section (2) shall not apply if—
(a) the house or part of the house is actually let during the whole or any part of the previous year; or
(b) any other benefit therefrom is derived by the owner.
(4) Where the property referred to in sub-section (2) consists of more than two houses—
(a) the provisions of that sub-section shall apply only in respect of two of such houses, which the assessee may, at his option, specify in this behalf;
(b) the annual value of the house or houses, other than the house or houses in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.
(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.