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  Wealth Tax - Valuation of House Property

Valuation of House Property 

Following steps are required to be followed:

Step 1: Calculate Gross Maintainable Rent (GMR)

Step 2: Calculate Net Maintainable Rent (NMR)

Step 3: Capitalization of Value

Step 4: Addition for Un-built Area

Step 5: Reduction for Unearned Increment


All these steps are enumerated here in below:

Step  1: Calculate Gross Maintainable Rent (GMR) [Rule 5]

Nature of Property

Gross Maintainable Rent

Let  out property

Higher of the following -

a. Annual Rent# received / receivable

b. Municipal Value

Other properties

Municipal value or where property is situated outside the area  of a local authority, the amount which the owner can reasonably be expected  to receive as annual rent had such property been let out [i.e. fair rent]

# Annual  rent means aggregate of the following-

Particulars

Conditions

Actual rent  received or receivable per annum1

 

Add:

 

Local taxes

Local  taxes are borne by the tenant

Repairs being  1/9th of the actual  rent

Tenant  bears the repairs

Interest  on deposit @ 15% p.a. of the deposit2

Owner  has accepted any deposit (other than advance rent for a period of 3 months or  less3),

Lease  premium being proportionate amount that the premium bears to the period out  of total lease period.

Owner  has received any amount by way of premium or otherwise for giving the  property on lease or modification of the terms of the lease,

Value of the perquisite or benefit

Owner derives any benefit or perquisites  (whether convertible into money or not) as consideration for leasing the  property or any modification of the terms of lease

Annual Rent

Notes

1. Where the property is let out for part of the previous year,  rent pertaining to the let out period shall be increased proportionately for  the rent of whole year.

2. Interest shall be calculated on deposit outstanding from  month to month, for the number of months (excluding part of a month) during  which the deposit was held by the owner in the year. Where any interest is to  be paid to the tenant, such interest actually paid is to be reduced from the  interest on deposit so computed.

3. Interest shall be calculated on the whole amount of deposit  if the amount of deposit exceeds advance rent for a period of 3 months. 

4. Where the tenant commits  default in the payment of rent and makes part payment of the rent, then the  gross maintainable rent shall be determined not on the basis of actual rent  received by the landlord, but on the basis of the amount payable under the  agreement [CIT vs Bhagwati Ammal]


Step II: Calculate Net  Maintainable Rent (NMR) [Rule 4]

Particulars

Amount

Amount

Gross  Maintainable Rent

 

*****

Less: a) Taxes levied by local authority on the property (on  accrual basis)

***


Note: Deduction is available even when such taxes are borne by the  tenant

 


b) 15% of Gross  Maintainable Rent

***

****

Net Maintainable Rent (NMR)

 

*****


Step 3: Calculate Capitalized  Value [Rule 3]

Case

Capitalised value

If the house property is  constructed on freehold land

NMR * 12.5

If the property is constructed  on leasehold land; and


- Unexpired  lease period is 50 years or more

NMR  * 10

- Unexpired  lease period is less than 50 years but more than 15 years

NMR  * 8

- Unexpired lease period is equal to or less  than 15 years

Rule 20 of Schedule III shall be applicable   

Rule of Substitution

Where the  property is acquired or constructed after 31-3-1974, higher of the following shall be considered as Capitalized  value -

- The value computed above; or

 

- The cost of acquisition or construction and cost  of improvement  

Exceptions to the Rule of substitution

The rule of  substitution is not applicable on one house belonging to the assessee, if the  following conditions are satisfied -

1. Such  house is exclusively used for own residential purpose throughout the period  of 12 months (or from the date of acquisition, if house is purchased in the  relevant previous year) immediately preceding the valuation date; and

2. The actual cost of acquisition or construction  does not exceed -

If the house is situated at

Cost

- Mumbai/  Delhi/ Kolkata/ Chennai

Rs.50  lakh

- Any other  place

Rs.25  lakh

Note: Self-occupied does not mean that assessee should reside in  the house, but it means that house is exclusively reserved for  self-occupation of the assessee [CWT vs Anilkumar  M. Virani]


Step IV: Adjustment for unbuilt  area of the plot of land [Rule 6]

Where the  unbuilt area of the plot of land on which the property is constructed exceeds  the specified area, the capitalised value (as derived in step III) shall be  increased by an amount calculated in the following manner -

Excess of unbuilt area2 over specified area3

Upward adjustment

Not exceed 5%  of the aggregate area1

NIL

Exceed 5% but  does not exceed 10% of the aggregate area

20%  of Capitalised value

Exceeds 10% but  does not exceed 15% of the aggregate area

30%  of Capitalised value.

Exceeds 15% but  does not exceed 20% of the aggregate area

40%  of Capitalised value

Exceeds 20% of the aggregate area

The above valuation rule will not apply and Rule  20 of Schedule III shall apply.

1. Aggregate Area means the aggregate of the area on  which the property is built and the unbuilt area.

2. Unbuilt Area means that part of the aggregate  area on which no building has been erected.

3. Specified Area means -

 

Property situated at

Specified area in terms of  percentage of aggregate area

Mumbai,  Kolkata, Delhi & Chennai

60%

Agra,  Ahmedabad, Allahabad, Amritsar, Bangalore, Bhopal, Cochin, Hyderabad, Indore,  Jabalpur, Jamshedpur, Kanpur, Lucknow, Ludhiana, Madurai, Nagpur, Patna,  Pune, Salem, Sholapur, Srinagar, Surat, Tiruchirapally, Trivandrum, Baroda  and Varanasi

65%

Any other place

70%

Note: Where, under any law for the  time being in force, the minimum area of the plot of land required to be kept  as open space for the enjoyment of the property exceeds above mentioned  specified area, such minimum area shall be deemed to be the specified area.   


Step V: Adjustment for unearned  increment [Rule 7]

Conditions

1. The property is constructed on leasehold land obtained from the Government, a  local authority or any authority referred in section 10(20A) of the Income  Tax Act;

2. Under the terms of lease, the Government or any  such authority is entitled to claim and recover a specified part of the  unearned increase in the value of the land at the time of transfer of the  property

Treatment 

Lower of the following shall be reduced from the value  determined in step IV -

1. The amount so liable to be claimed and recovered  as if the property had been transferred on the valuation date; or

2. An amount equal to 50% of the value of such property as  determined in step IV


Cases where valuation  principles stated above would not apply [Rule 8]

The above valuation principles will not apply in  the following cases:

1

Where, having regard  to the facts and circumstances of the case, the Assessing Officer, with the  prior approval of the Joint Commissioner, is of the opinion that it is not  practicable to apply the above provisions to the case.

2

Where the difference between the unbuilt  area and the specified area is more than 20% of the aggregate area.

3

Where the property is  constructed on leasehold land and the lease expires within a period of 15  years from the relevant valuation date and the lease deed does not give an  option to the leasee for the renewal of the lease.


In the above cases, the valuation will be made as  per Rule 20, as given below

1

The value of any  asset, other than cash, being an asset which is not covered by rules 3 to 19,  shall be estimated to be the price, which in the opinion of the AO, it would  fetch if sold in the open market, on the valuation date.

2

Where the valuation  of any asset as mentioned above is referred by the AO to the Valuation  Officer, the value of such asset shall be estimated to be the price, which in  the opinion of the Valuation Officer, it would fetch if sold in the open  market on the valuation date.

3

Where the value of  any asset cannot be estimated because it is not saleable in the open market,  the value shall be determined as per the guidelines specified by the Board  from time to time by general or special order.



Freezing of valuation of one self-occupied house as  on a particular valuation date [Sec. 7(2)]

Condition: The house is exclusively used by the assessee for residential  purposes throughout the period of 12 months immediately preceding the  valuation date.

Treatment: Value (determined as per schedule III) of such one house shall be minimum of the  following -

1

Value as on relevant valuation  date.

2

Value as on the valuation date,  which comes later, out of the following -


a. Valuation date immediately  following the date on which the assessee became owner of the house; or


b. Valuation  date relevant to the A. Y. 1971-72 (i.e., 31-3-1971)

Tax Point

1

The  house exclusively reserved for the residential purpose of the assessee shall  be treated as self-occupied house property, it does not require compulsorily  residence in that house [CWT vs Anil Kumar M.  Virani]

2

Where the house has  been constructed by the assessee, he shall be deemed to have become the owner  thereof on the date on which the construction of such house was completed;

3

House includes a part of a  house being an independent residential unit.

4

Assessee has option to apply  this provision for a different house property in the next year.