# Determination of Annual Value [Section 23]

## Formula

```

Gross Annual Value (GAV) xxx

(-) Municipal Taxes paid (xxx)

by owner during the PY

────────────────────────────────────

Net Annual Value (NAV) xxx

```

Note on Municipal Taxes: Only deductible if actually paid by the owner during the PY — accrual basis is not allowed; tenant-paid taxes are not deductible.

## How to Calculate GAV — Step-by-Step

### Step 1 — Compute Expected Rent (ER)

1. Reasonable Expected Rent (RER) = Higher of:

Municipal Value (MV)
Fair Rent (FR)

2. Expected Rent (ER) = Lower of:

RER (from step 1)
Standard Rent (SR) — standard rent acts as a ceiling under Rent Control Act

### Step 2 — Compare Expected Rent with Actual Rent

```

GAV = Higher of (Expected Rent, Actual Rent Received/Receivable)

```

## Quick Logic Tree

```

Municipal Value vs Fair Rent

(whichever is HIGHER)

Compare with Standard Rent

(whichever is LOWER)

Expected Rent

Compare with Actual Rent

(whichever is HIGHER)

GAV

```

## Key Definitions

Municipal Value (MV): Value fixed by local municipal authority for tax purposes.
Fair Rent (FR): Rent that a similar property in the same locality would fetch.
Standard Rent (SR): Maximum rent the owner can legally collect under Rent Control Act.
Actual Rent: Rent actually received or receivable for the period let out.

Worked example

### Example 1

Example: Mr. R owns a let-out house.

Municipal Value: ₹2,40,000
Fair Rent: ₹2,60,000
Standard Rent: ₹2,50,000
Actual Rent: ₹2,70,000
Municipal Taxes paid by owner: ₹24,000

Solution:

1. Higher of MV & FR = ₹2,60,000

2. Lower of above & SR = ₹2,50,000 → Expected Rent

3. Higher of ER (2,50,000) & Actual Rent (2,70,000) = ₹2,70,000 → GAV

4. Less: Municipal Taxes paid by owner ₹24,000

5. NAV = ₹2,46,000

⚠️ Common exam mistakes

Skipping the standard rent ceiling — SR caps the expected rent.
Deducting municipal taxes paid by the tenant — only owner-paid taxes qualify.
Deducting accrued but unpaid taxes — must be paid during the PY.
Taking Lower of MV & FR — it is Higher of MV & FR.
Comparing Actual Rent with Standard Rent directly — Actual Rent is compared with Expected Rent, not SR.

Bare-Act text Section 23(1) · Income-tax Act, 1961 · click to expand

Section 23(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.

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Determination of Annual Value — Section 23(1)

Worked example

⚠️ Common exam mistakes