Two self-occupied homes, then deemed let-out: how the Income-tax Act, 2025 taxes a third house

Rules and rates as of 15 October 2026.

Own one or two homes and use them yourself, and the Income-tax Act treats their annual value as nil. Buy a third that sits empty, or keep one for later, and the picture changes. That third home is taxed as if it earns rent, even if not a rupee comes in. Tax professionals call this a "deemed let-out" property. This explainer shows where the rule sits in the Income-tax Act, 2025, which came into force on 1 April 2026, and works through a three-flat example.

Where the rule sits now

Four sections of the 2025 Act do the work. We read each on the Income Tax Department's own pages.

• Section 20 charges tax on "the annual value" of a building you own, under the head "Income from house property". The charge is on the value, not on rent you actually receive.
• Section 21(1) fixes annual value as the higher of "the sum for which it might reasonably be expected to let from year to year" and the rent actually received, if the house is let. Section 21(3) then reduces it by municipal taxes "actually paid during the tax year by the owner".
• Section 21(6) makes annual value nil if you occupy the house as your own residence, or cannot actually occupy it for any reason (a job in another city, for instance).
• Section 21(7)(a) limits that nil value to "two of such houses as specified by the assessee". Under section 21(7)(b), no house gets the nil value if any part of it is actually let at any time in the tax year, or if you derive "any other benefit" from it.

The phrase "deemed let-out" does not appear in the 2025 Act. It is shorthand. The effect comes from reading section 21(7) with section 21(1): once two houses take the nil value, every other house you own falls back to the general rule, which is the rent it could reasonably fetch. Under the 1961 Act, the same rules sat in section 23 (now section 21) and section 24 (now section 22).

Which two houses get the nil value

You choose. The Act says only that the two houses are those "specified by the assessee". It does not require them to be the cheapest, the oldest or the ones in your city. That makes the choice a piece of arithmetic: the house left out is the one taxed on notional rent, so it usually pays to leave out the one with the lower expected rent and the bigger loan.

Two things the section does not settle. It does not say when or how the choice is made, or whether it is fixed for later years; in practice it shows up in how you fill the house property schedule of your return. And it does not define "occupies for his own residence" for a house used by parents or a sibling. If either point matters to you, settle it with your chartered accountant before you file.

Interest on the third home is not capped

Section 22(1) allows three deductions from annual value: a flat 30% under clause (a), which stands in for repairs; interest on money borrowed to buy, build, repair or reconstruct the house under clause (b); and, under clause (c), interest paid before the year of purchase or completion, spread over five equal instalments.

The ₹2 lakh ceiling everyone quotes is in section 22(2), and it applies only to houses covered by section 21(6), that is, the nil-value ones. It is ₹2,00,000 where the house was bought or built with a loan, finished within five years from the end of the tax year of borrowing, and you have the lender's certificate; ₹30,000 otherwise. Section 22(5) adds that the total for all such houses together cannot exceed ₹2,00,000. So two self-occupied homes share one ₹2 lakh cap.

The third, notionally let house is outside section 22(2). Its full interest is deductible against its own notional rent.

What happens to a loss

If interest exceeds the taxable value, you have a loss under house property. Under section 109(1)(b) that loss can be set against salary or other income only up to ₹2,00,000 in a tax year. Section 110 carries the rest forward for up to eight tax years, but only against future house property income.

The new regime, now the default under section 202, is stricter. Section 202(2)(a)(v) disallows interest on the nil-value houses entirely, and section 202(2)(b)(ii) bars setting off any house property loss against another head. Interest on the third home still reduces its own notional rent under the new regime, but the result cannot go below zero in any useful way.

Worked example: three flats, two choices

Assumptions, all illustrative: Ravi, a resident salaried individual under the old regime, owns three flats through tax year 2026-27 and lets none of them.

• Flat A, where he lives. Home-loan interest for the year ₹2,60,000.
• Flat B, in his home town, kept for his own visits. No loan. Similar flats let for ₹40,000 a month; municipal tax paid ₹15,000.
• Flat C, bought for later and kept empty. Interest ₹1,50,000. Similar flats let for ₹30,000 a month; municipal tax paid ₹12,000.

Choice 1: nil value for A and B, so C is taxed.

Annual value of C = (₹30,000 × 12) − ₹12,000 = ₹3,48,000. The 30% deduction = ₹3,48,000 × 30% = ₹1,04,400. Income from C = ₹3,48,000 − ₹1,04,400 − ₹1,50,000 = ₹93,600.

Flats A and B: annual value nil. A's interest of ₹2,60,000 is capped at ₹2,00,000 under section 22(2), giving −₹2,00,000. B has no loan, so ₹0.

Net house property = ₹93,600 − ₹2,00,000 = −₹1,06,400. That is within the ₹2 lakh limit in section 109, so all of it reduces his salary income.

Choice 2: nil value for A and C, so B is taxed.

Annual value of B = (₹40,000 × 12) − ₹15,000 = ₹4,65,000. The 30% deduction = ₹1,39,500. Income from B = ₹4,65,000 − ₹1,39,500 = ₹3,25,500.

A and C are now both nil-value houses, with combined interest of ₹2,60,000 + ₹1,50,000 = ₹4,10,000. Section 22(5) caps the two together at ₹2,00,000.

Net house property = ₹3,25,500 − ₹2,00,000 = ₹1,25,500 of taxable income.

Item	Choice 1: tax C	Choice 2: tax B
Annual value of the taxed flat	₹3,48,000	₹4,65,000
30% deduction, s.22(1)(a)	₹1,04,400	₹1,39,500
Interest on the taxed flat, uncapped	₹1,50,000	₹0
Income from the taxed flat	₹93,600	₹3,25,500
Interest on the two nil-value flats, after s.22(2) and 22(5)	−₹2,00,000	−₹2,00,000
Net income from house property (old regime)	−₹1,06,400	₹1,25,500
Under the new regime (no self-occupied interest, no set-off)	₹93,600	₹3,25,500

The gap between the two choices is ₹1,25,500 − (−₹1,06,400) = ₹2,31,900 of taxable income. In the 30% slab that is ₹69,570 of tax before cess, for the same three flats and the same cash. The new regime narrows nothing here: the better choice is still to leave out Flat C.

Points that trip people up

• Vacancy relief needs a letting. Section 21(2) lowers annual value for vacancy only where the property was let and then fell vacant. A flat you never put on rent does not use it, on the section's wording.
• "Reasonably expected" rent is a fact question. The Act gives no formula. Keep evidence of what comparable flats in the building actually let for, because that is what a tax officer will look at.
• Letting even part of a flat, even briefly, takes it out of the nil-value pair for the whole year under section 21(7)(b).
• A house used for your own business or profession is outside this head altogether under section 20(2).

When to get advice

If you own three or more homes, or hold them jointly with a spouse, ask a chartered accountant to run the comparison above with your own rents, municipal taxes and interest certificates before you file. The section numbers above are the ones to quote.