According to the Income Tax Act, a property’s annual worth is the value remaining after the owner has paid any applicable municipal taxes. However, a regular approach can be used to determine the GAV for convenience's sake.
Gross annual value (GAV) is a term used to describe the potential revenue from immovable property. GAV will still apply whether the property is rented out for business or residential uses.
Regarding income tax, “immovable property” refers to structures like homes, businesses, factories, godowns, and land on which bonded warehouses have been built. This article briefly describes how to determine a property’s gross annual value.
What is the Purpose of Calculating GAV in Income Tax?
Before doing anything else, we should all stop and ask ourselves, “Why is GAV calculation important?” The GAV must be determined following Section 22 of the Income Tax Act of 1961 if the taxpayer satisfies three requirements.
- A property that generates money for the taxpayer is considered for GAV calculation.
- This property can be a piece of land, an apartment, a building, etc.
- The owner shouldn’t use the property for business purposes.
Calculating gross yearly value is crucial because, if the requirements above are satisfied, the income from the real estate must be taxed.
Unlock Financial Success With Our Unparalleled Accounting Services – Your Gateway to Streamlined Bookkeeping and Prosperity.
Terminologies You Must Know Before Determining the GAV
Municipal value: A fair property value subject to municipal taxes is determined by the individual municipal authorities. It’s known as municipal value.
Standard rent: By the Rent Control Act, there is a set rent amount. The landlord is not allowed to charge a rent that is more than what is allowed by this Act.
Fair rent: If a house in the same neighbourhood has comparable characteristics or amenities, a fair rent needs to be paid.
Net annual value: After municipal taxes are subtracted from the gross annual value, the remaining sum is known as the net annual value, or NAV.
Deductions: In accordance with Section 24 of the Income Tax Act of 1961, the taxpayer may deduct the following amounts in order to determine their actual taxable income.
Standard Deduction: Regardless of the actual expense expended, the assessee may deduct 30% of the NAV for rent collection, repairs, etc. In the event that the GAV is zero, this deduction will not be allowed.
Interest on a mortgage: Section 24 of the Income Tax Act allows for deducting mortgage interest. This section has a ₹2 lakh cap.
What are the Variables that Affect the GAV of a Property?
The following variables affect the property’s gross annual value:
- Actual rent due from tenant
- Municipal evaluation of the asset above
- Realistic rental value
- According to the Rent Control Act, standard rent payable also influences the gross annual value
If the property is rented out throughout the fiscal year, the difference in gross yearly value between predicted rent and actual rent is larger. The actual rent amount will be regarded as GAV if the property remains empty for all or part of the fiscal year. Standard rent will be considered as GAV if the property is used for residential purposes for parts of the year but is rented out for the remainder.
Step-by-Step Guide on How to Calculate the Revenue Generated by a Property
We have produced a sequenced list to calculate the income from housing property. Read on to learn more.
- Determine your property’s GAV, or gross annual value: The net GAV of a self-occupied home is zero. On the other hand, if you rent out your living space, the gross annual value equals the rent that is received.
Consider a scenario where a property is rented for the entire fiscal year. In that case we will calculate the gross annual value as follows:
Let’s assume that the fair rent is ₹40,000 while the municipal value, standard rent and actual rent are ₹30,000, ₹20,000 and ₹85,000 respectively.
Then the GAV for an entire year must be the cumulative result of the fair rent and actual rent as their values are higher compared to their counterparts.
Therefore, GAV = ₹(40,000 x 12) + ₹(85,000 x 12) = ₹15,00,000
- Property tax is subtracted from GAV: According to the Income Tax Act, you must pay property taxes, which are calculated as a percentage of GAV.
- Calculate Net Annual Value: The balance that remains after deducting the property tax from the gross annual value is known as the NAV (GAV).
- Consider the typical NAV deduction: A 30% deduction is made from the NAV in accordance with Section 24 of the Income Tax Act. Additionally, this clause specifies that fees for performing repairs, painting, or other services cannot exceed 30%.
- Low house loan interest: Section 24 of the Income Tax Act also permits a deduction for the amount of interest paid annually when a home loan has been chosen.
After all these deductions, the balance represents your actual revenue from the house property. In addition, you must pay taxes on your entire income at the applicable slab rate.
Please be aware that if you rent out your home, you must ensure that the rental price is greater than or equivalent to the amount the municipality deems acceptable.
What are the Things to Remember While Calculating the GAV
As previously indicated, the Annual Value is assumed to be zero for a single self-occupied home. There may still be a claim for a deduction under Section 24 for interest paid. The resulting loss cannot be carried forward but may be offset against revenue earned under other headings.
Any property that is owned and used exclusively for self-occupation can be chosen as self-occupied; all other properties are presumed to be rented out.
As long as it is the only house owned and it isn’t rented out, the annual value of one residence far from your place of employment can be treated as NIL.
Suppose a rented property has a component that is self-occupied or is self-occupied for some time during a financial year. In that case, the value proportionate to such portion or period, as applicable, is to be subtracted from the annual value.
How to Become Eligible for Tax Deductions on Revenue from Owned Property?
We recognise that the owner may find tax deductions on rental revenue extremely bothersome. You need not worry, though, as there are ways to reduce taxes that have been imposed. Here is a list of a few of these:
Own a property with someone else: The tax amount will be greatly reduced if you choose a house loan jointly with another person, such as your spouse, because you may both take advantage of the tax exemption.
Renting out vacant properties: Take notice that even if you own vacant homes or other properties, you must still pay taxes based on the fair rental value. We advise you to rent out such blank areas or premises since doing so will assist in reducing losses and increasing revenue.
Different ownership: If a property is already registered in your name, registering an other owner—such as your spouse or a family member—for an additional property is a better option. This will assist prevent high taxes.
Conclusion
Making wise investment selections requires thorough knowledge of property income and tax deductions. By putting the tactics above while calculating the gross annual value, you can maximise benefits while minimising taxation. To read similar tax-related articles, follow the official website of Vakilsearch.
Read more
