Section 23 of ITA, 1961 : Section 23: Annual Value How Determined

Explanation using Example

Imagine Mr. Sharma owns a property in Mumbai which he has rented out. The reasonable expected rent for the property is ₹30,000 per month. However, he has managed to rent it out for ₹35,000 per month. According to Section 23(1)(b) of The Income-tax Act, 1961, the annual value of his property for tax purposes would be the actual rent received, i.e., ₹35,000 per month, not the expected ₹30,000.

Now, consider that Mr. Sharma's property was vacant for 2 months, and he could only receive rent for 10 months in the year, totaling ₹3,50,000. As per Section 23(1)(c), the annual value would be based on the actual rent received, which is less due to the vacancy.

Furthermore, if Mr. Sharma paid local property taxes of ₹10,000 during the year, he can deduct this amount from the annual value as per the proviso to Section 23(1).

If Mr. Sharma also owns another house in Pune where he lives due to his job, as per Section 23(2), the annual value of the Pune house for tax purposes would be considered nil since it is occupied by the owner for his own residence.

However, if Mr. Sharma decides to rent out a portion of his Pune residence for a few months, then under Section 23(3), the annual value of that portion would no longer be considered nil for the period it was rented out.

Lastly, if Mr. Sharma owns three houses and lives in one, he can opt for two of them (including the one he lives in) to have a nil annual value under Section 23(4). The third house's annual value would be calculated as if it were rented out.