Self-Occupied and Vacant House Property: Deemed Annual Value Under the Income Tax Act 2025
Under the Income Tax Act 2025, a house you live in yourself has an annual value of nil under section 21(6), but only for two houses that you choose (section 21(7)(a)). A third house, or any house that is let even for part of the year, is taxed on its annual value. A vacant let-out house can be valued at the rent actually received if the vacancy caused the shortfall (section 21(2)).
This guide covers the special cases in section 21: self-occupied houses, houses you cannot occupy, vacancy, unsold flats held as stock-in-trade, and the interest cap that goes with a nil-value house (section 22(2)). The figures come from the Act as amended by the Finance Act 2026, effective 1 April 2026. All examples use tax year 2026-27. For the basic computation, read our guide on income from house property first.
How is the annual value of a house decided?
Section 20(1) taxes the annual value of buildings and attached land owned by you under the head "Income from house property". Section 21(1) says the annual value is the higher of two amounts:
- the sum for which the property might reasonably be expected to let from year to year, or
- the actual rent received or receivable, if the property or any part of it is let.
Sections 21(2), 21(5) and 21(6) change this default in three situations: vacancy, stock-in-trade and own residence. The diagram shows which rule applies.
When is the annual value of a self-occupied house nil?
Section 21(6) says the annual value of a house, or any part of it, is taken as nil if the owner occupies it for his own residence or cannot actually occupy it due to any reason. So a house where you live is covered. So is a house you own in another city where you cannot live because your job is elsewhere, as long as the other conditions are met.
Section 21(7) adds two conditions:
- The nil value applies only to two houses, as specified by you (section 21(7)(a)).
- It does not apply if the house or any part of it is actually let at any time in the tax year, or if you derive any other benefit from it (section 21(7)(b)).
If you own more than two such houses, the rest are valued under section 21(1), as if they were let, using the sum for which they might reasonably be expected to let.
What deductions can you claim on a nil-value house?
The 30% deduction in section 22(1)(a) is 30% of the annual value. When the annual value is nil, 30% of nil is nil. What remains is the deduction for interest on borrowed capital under section 22(1)(b) and (c), and section 22(2) limits it for houses covered by section 21(6):
| Situation (house covered by s 21(6)) | Maximum interest deduction | Source |
|---|---|---|
| Acquired or constructed with borrowed capital, construction completed within five years from the end of the tax year in which the capital was borrowed, and you hold the lender's certificate | Rs 2,00,000 | s 22(2)(a) |
| Any other case (for example, interest on a loan for repairs, or construction not completed in time) | Rs 30,000 | s 22(2)(b) |
| Total across all such houses | Rs 2,00,000 | s 22(5) |
The certificate must state the interest payable on the capital borrowed, and the interest on any new loan taken to repay it (section 22(4)). Interest for the period before the house was acquired or built is allowed in five equal instalments, starting with the year of acquisition or construction (section 22(1)(c)), after reducing any amount already allowed under another provision (section 22(3)).
Because a nil annual value leaves nothing to set the interest against, the result is a negative figure, a loss under the head house property. How that loss is set off or carried forward is covered in our guide on house property loss.
Worked example 1: self-occupied house with a home loan
Assumptions (tax year 2026-27): Ravi owns one flat where he lives. He borrowed for the purchase, the flat was completed within five years from the end of the year he borrowed, and he holds the bank's interest certificate. He has no other house.
| Step | Case A: interest Rs 1,80,000 | Case B: interest Rs 2,60,000 |
|---|---|---|
| Annual value (s 21(6)) | Rs 0 | Rs 0 |
| 30% of annual value (s 22(1)(a)) | Rs 0 | Rs 0 |
| Interest payable | Rs 1,80,000 | Rs 2,60,000 |
| Cap under s 22(2)(a) | Rs 2,00,000 | Rs 2,00,000 |
| Interest allowed (lower of the two) | Rs 1,80,000 | Rs 2,00,000 |
| Income from house property | Rs 0 - 1,80,000 = (Rs 1,80,000) loss | Rs 0 - 2,00,000 = (Rs 2,00,000) loss |
If Ravi had no lender's certificate, or the interest was on a loan taken to repair the flat, the cap would be Rs 30,000 under section 22(2)(b) and the loss in Case B would be Rs 30,000.
What if the house is let for part of the year or left vacant?
Section 21(2) applies when the property, or any part of it, is let and was vacant for all or part of the tax year, and because of that vacancy the rent received or receivable is less than the expected rent in section 21(1)(a). In that case the annual value is the rent actually received or receivable.
The rule needs a link between the vacancy and the lower rent. If the rent is low because you agreed a low rent with the tenant, and there was no vacancy, section 21(2) does not apply and the higher-of test in section 21(1) holds.
Section 21(3) then reduces the annual value by taxes levied by a local authority (property tax, for instance), actually paid during the tax year, whenever they became payable. Section 22(1)(a) takes 30% of the annual value as determined under section 21.
Worked example 2: a let house vacant for four months
Assumptions (tax year 2026-27): Meena owns a flat she lets out. A fair expected rent is Rs 25,000 a month. The flat was vacant for four months between tenants and let for eight months at Rs 25,000. She paid Rs 12,000 of municipal tax in the year and Rs 40,000 of home loan interest.
| Step | Working | Amount |
|---|---|---|
| 1. Expected rent for the year (s 21(1)(a)) | Rs 25,000 x 12 | Rs 3,00,000 |
| 2. Actual rent received | Rs 25,000 x 8 | Rs 2,00,000 |
| 3. Annual value (s 21(2): vacancy caused the shortfall) | Rent received | Rs 2,00,000 |
| 4. Less: municipal tax paid (s 21(3)) | Rs 12,000 | |
| 5. Net annual value | 2,00,000 - 12,000 | Rs 1,88,000 |
| 6. Less: 30% (s 22(1)(a)) | 30% of 1,88,000 | Rs 56,400 |
| 7. Less: interest (s 22(1)(b)) | Rs 40,000 | |
| Income from house property | 1,88,000 - 56,400 - 40,000 | Rs 91,600 |
The Rs 40,000 interest is not limited by section 22(2) here, because that cap applies to houses covered by section 21(6), and this one is let.
Worked example 3: three houses and the two-house limit
Assumptions (tax year 2026-27): Suresh owns three flats. He lives in one, he cannot occupy the second because his job is in another city (it is never let and gives no other benefit), and the third is empty. He specifies the first two as his section 21(7)(a) houses. A fair rent for the third flat is Rs 20,000 a month, and he paid Rs 10,000 of local tax on it. He has no loan on it.
| House | Treatment | Annual value |
|---|---|---|
| Flat 1 (his residence) | Specified, s 21(6) | Nil |
| Flat 2 (cannot occupy, not let) | Specified, s 21(6) | Nil |
| Flat 3 (empty) | Third house, s 21(1)(a): expected rent Rs 20,000 x 12 | Rs 2,40,000 |
For flat 3: 2,40,000 - 10,000 (local tax, s 21(3)) = 2,30,000; 30% of 2,30,000 = 69,000; income = 2,30,000 - 69,000 = Rs 1,61,000, taxed even though no rent came in. Whether Suresh should specify the empty flat as one of the two is a choice he makes each year (the Act says "as specified by the assessee"), so compare the outcomes before filing.
What is the rule for unsold flats held as stock-in-trade?
Section 21(5) covers a builder or developer who holds a property as stock-in-trade and does not let it, wholly or partly, at any time during the tax year. Its annual value is nil up to two years from the end of the financial year in which the completion certificate is obtained from the competent authority. The wording "nil up to" was substituted for "nil for" by the Finance Act 2026, with effect from 1 April 2026. Section 21(5) does not say how the property is valued after those two years, so check the position for your project before relying on it.
Real-life scenarios
Meena's spare room. Meena lives in her own flat and lets one room to a student for two months. Under section 21(7)(b), the nil treatment does not apply if the house or any part of it is actually let at any time in the tax year. For that year the flat is not a nil-value house, and it is valued under section 21(1).
Ravi's posting in another city. Ravi owns a flat in Pune but works in Chennai, so he cannot occupy it. Section 21(6) treats a house the owner cannot actually occupy "due to any reason" like an occupied one, so the Pune flat can be one of his two nil-value houses if he does not let it or take another benefit from it.
Unpaid rent on a vacated flat. A tenant stops paying and leaves. Section 21(4) excludes rent the owner cannot realise, subject to rule 21 of the Income-tax Rules, 2026. The rule requires the tenancy to be bona fide, the tenant to have vacated or steps taken to make him vacate, the tenant not to be in another property of yours, and reasonable steps taken to recover the rent through legal proceedings (or proof that they would be futile). Keep the notices and the legal papers.
Common mistakes
- Treating three or more homes as nil. Section 21(7)(a) limits the nil value to two houses.
- Letting a room and still claiming nil. Letting any part at any time in the year takes the house out of section 21(6).
- Assuming the full Rs 2,00,000 interest deduction. It needs the completion-within-five-years condition and the lender's certificate; otherwise the cap is Rs 30,000.
- Counting the Rs 2,00,000 cap per house. Section 22(5) applies it to all section 21(6) houses together.
- Using the vacancy rule for a low agreed rent. Section 21(2) needs the shortfall to be caused by vacancy.
- Deducting local taxes that were not paid in the year. Section 21(3) allows only taxes actually paid during the tax year, irrespective of the year they fell due.
Quick reference
| Situation | Annual value | Section |
|---|---|---|
| Let out, no vacancy | Higher of expected rent and actual rent | 21(1) |
| Let out, vacancy lowers the rent | Rent actually received or receivable | 21(2) |
| Self-occupied or cannot be occupied (max 2 houses, not let) | Nil | 21(6), 21(7) |
| Third and further houses | Expected rent, as under 21(1) | 21(1), 21(7)(a) |
| Stock-in-trade, not let | Nil up to two years from the end of the financial year of the completion certificate | 21(5) |
| Rent that cannot be recovered | Excluded, if rule 21 conditions are met | 21(4), rule 21 |
Where this is in the Act
- Section 20(1), (2): house property income charged on annual value; own business premises excluded.
- Section 21(1) to (7): determination of annual value.
- Section 22(1) to (5): 30% deduction, interest, and the Rs 2,00,000 and Rs 30,000 caps.
- Rule 21, Income-tax Rules, 2026: unrealised rent.
For a CA firm, the hard part is tracking which clients own more than two houses, which one has a part-year tenant, and who is missing a lender's certificate. Finexo's practice management software helps you keep client documents and filing tasks in one place. It does not compute the tax or file returns for you.
This article is general information, not tax advice. Check the current text of the Act and Rules, and the facts of your case, before filing.
Frequently Asked Questions
Is the annual value of a self-occupied house nil under the Income Tax Act 2025?
Yes, under section 21(6) the annual value is nil if the owner occupies the house for his own residence or cannot actually occupy it. This applies to only two houses specified by the owner and not to a house that is let at any time in the tax year (section 21(7)).
How many self-occupied houses can have nil annual value?
Two. Section 21(7)(a) says the nil value applies only in respect of two houses as specified by the assessee. Any other house is valued under section 21(1).
What is the home loan interest limit on a self-occupied house?
Rs 2,00,000 if the house was bought or built with borrowed capital, completed within five years from the end of the tax year of borrowing, and you have the lender's certificate. In any other case it is Rs 30,000 (section 22(2)). The total across all such houses cannot exceed Rs 2,00,000 (section 22(5)).
How is a vacant let-out property valued?
If the property was vacant for part of the year and that vacancy made the rent received lower than the expected rent, the annual value is the rent actually received or receivable (section 21(2)). Otherwise the higher of expected rent and actual rent applies.
Is rent that a tenant never paid taxable?
Section 21(4) excludes rent the owner cannot realise, subject to the conditions in rule 21 of the Income-tax Rules, 2026. These include a bona fide tenancy, the tenant having vacated, and reasonable steps to recover the rent.
Is a third house taxed if it stays empty all year?
Yes. Only two houses specified by you get nil value under section 21(6) and (7)(a). The third is valued under section 21(1), on the sum it might reasonably be expected to let for, even if no rent comes in.