Deemed let-out property

A person may own several houses and let none of them. The Income Tax Act does not let all of them escape tax.

An assessee can, at his option, select any two houses (which are not actually let out) as self-occupied for tax purposes. Once that selection is made, any other house property not actually let out is "deemed let-out" — taxed as though rented, with its reasonable expected rent as the annual value.

Finance Act, 2025 change. Until FY 2024-25, a house counted as self-occupied only if the owner actually lived in it, or could not because of employment, business or profession elsewhere. From the amendment, a house is self-occupied where it is actually occupied by the owner or cannot be occupied for any other reason. The benefit remains limited to two houses.

The workbook's Mr P. He owns houses A, B, C and D. He lives in A; B is let out; C and D are not let out.

• B is let out — rental income taxed.
• Of A, C and D he may select any two as self-occupied. If he picks A and D, then C is deemed let-out and its reasonable expected rent is taxed.

Computation for a deemed let-out house — the same as for a let-out house, except that annual value is the reasonable expected rent (not the higher of expected and actual):

Annual value − municipal taxes paid = net annual value; less 30% standard deduction; less interest on borrowed capital, which for let-out or deemed let-out property has no maximum limit, subject to set-off and carry-forward rules.

Which two to choose? The workbook first says it is in the taxpayer's interest to choose as self-occupied the properties where reasonable rent is highest, adding that interest on a loan taken for a property can also affect the choice. Its Chapter 13 caselet gives the method: compute a hypothetical taxable value for every house as if let out, then treat the houses with the lowest taxable value as deemed let-out and the two with the highest as self-occupied.

Under the new regime a self-occupied house produces nil income, so the choice decides exactly which taxable values end up in income.

The workbook's Chapter 13 caselet. Mr Q (new tax regime) owns four houses, all occupied by him or his family, none let out.

The workbook's answer deducts only Rs 2,00,000 of D's interest, giving taxable values of A 2,40,000, B 3,36,000, C 4,20,000, D 3,88,000, and so treats A and B as deemed let-out (total Rs 5,76,000 taxed) and C and D as self-occupied.

The contradiction. Chapter 7 states that for let-out or deemed let-out property there is no maximum limit on interest; the Rs 2,00,000 cap applies to self-occupied property under the old regime. Deducting D's full Rs 3,00,000 gives D a taxable value of Rs 2,88,000. The two lowest become A (Rs 2,40,000) and D (Rs 2,88,000), taxing Rs 5,28,000 — Rs 48,000 less — with B and C self-occupied.

The method is the same either way; only the interest cap changes the pick. If the exam reproduces the caselet, expect its answer (A and B); if it asks the rule, the Chapter 7 statement is the one to apply.

Chapter 7 (Concepts of Taxation), section 7.6.2, where the two-self-occupied-houses rule, the Finance Act 2025 amendment and the Mr P example appear; Chapter 13 (Tax Provisions for Special Cases), Caselet 1, which works the choice across four houses. Expect a scenario asking which property is deemed let-out and how its income is computed.

• Two houses, not one, may be treated as self-occupied.
• Deemed let-out annual value = reasonable expected rent — not "higher of expected and actual", which is the let-out rule.
• The 2025 amendment widened self-occupation to houses that cannot be occupied "for any other reason"; the two-house limit is unchanged.
• Choose self-occupied houses by highest hypothetical taxable value, not simply highest rent, once loans are involved.
• Interest on deemed let-out property has no maximum per Chapter 7 — the Chapter 13 caselet's Rs 2,00,000 cap on house D conflicts with that and changes which houses are chosen.