Sub-section (1) sets the annual value for section 20 as the higher of the sum for which the property might reasonably be expected to let from year to year and the actual rent received or receivable if the property or any part of it is let. Sub-section (2) cuts that down where a let property or part of it was vacant for the whole or part of the year and, owing to that vacancy, the actual rent is less than the reasonable letting sum: the annual value is then the amount actually received or receivable.
Sub-section (3) reduces the annual value by taxes, including service taxes, levied by a local authority and actually paid during the tax year by the owner, irrespective of when they became payable. Sub-section (4) keeps rent which cannot be realised out of the actual rent, subject to the rules made in that behalf.
Sub-section (5) gives property held as stock-in-trade and not let wholly or partly at any time during the tax year a nil annual value up to two years from the end of the financial year in which the completion certificate is obtained from the competent authority; "nil up to" was substituted for "nil for" by Act No. 4 of 2026 with effect from 1 April 2026. Sub-section (6) makes the annual value nil where the owner occupies the house for his own residence or cannot actually occupy it for any reason, and sub-section (7) confines that to two houses specified by the assessee and withdraws it if the house or any part of it is actually let at any time in the year or the owner derives any other benefit from it.
Why it is there
House property is taxed on a notional letting value, so the Act must say what that value is and when the notional figure gives way to the real one. Sub-sections (2) to (4) keep the owner from being taxed on rent he never got. Sub-sections (5) to (7) are concessions with hard edges, and the section states exactly how long and how many.
Who it applies to
An owner of house property whose income is computed under section 20
An owner occupying a house for his own residence, or unable to actually occupy it
An owner of property held as stock-in-trade, including completed but unsold units
An owner who has paid local authority taxes on the property
The figures, and what each one turns on
Read the condition in the same row. A figure quoted without it is a wrong answer with a citation attached.
What
Figure
The condition on it
Where
Nil annual value for completed stock-in-trade
Up to two years
Property held as stock-in-trade and not let wholly or partly at any time during the tax year; counted from the end of the financial year in which the completion certificate is obtained from the competent authority
Sub-section (5)
Number of houses that may be taken at nil annual value
Two houses
Only those specified by the assessee, and only where sub-section (6) applies — owner-occupied or incapable of actual occupation
Sub-section (7)(a)
What this means in practice
Start with the higher of expected letting value and actual rent, then apply the reducers. The vacancy rule operates only where the property was let and fell vacant. The municipal tax deduction turns on payment, not liability — taxes actually paid during the year are allowed whichever year they related to, and outstanding taxes are not. The two-house nil value is a choice the assessee specifies, lost for any house actually let for part of the year or from which he derives any other benefit.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
An individual owns three houses. Two are specified as self-occupied and taken at nil annual value. The third could reasonably be expected to let for Rs. 6,00,000 a year but was actually let for Rs. 4,50,000 because it lay vacant for three months; the shortfall being owing to the vacancy, sub-section (2) makes the annual value Rs. 4,50,000, less municipal taxes of Rs. 30,000 actually paid during the year.
Where you meet this section
You meet this section every time house property income is computed in the return — nominating which two houses are shown at nil annual value, claiming the municipal tax deduction, or deciding whether a developer's unsold flats still carry nil value.
The words themselves
shall apply only in respect of two of such houses as specified by the assessee in this behalf
Section 21(7)(a), Income-tax Act, 2025.
reduced by the taxes (including service taxes) levied by a local authority in respect of such property, actually paid during the tax year by the owner, irrespective of when such taxes became payable
Section 21(3), Income-tax Act, 2025.
What people get wrong
Deducting municipal taxes on an accrual basis. Sub-section (3) allows only taxes actually paid during the tax year by the owner.
Taking a third house at nil annual value. Sub-section (7)(a) limits sub-section (6) to two houses specified by the assessee.
Keeping the nil value for a house let for part of the year. Sub-section (7)(b) withdraws it if the house or any part of it is actually let at any time, or if the owner derives any other benefit from it.
Applying the vacancy rule to a property never let. Sub-section (2) requires that the property or part of it is let and was vacant, and that the shortfall is owing to that vacancy.
Counting the stock-in-trade nil period from the date of the completion certificate. Sub-section (5) runs it from the end of the financial year in which the certificate is obtained.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
23 - Annual value how determined
27 - “Owner of house property”, “annual charge”, etc., defined
Rules of the Income-tax Rules, 2026 that work section 21. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 538 — 430. Whether capital gain arising from transfer of a self-occupied residential house would be entitled to exemption 1989-07-13
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 21. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
CIT v Podar Cement (P) LtdSupreme CourtCuts both waystagged s.27 I have paid for the flat and I am in possession, but the conveyance was never registered. Am I the owner for s.22?
Raj Dadarkar & Associates v ACITSupreme CourtHelps departmenttagged s.23 Our deed says sub-letting is our business. Does that make the licence fees business income?
Ansal Housing & Construction Ltd v ACITHigh CourtHelps departmenttagged s.23 My unsold flats are stock in trade and were never let. Can the AO still tax notional rent?
CIT v Sane & Doshi EnterprisesHigh CourtHelps taxpayertagged s.23 The department has taxed the rent from my unsold flats under income from house property. Can I still deduct the interest on the money I borrowed to…
CIT v Tip Top TypographyHigh CourtHelps taxpayertagged s.23 The Assessing Officer disbelieves the rent I have declared and has fixed a higher annual value from properties he says are comparable. What must he…
Shivani Madan v PCITHigh CourtHelps taxpayertagged s.23(1)(a) My husband and I are both on the sale deed. Must half the annual value be taxed on me?
Tivoli Investment & Trading Co v ACITHigh CourtHelps departmenttagged s.23 The officer says my declared rent is too low and has fixed a much higher annual value. Is he bound by the municipal rateable value?
Vivek Jain v ACITHigh CourtHelps departmenttagged s.23 My flat was never let during the year. Can I take the annual value as nil under the vacancy clause?
Osho Developers v ACITITATHelps taxpayertagged s.23 I'm a builder holding unsold flats as stock. Can notional rent be taxed as house property?
Ramesh Dungarshi Shah v DCITITATCuts both waystagged s.23 I'm a builder taxed on notional rent for unsold flats. From which year can that apply?
Sachin R Tendulkar v DCITITATHelps taxpayertagged s.23 My flat stayed vacant although I tried to let it. Can I still claim vacancy allowance?
Saif Ali Khan Pataudi v ACITITATtagged s.23 The flat could not be let at all because it did not match the sanctioned plan and needed alteration. Am I still taxable on a notional annual value?
Sonu Realtors P Ltd v DCITITATHelps taxpayertagged s.23 The flat was let for three years, then lay empty for the whole of this year. Is the annual value nil?
Sunil Ramnarayan Mantri v DCITITATHelps taxpayertagged s.23 My property was let for only a few days in the year and lay vacant for the rest. The officer has taxed the full twelve-month notional value. Can…
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.