Section 21: determination of annual value

Introduction

Annual value is a statutory computation, not always the rent deposited in the bank. Expected rent, actual rent, vacancy, municipal tax and self-occupation each have a separate role in the sequence.

Key takeaways

The basic test

The annual value is the higher of (a) the sum for which the property might reasonably be expected to let from year to year, or (b) the actual rent received or receivable, where the property or any part is let (section 21(1)).

Vacancy adjustment

If a let property was vacant for the whole or part of the tax year, and because of that vacancy the actual rent received/receivable is less than the reasonably-expected rent, the annual value is taken as the actual (lower) amount received or receivable (section 21(2)).

Deduction for local taxes and unrealised rent

The annual value is reduced by local-authority taxes (including service taxes) actually paid by the owner during the tax year, regardless of when they became payable (section 21(3)).

Rent that cannot be realised by the owner is excluded from the computation of actual rent received/receivable, subject to prescribed rules (section 21(4)).

Unsold stock-in-trade property

Where a property is held as stock-in-trade and is not let out (wholly or partly) at any time in the tax year, its annual value is nil for up to two years from the end of the financial year in which the completion certificate for construction was obtained (section 21(5)).

Self-occupied property - nil annual value

The annual value of a house (or part of it) is taken as nil if the owner occupies it for their own residence, or cannot actually occupy it for any reason (section 21(6)).

This nil-value treatment applies only to a maximum of two houses specified by the assessee, and does not apply if the house is actually let at any time during the tax year or if the owner derives any other benefit from it (section 21(7)).

Step-by-step flow for applying Section 21

1. 1

   Is the house occupied by the owner for own residence (or not occupiable for any reason), and not let at any time and with no other benefit derived?

   Section 21(6) and (7): nil annual value, for up to two houses specified by the owner.

   • Yes: Annual value is nil.
   • No: Go to the next step.
2. 2

   Is it stock-in-trade that was not let at any time in the tax year?

   • Yes, within two years from the end of the financial year of the completion certificate: Annual value is nil (Section 21(5)).
   • No: Go to the next step.
3. 3

   Take the higher of expected rent and actual rent received or receivable

   Exclude rent that cannot be realised, subject to the rules (Section 21(4)).

4. 4

   Was the let property vacant for part or all of the year, causing actual rent to fall below expected rent?

   • Yes: Annual value is the actual rent received or receivable (Section 21(2)).
   • No: Keep the figure from the previous step.
5. 5

   Reduce by local authority taxes actually paid by the owner during the tax year (Section 21(3))

Practical checklist

Glossary

Annual value

The value determined by the statutory expected-rent, actual-rent and adjustment rules in Section 21.

Unrealised rent

Rent that the owner cannot realise, excluded from actual rent only subject to the applicable rules.

Frequently asked questions