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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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FAQs on Compute actual rent and loss on account of vacancy - Taxation - Income Tax for assessment (Inter Level)

1. What is actual rent and how is it calculated?

Ans. Actual rent refers to the amount of rent paid by a tenant for a particular property. It is calculated by multiplying the monthly rent by the number of months for which the property is rented.

2. How is the loss on account of vacancy calculated?

Ans. The loss on account of vacancy is calculated by subtracting the actual rent received from the potential rent that could have been received if the property had been fully occupied. This calculation helps determine the financial impact of vacant units on rental income.

3. How does taxation affect rental income?

Ans. Taxation can affect rental income in several ways. Rental income is generally subject to income tax, and property owners may need to report and pay taxes on the income they receive from renting out their properties. Additionally, certain expenses related to the property, such as repairs and maintenance, may be tax-deductible, reducing the taxable rental income.

4. What is the significance of calculating the loss on account of vacancy for property owners?

Ans. Calculating the loss on account of vacancy helps property owners understand the financial impact of unoccupied units on their rental income. It allows them to evaluate the effectiveness of their marketing and leasing strategies and make informed decisions to minimize vacancy periods. This information is crucial for managing rental properties and optimizing overall financial performance.

5. Are there any tax benefits for property owners in case of vacancy losses?

Ans. In certain cases, property owners may be allowed to deduct vacancy losses on their taxes. However, the specific rules and eligibility criteria can vary depending on the jurisdiction and local tax laws. It is advisable to consult with a tax professional or accountant to determine if any tax benefits are applicable in a particular situation.

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