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
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-
Actual rent received or receivable per annum1
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
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]
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]
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
- Mumbai/ Delhi/ Kolkata/ Chennai
- Any other place
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
Not exceed 5% of the aggregate area1
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
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
Any other place
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]
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
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:
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.
Where the difference between the unbuilt area and the specified area is more than 20% of the aggregate area.
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
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.
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.
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 -
Value as on relevant valuation date.
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)
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]
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;
House includes a part of a house being an independent residential unit.
Assessee has option to apply this provision for a different house property in the next year.