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Income from Deemed Let-Out House Property
Under the Income Tax Act, if an assesses owns more than one house property, they have the option to declare two of them as self-occupied for tax purposes. However, any additional properties beyond these two must be compulsorily declared as rented out, even if they are not actually rented. These additional properties are treated as deemed let out properties, also known as vacant properties.
For deemed let-out properties, the assesses is required to calculate the rental income based on the fair market value of the property. This rental income is then subject to taxation as per the applicable slab rates. It's essential to note that even if the property is vacant and not generating any actual rental income, the assesses is still liable to pay tax on the deemed rental income from these properties.
For deemed let-out properties, the calculation of income follows a similar process as for properties that are actually let out. However, there is a difference in the deduction available under section 24(b) of the Income Tax Act.
Under section 24(b), the deduction for interest on home loan is limited to Rs. 2 lakhs for deemed let-out properties, which is the same as for self-occupied properties. This means that even if the property is deemed let-out and not actually generating rental income, the owner can still claim a deduction of up to Rs. 2 lakhs for interest paid on a home loan.
Why is it "deemed"?
Because under Section 23(4) of the Income Tax Act, 1961, if a person owns more than one self-occupied house property, then only one can be treated as self-occupied (with no income), and the others are deemed to be let out, even if they are lying vacant or used occasionally.
⚖️ Legal Provision: Section 23(4)
“If a taxpayer owns more than one house property for self-occupation, then only one of them, at the option of the assessee, shall be treated as self-occupied, and the remaining shall be deemed to be let out.”
When Does Deemed Let-Out Apply?
You are treated as owning a deemed let-out property if:
- You own more than one house property, and
- The second or additional property is not actually rented, and
- It is not self-occupied (because you can choose only one SOP)
Scenarios Where DLOP Applies:
| Situation | Is it Deemed Let-Out? |
|---|---|
| You live in Property A and keep Property B locked | ✅ Yes |
| You stay in City A, and keep a house in City B vacant | ✅ Yes |
| You own 3 flats, all vacant | ✅ 2 are deemed let-out |
| You stay in one house and rent out another | ❌ No, because second is actually let out |
| You have 2 houses, both self-occupied | ❌ You can now treat both as SOP (after 2019 amendment) |
🔔 Note: Since Budget 2019, you can declare 2 properties as self-occupied. So, deemed let-out applies only from the third house onward.
What is the difference between Self Occupied & Let Out?
| Self-Occupied | Let Out |
| A Self Occupied House Property is the one that you use as your own residence, your spouse, children and/or parents. | Let Out is when you give a house property for rent for during the financial year either for the whole or a part of the year. |
Starting from the Assessment Year (AY) 2020-21, taxpayers in India have the option to declare up to two house properties as self-occupied for the purpose of income tax calculation. This means that if an individual owns more than two properties, they must consider the remaining properties as deemed let-out properties, even if they are not actually rented out.
For example, if an individual owns three properties:
- They can declare two of these properties as self-occupied.
- The third property will be considered as a deemed let-out property, even if it is not generating any rental income.
This provision allows individuals to optimize their tax liabilities by treating certain properties as self-occupied, thereby maximizing the available deductions and minimizing the tax burden.
How to Determine Taxable Income from Deemed Let Out House Property?
Income from a Deemed Let Out Property is calculated through a series of steps to determine the Gross Annual Value (GAV), Net Annual Value (NAV), and allowable deductions:
- Calculate Gross Annual Value (GAV):
- GAV of a Deemed Let Out Property is determined based on the least of the following factors:
- Fair Rent Value (FRV), which is assessed using the Annual Rent Value of similar properties in the locality.
- Assessed Value, determined according to the Municipal Tax Value of the property.
- Standard Rent, established as per Rent Act regulations.
- GAV of a Deemed Let Out Property is determined based on the least of the following factors:
- Deduct Municipal Taxes Paid:
- Municipal taxes, also known as property taxes, are deductible from the GAV. The full amount of municipal taxes paid is allowed as a deduction, effectively reducing the Net Annual Value of the property. However, this deduction is only permitted if the taxes are paid by the property owner.
- Calculate Net Annual Value (NAV):
- NAV is derived by subtracting the municipal taxes paid from the Gross Annual Value (GAV). This computation results in the Net Annual Value of the Deemed Let Out Property.
- Claim Standard Deduction of 30%:
- A standard deduction of 30% is applied to the NAV. This deduction represents expenses related to the maintenance and upkeep of the property.
- Deduct Interest Paid on Home Loan u/s 24(b):
- Interest paid on a home loan, as per Section 24(b) of the Income Tax Act, can be deducted from the NAV. This deduction provides relief for the interest expense incurred by the property owner.
| Particulars | Self Occupied | Let Out | Deemed Let Out |
| Gross Annual Value (Generally, total rent received) | NIL | XXX | XXX |
| Less: Municipal Taxes Paid | Not Applicable | XX | XX |
| Net Annual Value | NIL | XXX | XXX |
| Less: Deduction u/s 24 1. Standard Deduction at 30% 2. Interest on Housing Loan | Not Applicable INR 2 Lakh Limit | XX No Limit | XX No Limit |
| Income from House Property | (XXX) | XX | XXX |
Conclusion
Income from Deemed Let-Out Property is a crucial area in property taxation. Whether you keep a second home for investment, occasional visits, or future use – if it's not rented out, it may still be taxed as if it were.
To ensure compliance:
- Disclose all house properties in your ITR
- Calculate notional rent accurately
- Claim eligible deductions under Section 24
- Choose the correct ITR form
Frequently Asked Questions
1. I own three houses – one I live in, and two are vacant. Will I be taxed on the vacant ones?
Yes. You can treat two as self-occupied. The third one will be treated as deemed let-out, and notional rent will be taxed even if it’s lying vacant.
2. My second house is locked for personal visits. It's not rented. Do I still need to pay tax?
Yes. If it's not rented and not your second self-occupied house, it will be considered deemed let-out, and you must pay tax on the expected rental income.
3. How do I calculate the rent for a deemed let-out property that I’ve never rented before?
You need to estimate the fair market rent based on similar properties in the locality, or use municipal valuation if available. Choose the lower of the two as the Gross Annual Value.
4. Can I claim full interest deduction on my home loan for a deemed let-out property?
No. Even for a deemed let-out property, the deduction for interest on home loan is capped at ₹2,00,000 under Section 24(b).
5. My second property is in my hometown and used only during festivals. Will it still be taxed?
Yes. Occasional personal use does not qualify as self-occupied. If it's not your second self-occupied house, it will be treated as deemed let-out, and taxed accordingly.
6. What if I paid municipal taxes but forgot to claim them?
You can still claim the municipal taxes paid as a deduction from Gross Annual Value, only if they were paid during the year and by the owner (you).
7. I took a home loan for a deemed let-out property. Can I claim Section 80C for principal repayment?
Yes. You can claim up to ₹1.5 lakh under Section 80C for principal repayment, provided the property is not sold within 5 years of possession.
8. Do I need to show deemed let-out property details if there’s no rental income?
Yes. Mandatory disclosure is required in your ITR, even if the property is vacant. You must report notional rent and claim eligible deductions to avoid tax scrutiny.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
