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When a taxpayer owns multiple properties, the income tax (IT) rules allow him/her to claim any two house properties as self-occupied, subject to some conditions. Rent income from any other house property is taxable and needs to be reported in the income tax return (ITR) under ‘income from house property’ head.

If any of the house property other than the two self-occupied ones is vacant and doesn’t actually earn rent, the taxpayer still needs to pay tax on notional rent.

As per the I-T rules, any vacant property apart from the self-occupied ones is treated as ‘deemed to be let out’ for the purpose of taxation. Accordingly, the taxpayer has to report notional rent in his/her ITR on such properties.

Take note that in case of multiple properties, rent from different house properties has to be calculated and declared separately in the ITR form 2/3/4, as applicable to you, and not clubbed together.

How to calculate notional rent

Deemed rent is arrived at as per Section 23(1)(a), which says that annual value of the house property is used for calculating income from it. Annual value is calculated by taking into account standard rent, municipal rent and fair rent.

Fair rent refers to the rent that a similar property in the same location as the property in question can fetch. Municipal rent will be decided by the municipal authority of the area. Standard rent is determined under the Rent Control Act and a landlord cannot charge beyond it. Since standard rent is fixed, higher of municipal rent and fair rent is compared with it and the lower between the two is taken as notional rent.

How to pick self-occupied property

The 2019 Budget allowed taxpayers to claim any two house properties owned by them as self-occupied in place of the previous rule of one. Tax on notional rent on the second house was exempted citing difficulty people face maintaining two families at two locations owing to their jobs, children’s education or elder parent’s care.

As per Section 23(2), a property can be treated as self-occupied if the owner or his/her family lives in it or if the owner or his/her family do not occupy the property owing to the owner’s work obligations in some other area and they live in a house not belonging to them. In the latter condition, an additional caveat is that the property or a part of it should not have been let out at any time during which notional rent is being considered.

When a taxpayer has vacant house properties apart from the one they live in, they have the option to declare any of the houses as self-occupied for taxation. It is recommended that you choose the house with lower annual value as deemed to be let out to reduce your tax outgo. For instance, if the net annual value of house A, house B and house C are 3 lakh, 2.5 lakh and 4 lakh, respectively, declaring house B as deemed to be let out will result in lesser tax outgo between the three. Even if house B is vacant, you can still declare house B as self-occupied and report notional rent on the other house properties.

Net annual value should be calculated after deducting municipal taxes from the gross annual value. Municipal tax can only be claimed as deduction if it is paid by the house owner. In the case of a let-out property where the owner pays the municipal taxes, he/she can deduct them from the gross rent while filing ITR.

In the case of jointly owned properties, the notional rent is split between the co-owners in proportion to their respective shares in the property and taxed accordingly. Similarly, municipal taxes too are split between the co-owners.

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