Compute actual rent and loss on account of vacancy - Taxation | Income Tax for assessment (Inter Level) PDF Download
P1 : Compute actual rent and loss on account of vacancy.
1. A house let out for Rs. 10,000 p.m. for 9 month. 1 month vacant. 2 month SOP-residence. 1 month unrealised rent.
2. A house let out for Rs. 10,000 p.m. for 1 month. 11 month SOP-residence.
3. Let out for 6 months for Rs. 20,000 p.m and for 2 months for Rs. 30,000 p.m. 4 months vacant. Unrealised rent 6,000.
4. Actual rent Rs. 8,000 p.m. X gets 8 months advance rent of Rs. 64,000.
Ans: (1) Actual rent is the rent received or receivable. Therefore actual rent shall be 90,000. [10,000 x 10 –10,000 x 1 = 90,000] Loss on account of vacancy shall be Rs. 10,000.
(2) Actual rent is the rent received or receivable. Therefore actual rent shall be 10,000. Loss on account of vacancy shall be nil
(3) Actual rent Rs. 2,94,000. Loss on account of vacancy 1,20,000.
(4) Actual rent shall be Rs. 96,000.
P2: Actual rent Rs. 10,000 p.m. Vacant for 2 months. Compute GAV if ER is (a) 50,000 (b) 1,50,000.
Solution
| Case 1 | Case 2 | |
| Expected rent | 50,000 | 1,50,000 |
| Actual rent | 1,20,000 | 1,20,000 |
| Loss on account of vacancy | (20,000) | (20,000) |
| GAV | 1,00,000 | 1,00,000 |
P3 : Compute actual rent and annual value from the following cases if expected rent in all cases is 10,000.
1. let out for 12 months for 4,000 p.m.
2. let out for 10 months for 4,000 p.m. 2 months vacant. 1 month unrealised rent.
3. let out for 10 months for 4,000 p.m. 2 months SOP for residence.
4. let out for 10 months for 4,000 p.m. 1 month vacant. 1 month SOP for residence. 2,000 unrealised rent
5. let out for first 4 months for 8,000 p.m and for next 6 months for 9,000 p.m. 2 months vacant. 6,000 unrealised rent.
6. let out for first 9 months for 5,000 p.m. and for next 2 months for 4,000 p.m. 1 month SOP for residence. 5,000 unrealised rent.
7. let out for first 3 months for 12,000 p.m. and for next 5 months for 11,000 p.m. 2 months SOP for residence. 2 months vacant. 13,000 unrealised rent.
Solution
Computation of Gross Annual Value
| Case 1 | Case 2 | Case 3 | Case 4 | Case 5 | Case 6 | Case 7 | ||
| a. | Expected rent (ER) | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 |
| b. | Actual rent (AR) | 48,000 | 44,000 | 40,000 | 42,000 | 98,000 | 48,000 | 1,02,000 |
| c. | Loss on account of vacancy | Nil | 8,000 | Nil | 4,000 | 18,000 | Nil | 24,000 |
| GAV (a or b higher less c) | 48,000 | 36,000 | 40,000 | 38,000 | 80,000 | 48,000 | 78,000 | |
P4 : Compute actual rent & annual value from the above informations if expected rent in all cases is Rs. 1,10,000.
Computation of Gross Annual Value
| Case 1 | Case 2 | Case 3 | Case 4 | Case 5 | Case 6 | Case 7 | ||
| a. | Expected rent (ER) | 1,10,000 | 1,10,000 | 1,10,000 | 1,10,000 | 1,10,000 | 1,10,000 | 1,10,000 |
| b. | Actual rent (AR) | 48,000 | 44,000 | 40,000 | 42,000 | 98,000 | 48,000 | 1,02,000 |
| c. | Loss on account of vacancy | Nil | 8,000 | Nil | 4,000 | 18,000 | Nil | 24,000 |
| GAV (a or b higher less c) | 1,10,000 | 1,02,000 | 1,10,000 | 1,06,000 | 92,000 | 1,10,000 | 86,000 | |
P5 : Questions and answers.
1. Why expected rent is sometimes substituted for actual rent ?
2. What do you mean by unrealised rent or bad debt ?
3. Deduction of unrealised rent can be claimed for earlier PY’s. (True or False)
4. Unrealised rent of current year is subtracted from expected rent. (True or False)
5. Loss on account of vacancy is first added to actual rent and then always subtracted from higher of ER or AR (True or False)
Solutions
1. It can be explained through an example. For e.g. the assessee might let out the property to a close relative which is less than ER. In such case AR does not reflect the true earning capacity of the building. To mitigate such situation ER is substituted for AR. It is to prevent evasion of tax.
2. It is the rent which the owner could not realise from the tenant.
3. False. Deduction of unrealised rent can be claimed only for the current previous year.
4. False. Unrealised rent shall always be subtracted from actual rent and never from expected rent.
5. True.
P6: K purchases the property on 11-9-2015. Find out the annual value for the AY 2017-18.
| Case 1 | Case 2 | Case 3 | Case 4 | Case 5 | Case 6 | |
| Municipal Valuation | 100 | 100 | 185 | 97 | 36 | 22 |
| Fair Rent | 140 | 140 | 140 | 96 | 40 | 33 |
| Standard Rent | 160 | 160 | 200 | NA | 35 | 55 |
| Actual Rent in month | 15.33 | 14.5 | 20 | 8.5 | 2 | NA |
| Unrealised rent in Rs. | 20 | 50 | 50 | 20 | nil | nil |
| Let out period (in months) | 9 | 10 | 11 | 10 | 11 | nil |
| Vacancy period | 3 | 2 | 1 | 2 | 1 | 12 |
Ans: 118; 111; 170; 80.50; 33; Nil.
P7: K, purchases the property on 11-9-2015. Find out the GAV for the AY 2017-18.
| Case 1 | Case 2 | Case 3 | Case 4 | Case 5 | Case 6 | |
| Municipal Valuation | 980 | 980 | 450 | 450 | 800 | 900 |
| Fair Rent | 850 | 850 | 600 | 600 | 134 | 850 |
| Actual Rent in month | 68 | 40 | 60 | 80 | 60 | NA |
| Let out period (in months) | 9 | 7 | 1 | 2 | 223 days | nil |
| SOP for residence (in months) | 1 | 2 | 10 | 3 | 8 days | 6 |
| Vacancy period (in months) | 2 | 3 | 1 | 7 | 135 days | 6 |
Ans: 882; 860; 540; 160; 530; Nil.
P8: K, purchases the property on 1-6-2016 and is let out on the same day. Compute GAV for the AY 2017-18.
| Case 1 | Case 2 | Case 3 | Case 4 | |
| Municipal valuation in annum | 3,600 | 1,780 | 1,100 | 2,100 |
| Fair rent in annum | 3,900 | 3,500 | 1,250 | 2,000 |
| Standard rent in annum | 4,200 | 3,980 | NA | NA |
| Rent in month | 350 | 420 | 100 | 210 |
| Unrealised rent | Rs. 805 | Rs. 800 | Nil | Rs. 210 |
| Vacancy period | 1 month | 15 days | 6 month | 8 month |
Ans: 2,900; 3,190; 441.67; 210.
Hint: Computation of Gross Annual Value
Since the property is acquired on 1-6-2016, expected rent and actual rent shall be computed from 1-6-2016 to 31-3-2017 i.e for 10 months. ER & AR is to be converted in value of 10 months.
| Case 1 | ||
| Expected rent of 12 months (MV or FR whichever is higher limited to SR) | 3900 | |
| a. | Expected rent for 10 months | 3250 |
| b. | Actual rent for 10 months (350 × 10 – 805) | 2695 |
| c. | Loss on account of vacancy (350 × 1) | 350 |
| GAV (a or b higher less c) | 2900 | |
P9: Solve the above question if the property remains self occupied for residence instead of remaining vacant.
Ans: 3,250; 3,190; 1,041.67; 1,750.
P10: Property is let out for Rs. 5,000 p.m. 2 month self occupied for residence. Compute annual value.
Ans: Where Fair Rent is not given, then actual rent shall be treated as fair rent. Actual rent shall be Rs. 50,000. But fair rent shall be Rs. 60,000. Therefore GAV shall be Rs. 60,000.
Deductions Allowed
There are only 3 deductions which can be claimed from gross annual value.
1. Municipal tax : As per section 23 annual value is the value after deduction of municipal tax. Municipal tax is the tax levied by local authority on the property. Also known as local tax /corporation tax / property tax. It’s deduction is allowed if paid by owner in the relevant previous year. Deduction not allowed if paid by tenant. Basis of levying of municipal tax is municipal valuation.
2. Standard deduction : 30% of net annual value. Standard Deduction u/s 24 is not allowed if NAV is nil or negative. Following deductions are not allowed, if given in the question it is ignored. Repairs | Annual Charge | Insurance premium | Land revenue - it is the tax levied by State Govt. on the property | Ground rent
3. Interest on borrowed capital. It’s deduction is allowed on accrual basis.
P1 : One word questions and answers.
1. What is the meaning of municipal tax ?
2. What is the basis of levying municipal tax ?
3. When municipal tax is not allowed as deduction ?
4. Are taxes levied on property by the State Govt. deductible ?
5. Can deduction be claimed for arrears of municipal tax or advance payment of municipal tax ?
6. When standard deduction u/s 24(a) is not available ?
7. When can NAV be nil or negative ?
8. Is deduction like repairs of house property, land revenue, ground rent, etc. available ?
Solutions
1. Municipal tax is the tax levied on property by the Municipal Authorities. Like water tax, sewage tax, fire tax or education cess. All these taxes known as municipal tax, since levied by the municipal authority on the property.
2. Municipal valuation. E.g. MT 10%. MV 1,00,000; FR 1,50,000. MT levied shall be 10% of Rs. 1,00,000. Rs10,000.
3. When Municipal tax is paid by the tenant or if owner is liable but not discharged his liability.
4. No.
5. Yes, only condition to be fulfilled is that municipal tax is paid by the owner during the relevant PY. Suppose you are computing income from house property for the PY 2016-17, to claim deduction municipal tax should be paid during the PY 2016-17. Otherwise deduction is not allowed.
6. When NAV is nil or in negative.
7. When municipal tax is equal to or more than GAV.
8. No, the only deductions available are those specified under section 23 & 24. So even if the question provides for repairs etc. it has to be ignored. All these deductions are now clubbed in Standard Deduction.
Computation of Income from House Property
| Gross Annual Value (GAV) | 5,100 |
| Less: Municipal tax u/s 23 | 100 |
| Net Annual Value (NAV) | 5,000 |
| Less: Deduction u/s 24 | |
| (–) Standard Deduction (30% of NAV) | (1,500) |
| (–) Interest on borrowed capital | (2,500) |
| Income from House Property. [23 – 24] | 1,000 |
| (+) Recovery of unrealised rent – 30% of arrears of rent [20,000 – 6,000] u/s 25A | 14,000 |
| (+) Receipt of arrears of rent – 30% of arrears of rent [10,000 – 3,000] u/s 25A | 7,000 |
| Income from House Property. [23 – 24 + 25A] | 22,000 |
P1: Compute Income from House Property for the AY 2017-18.
| Case 1 | Case 2 | Case 3 | |
| Gross Annual Value | 40,000 | 60,000 | 25,000 |
| Municipal tax paid by owner on | |||
| • 31-5-2016 | 5,000 | nil | 30,000 |
| • 1-4-2017 | 35,000 | 5,000 | nil |
| Municipal tax paid by tenant on 11-8-2016 | 1,000 | 2,000 | 500 |
| Repairs | 900 | 1,000 | 800 |
| Insurance | 200 | 200 | 200 |
| Land revenue | 100 | 100 | 100 |
| Ground Rent | 400 | 400 | 400 |
| Interest on borrowed capital due for PY 2016-17 | 600 | 500 | 800 |
Ans: (1) 23,900; (2) 41,500; (3) (5,800).
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