The method of calculating Income from House property is the "annual value" of a house property in India. What it means is the ability of a house to generate or earn income during the financial year.
It's important to emphasize here that it may not be necessary, for the property to be actually rented out during the course of the year.
The annual value of a house property also does not mean that the return estimated should actually be the return received at the end of the year.
What happens when the received rent is more than the annual value?
When the actual rent received is more than the annual value estimated, in such a case actual rent will be the annual value.
In case where the property is not let out and was vacant during the course of the year then the rent received shall be the Annual value.
Let's cite an example. In case an apartment, whose municipal value is Rs 20,000 and actual rent received is Rs 30,000, the annual lettable value will be taken at Rs 30,000.
If the actual rent received were to be Rs 18,000, in such case Rs 20,000 would be the annual value for the purpose of computing Income Tax.
The following four factors have to be taken into consideration while determining the annual property:
1) The rent that is likely to be received from the tenant.
2) The costs estimates based on municipal valuation'
3) You cannot underprice the rental. You would have to estimate it based on the value received from similar properties in the area.
From the annual value there are certain deductions that are so allowed.
1) Repairs & Collection Charges:
Thirty per cent of the Annual Value can be considered towards repairs and collection. It's very important to remember that you can deduct, even if you have not incurred the expenditure.
Where you have borrowed money on interest for the construction of the said property, you are allowed to deduct such a sum from the annual value. This can at times means considerable savings.
It's important to remember that the amount should have been borrowed for construction and not for other purpose, in which case you cannot claim the deduction.
It's important to also remember that any fresh borrowings to pay-off the interest than the interest on the fresh borrowings will not be allowed as deductions.