TaxSaral

Section 21 · was Section 23 in the 1961 Act

Annual Value of House Property

The annual value is the amount the property can reasonably be expected to fetch as annual rent. For a self-occupied property (up to 2), the annual value is nil. For let-out property, it is the higher of actual rent or expected market rent.

Who it applies to: All property owners — relevant for computing taxable income from house property.

Key points

  • Annual value = higher of (a) actual rent received/receivable, or (b) fair market rent (municipal value or standard rent, whichever is higher).
  • If actual rent < fair market rent (e.g., property rented to family at below-market rate), you are taxed on the fair market rent anyway.
  • Self-occupied properties (up to 2): annual value is nil regardless of market rent.
  • Municipal taxes paid by the owner are deducted from annual value to arrive at Net Annual Value (NAV).

Worked example

Property rented below market rate

Suresh rents his flat to his brother at ₹8,000/month. The market rent for similar flats in the area is ₹20,000/month.

Actual rent received: ₹8,000 × 12 = ₹96,000
Fair market rent:     ₹20,000 × 12 = ₹2,40,000

Annual value = Higher of (actual rent, market rent)
             = ₹2,40,000

Net annual value after municipal taxes (say ₹12,000):
= ₹2,40,000 – ₹12,000 = ₹2,28,000

Result: Suresh is taxed on ₹2,28,000 (market rent basis), not on ₹96,000 (actual rent). The below-market rental to a family member does not reduce his tax.

Related sections

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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative; verify with a Chartered Accountant before filing.