Deemed Let Out Property

The deemed let out property concept arose from the Finance Act 2019 amendment that allowed taxpayers to designate up to two properties as self-occupied with a nil annual value. Prior to this amendment, only one property could be designated as self-occupied and all other owned properties that were vacant or in owner-occupation were treated as deemed let out. The 2019 change provided relief to taxpayers who owned two homes — such as a parent maintaining a home in their hometown while living in another city for work.

For a property to be treated as deemed let out, it must satisfy the condition that it has not actually been let out during any part of the year and is not chosen as one of the two self-occupied properties. Once classified as deemed let out, the Gross Annual Value was computed as the higher of the fair rent and the municipal rental value for the property. Actual rent received being nil did not change this calculation — the notional annual value was still assigned.

The practical consequence was that an owner of three or more residential properties who was not generating any rental income from the third and subsequent properties still paid income tax on the notional rent of those properties. This created a real cash outflow — tax on non-existent income — which was a structural disincentive to property investors holding multiple vacant residential properties without letting them out.

A common scenario was inherited properties. When a taxpayer received multiple properties through inheritance or family settlement, properties beyond the two self-occupied threshold became deemed let out. The taxpayer had no choice over which properties to classify as self-occupied — any two could be selected, and the selection could theoretically vary year to year. Strategic selection involved designating the higher-value properties (with higher fair rent potential) as self-occupied to minimise the notional rental income taxable under the deemed let out provisions.

Section 24(b) interest deductions were still available for a deemed let out property. If the property was acquired with a home loan, the full interest was deductible from the notional annual value, frequently resulting in a loss that was subject to the Rs 2 lakh set-off cap. This created a situation where a taxpayer was paying tax on a notional income while simultaneously having a tax loss — the net economic treatment could be favourable or unfavourable depending on the quantum of interest and the notional rent.

For real estate developers and investors who kept completed but unsold or unleased units in their books, the deemed let out provisions applied from the end of the second year following the year of completion of construction (under an older provision that was later amended). This created a tax cost on inventory properties and was a consideration in developer holding strategies. The deemed let out framework illustrated the tax system's attempt to prevent tax advantages from property hoarding while incentivising productive use of housing stock.