The Union Budget 2025 brought huge relief to middle class taxpayers by changing tax slabs and reducing tax rates. Further, the income up to Rs 12 lacs was made tax-free through rebate under Section 87A.
Amidst this excitement, you may have missed an important change for taxpayers with multiple houses. In this post, let us find out more about this change.
How Is Income from House Property Taxed?
Section 23 of the Income Tax Act determines how the income from the house property is taxed.
For a self-occupied property, the income from house property is considered zero.
For a let-out property, you must add rent to your income and pay taxes accordingly. Section 24 of the Income Tax Act allows for certain deductions from the rent such as a standard deduction of 30% and the interest payment on the housing loan.
However, there is a third type of property as well. It is not self-occupied (since you do not stay there) and it has not been rented out either. Such properties are considered deemed let-out for the purpose of taxation. So, you do not receive rent for such properties, but you still must pay tax on the rental income that you could have reasonably earned from that property.
To save taxpayers from this bizarre situation, the tax laws allow you to consider any 2 of your properties as self-occupied (subject to conditions). You may own 10 houses, but you can only show 2 as self-occupied. This is specified in Section 23(4) of the Income Tax Act.
Hence, if you own 3 houses, only 2 houses can be considered self-occupied, and you can show income from those houses as zero. For the third house and beyond, even if the house is not let out and not earning rent, it will be deemed let-out, and you will have to show this deemed income in your tax returns (deductions under Section 24 still allowed) and pay taxes.
You may ask, why not rent out the property if you must pay the tax in any case? Well, there could be genuine reasons for not letting out a property. Your parents or a sibling may be staying there. Or you may not let out the property to avoid legal or procedural hassles later. Or you plan to return to the city soon and just want to keep the house vacant for own use later.
Which Property Can Be Considered Self-Occupied?
As per the existing rules, for a property to be considered self-occupied, it must meet one of the following conditions:
- You must be using the property as your residence. OR
- You cannot occupy the property because of your employment, profession, or business being carried out at any other place AND you are residing in a place NOT owned by you.
Further, you should have put the property on rent for any part of the year. In other words, even if you put out the property for rent for a single month, you cannot claim the property as self-occupied even if the property was vacant for the remaining 11 months.
This Definition of Self-Occupied Property Can Lead To Strange Scenarios
Let us understand this with the help of an example.
You own two houses in Delhi. House A and House B. You stay in House A and the house is either vacant or occupied by a friend/family member for which no rent is paid.
Now, House A will be considered self-occupied since you are staying there.
What about House B?
Firstly, there could be contention whether you cannot occupy due to employment, profession, and business reasons. After all, both the houses are in the same city, and you work in the same city.
Secondly, even if you could prove that you cannot stay in the house for one of the acceptable reasons, it will NOT be considered self-occupied. Why? Because you are residing in a property (House A) owned by you.
House B can NOT be considered self-occupied because you are staying in House A that you own.
For House B to be considered self-occupied, you must stay in House C that is NOT owned by you.
Hence, if you want both House A and House B to be considered self-occupied under Section 23 of the Income Tax Act, you cannot be residing in either of them.
It does not end here. To prove that you are NOT staying in a self-occupied property, you may be asked to produce rent receipts.
Sounds crazy, right?
What Does the Budget 2025 Change?
The Union Budget 2025 does away with the second condition about the reason for non-occupancy and NOT staying in an own property.
Copying excerpt from the Finance Bill 2025:
The annual value of the property consisting of a house or any part thereof shall be taken as nil, if the owner
- Occupies it for his own residence OR
- Cannot actually occupy it due to any reason
Hence, you do not have to provide the reason. You can claim any of your 2 properties as self-occupied. Yes, the restriction of 2 properties is still there. And you must NOT have let out the property for even a single day during the year.
Clearly, this makes life easy for owners of multiple houses.
What do you think?
Author’s Disclaimer: I am not a tax expert. Please consult a Chartered Accountant before acting.