Section 21(1)

For the purposes of section 20,

annual value of any property shall be deemed to be the higher of the following: —

(a) [Expected rent] - the sum for which it might reasonably be expected to let from year to year; or

(b) actual rent received or receivable by the owner, if the property or any part of it is let.

Section 21(2)

If the property or any part of it is let and was vacant for the whole or any part of the tax year and owing to such vacancy

actual rent received or receivable by the owner is less than [Expected Rent] the sum referred to in sub-section (1)(a),

annual value of such property shall be deemed to be the amount so received or receivable.

Section 21(5)

Where a property is held as stock-in-trade and is not let wholly or partly at any time during the tax year,

the annual value of such property or part thereof shall be

^[i][nil up to] 2 years from the end of the financial year in which the certificate for completion of construction is obtained from the competent authority.

Section 21(6)

Annual value of the house property consisting of a house or any part thereof shall be taken as nil,

if the owner

occupies it for his own residence or

cannot actually occupy it due to any reason.

The benefit of “Nil” Annual Value in respect of upto two selfoccupied house properties is available only to an individual/HUF.

No deduction for municipal taxes is allowed in respect of such property/ properties as annual value means value determined after deduction of municipal taxes.

Section 21(7)(a)

The provisions of sub-section (6)– [I.e. benefit of nil Annual Value]

shall apply only in respect of two of such houses as specified by the assessee in this behalf;

The benefit of “Nil” Annual Value is available only for upto two self-occupied or unoccupied house properties i.e., for either one house property or two house properties.

Section 21(7)(b)

The provisions of sub-section (6)– [I.e. benefit of nil Annual Value]

shall not apply, if the house or any part thereof is actually let during any time of the tax year, or if the owner derives any other benefit from it.

If a single unit of a property is self-occupied for part of the year and let-out for the remaining part of the year, then the ER for the whole year shall be taken into account for determining the AV.

ER for the whole year shall be compared with the actual rent for the let out period and whichever is higher shall be adopted as the GAV.

Municipal tax for the whole year is allowed as deduction provided it is paid by the owner during the previous year.

Where the assessee owns more than two properties for self occupation, then the income from any two properties, at the option of the assessee, shall be computed under the self occupied property category and their annual value will be nil.

The other self-occupied/ unoccupied properties shall be treated as “deemed let out properties”.

This option can be changed year after year in a manner beneficial to the assessee.

In case of deemed let-out property, the ER shall be taken as the GAV.

Municipal taxes actually paid by the owner during the previous year, in respect of the deemed let out properties, can be claimed as deduction.

Income from any portion or part of a property which is let out shall be computed separately under the “let out property” category and the other portion or part which is self-occupied shall be computed under the “self-occupied property” category.

There is no need to treat the whole property as a single unit for computation of income from house property.

Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such other reasonable basis.

Property taxes, if given on a consolidated basis, can be bifurcated as attributable to each portion or floor or on a reasonable basis

Section 21(3)

The annual value of the property shall be reduced by the taxes (including service taxes) levied by a local authority in respect of such property,

actually paid during the tax year by the owner, irrespective of when such taxes became payable.

If property taxes levied by a local authority for a particular tax year are not paid during that year, no deduction shall be allowed for that year.

However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed as deduction in computation of income from house property for that year.

In respect of self-occupied/unoccupied house property/properties for which “Nil” Annual Value benefit is claimed, deduction of municipal taxes paid is not allowable.

In case of property situated outside India, taxes levied by local authority of the country in which the property is situated is deductible.

CIT v. R. Venugopala Reddiar (1965) 58 ITR 439 (Mad)

Section 21(4)

The rent which cannot be realised by the owner shall not be included in computing the actual rent received or receivable, subject to the rules as may be made in this behalf.

Rule 21

For the purposes of section 21(4),

the amount of rent which the owner cannot realise shall be equal to the amount of rent receivable by the assessee but not paid by a tenant of the assessee and so proved to be lost and irrecoverable

where, —

(a) the tenancy is bona fide;

(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

(c) the defaulting tenant is not in occupation of any other property of the assessee; and

(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be futile.