If you have rental income (actual or deemed) from house property, then it is important to understand the concept of Gross Annual Value or commonly known as GAV of the house property.
The GAV of self-occupied properties is nil as per the income tax laws. The income tax laws allow a taxpayer to declare up to two of his house properties as self-occupied. However, if any house property is put on rent or if the number of properties is more than two and is lying vacant, then one is required to calculate GAV.
How to calculate GAV of house property
GAV is to be calculated if the house is either deemed to be let out or is actually on rent.
The calculation of GAV is a three-step process which is as follows:
1. Firstly, one must find out what is the municipal value of the property. Municipal value is the amount calculated by the municipality where the house is situated. The metric used for this calculation is proprietary to the respective municipality. Also, calculate the fair rent of the house. It is the rental value of a house property with similar properties in the same locality. Once both the values are known, compare them and take the higher value of either municipal rent value or fair rent.
2. Secondly, check if the said house property is covered under the Rent Control Act. If it is, then standard rent has to be taken into consideration. After this, one must calculate the reasonable expected rent which will be lower of either step 1 value or standard rent. The value arrived at here is called the expected rent.
This expected rent has to be compared with the actual rent received. In a deemed to be let out house, there is no scope of any actual rent since the house is vacant.
3. The last step is the calculation of GAV, which will be higher of the reasonable expected rent or actual rent received. In case of deemed to let out property, the GAV is the expected rent.
Let us take an example of Mr. X who has put his house property on rent and has to calculate its GAV and pay the income tax. For calculating GAV, Mr. X has to first gather some data.
Firstly, he has to note down the rental value of his house according to the local municipality, which is the municipal rent. Then he has to find out what rental value other people who have put up a similar house on rent are getting. This is the fair value. And lastly, he should check if his property is covered under the Rent Control Act and value assigned. This is called the standard rent. In this case, he found out that his house’s area was covered by the Act. Now using these three values, Mr. X has to use the formula (as mentioned in the steps above) to calculate the reasonable expected rent of his house. To arrive at the GAV, Mr. X has to take the higher of reasonable expected rent and the actual rent.
Important things to know about GAV calculation:
Normally, if the house is either deemed to be let out or is actually let out, GAV needs to be calculated.
GAV calculation will have the benefit of unrealised rent: It may so happen that the landlord of the property might not receive the full rent as promised by his tenant. There could be multiple questions as to why this happened, and it is a debatable topic too.