Bought a second home for investment or for your parents to live in, and it's sitting vacant? The Income Tax Act doesn't care that it's empty - if you own more than one house property and don't rent it out, the 'extra' properties are taxed on a notional rent basis under the deemed let-out provisions. Here's exactly how that works.
Under the Income Tax Act, a taxpayer can claim at most two house properties as "self-occupied" (a relaxation introduced a few years ago - earlier only one was allowed). For a self-occupied property, the annual value (notional rent) is taken as nil, meaning there's no rental income to tax on that property.
If you own more than two house properties and none of the additional ones are actually let out, those additional properties are classified as "deemed to be let out" - and the law requires you to compute a notional annual rental value for them and pay tax on it, even though you're not receiving any actual rent.
| Number of House Properties Owned | Tax Treatment |
|---|---|
| 1 property, used for own residence | Self-occupied - annual value is nil |
| 2 properties, both used for own residence (e.g., one in your home city, one in your hometown) | Both can be claimed as self-occupied - annual value of both is nil |
| 2 properties, one let out | One self-occupied (nil annual value); the let-out one is taxed on actual rent received |
| 3 or more properties, with fewer than 2 actually let out | Up to 2 can be self-occupied (nil annual value); any additional vacant properties are deemed let out and taxed on notional rent |
For a deemed let-out property, the annual value is determined as the higher of:
This figure - generally referred to as the "Gross Annual Value" (GAV) - is then used as the starting point for computing income from house property, exactly as if the property were actually rented at that amount.
| Step | Description |
|---|---|
| 1. Gross Annual Value (GAV) | Higher of municipal value, fair rent (subject to standard rent cap) |
| 2. Less: Municipal taxes paid | Deductible if actually paid by the owner during the year |
| 3. = Net Annual Value (NAV) | GAV minus municipal taxes |
| 4. Less: Standard deduction @ 30% of NAV | Flat 30% deduction, regardless of actual expenses |
| 5. Less: Interest on home loan (Section 24(b)) | Full interest amount is deductible for let-out/deemed let-out properties - no ₹2 lakh cap (unlike self-occupied property) |
| 6. = Income from House Property (for this property) | Can be a loss if interest deduction exceeds NAV minus standard deduction |
If the deemed let-out property results in a loss (common when home loan interest is high relative to the notional rent), this loss can be set off against income from other heads (such as salary) in the same year, subject to a cap of ₹2,00,000 for set-off against non-house-property income in a single year. Any loss beyond this cap can be carried forward for up to 8 assessment years to be set off against future house property income.
Under the new tax regime (Section 115BAC), the deduction for home loan interest on a self-occupied property under Section 24(b) is not allowed. However, for let-out and deemed let-out properties, interest deduction under Section 24(b) generally continues to be allowed even under the new regime, since it is a deduction in computing the income from that source (not a Chapter VI-A deduction), though any resulting loss from house property typically cannot be set off against salary income under the new regime.