If you own more than one residential property, only one property can be treated as self-occupied for income tax purposes. The other properties will either be considered as let out or deemed to be let out, irrespective of whether you are occupying them, letting them out or leaving them vacant partially or for the whole year. Also, these properties will attract tax on their annual value. However, you are entitled to claim standard deduction of 30% and interest payment if you have taken a home loan to acquire that property, out of the annual value that will be taxed. Besides these, you can also claim for vacancy allowance.
Inherent capacity of the property to earn income is termed as its “annual value", and has been defined as the sum for which the property may reasonably be let out. Where a person owns more than one property, the annual value of any one house property, as specified by her, will be considered “nil". Other properties will attract tax on their annual values.
HOW TO CALCULATE ANNUAL VALUE?
According to section 23 of the Income-tax Act, 1961, the annual value would be the standard rent in case the properties lies under the jurisdiction of Rent Control Legislation or rent based on the municipal value of the property or the rent equivalent to what other similar properties fetch in the same locality. Highest of these will be considered for taxation purposes.
However, to calculate net annual value, you can claim few deductions such as municipal taxes, provided the property was let out partially or for whole of the previous year. These must be borne by the house owner, and not by the tenant. The municipal taxes must be paid during the same financial year.
Other permissible deductions are standard deduction of 30% of the annual value. Interest paid on borrowed capital is allowed as deduction on accrual basis if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the particular house.
If the property remained vacant during the full or part of previous year, even after your best effort to let it out, you can claim deduction as vacancy allowance under section 23(1)(c) of the income tax Act. You will not have to pay tax on any notional rent for the period for which property remained vacant. This, however, can be challenged by the assessing officer, and in such a case, you will have to give justification and proof related to the efforts taken by you to put the property on rent. For instance, it could be an advertisement in a newspaper or realty portals, or a sign board stating so outside the property.
Remember, you are free to specify any one property as self-occupied. Therefore, before specifying one, calculate the tax liability on all the properties and choose the one that will attract the highest tax as the one that you declare as self-occupied.