Section 23: How Annual Value of House Property Is Determined

Section 23 of the Income-tax Act, 1961 explains how the annual value of a building or land appurtenant to it is calculated for taxation under the head "Income from house property." It distinguishes let-out, vacant, self-occupied and certain unsold builder properties.

What does annual value mean under Section 23?

Annual value is a statutory measure of the property's capacity to earn rent, adjusted by rules for actual letting, vacancy and specified deductions. It is not necessarily the rent actually collected. Section 22 identifies income chargeable under the house-property head; Section 23 determines annual value; and Section 24 provides certain deductions when computing taxable house-property income.

Previous year refers to the financial year for which income is computed under the 1961 Act. Municipal taxes are qualifying local-authority property taxes actually paid by the owner, not merely assessed or outstanding.

Section 23(1): Annual value of let-out property

Clause (a): Reasonably expected rent

Start with the amount for which the property might reasonably be expected to let from year to year. In applying this test, municipal valuation, comparable market rent and applicable rent-control restrictions may be relevant. A high hypothetical rent cannot simply be assumed without regard to legal restrictions.

Clause (b): Actual rent exceeds expected rent

Where a property or part of it is let and the actual rent received or receivable exceeds the amount determined under clause (a), the higher actual rent is used, subject to the applicable treatment of unrealised rent.

Clause (c): Vacancy reduces rent

Where a property was let and remained vacant for all or part of the previous year, and vacancy causes actual rent to fall below the reasonably expected amount, the qualifying lower actual rent is used. Whether a particular property satisfies the statutory vacancy conditions depends on its facts and evidence.

Municipal taxes and unrealised rent

The proviso to Section 23(1) permits deduction of qualifying local-authority taxes in the year actually paid by the owner. The Explanation excludes qualifying unrealised rent from actual rent, subject to prescribed conditions. For the 1962 Rules, see Rule 4 regarding unrealised rent; subsequent recovery may be taxed separately under the applicable provisions.

Section 23(2) to (4): Self-occupied and deemed let-out houses

Section 23(2): Nil annual value

For the relevant years, the annual value of a house or part of a house occupied by its owner for personal residence is taken as nil. The Finance Act, 2025 broadened the second limb of this provision from assessment year 2025-26 so that inability to occupy for any reason may qualify, subject to the other statutory conditions. The original uploaded page reproduces an older, narrower wording referring to residence elsewhere because of employment, business or profession.

Section 23(3): Exceptions

The nil-annual-value treatment under Section 23(2) does not apply where the house is actually let during the whole or any part of the year or the owner derives another benefit from it, subject to the applicable statutory interpretation.

Section 23(4): Maximum two houses

Where more than two houses qualify for the self-occupied treatment, the owner may select up to two houses for nil annual value under the applicable 1961 Act provisions. Additional qualifying houses are treated as deemed let-out and valued under Section 23(1), even if no rent is actually received.

The two-house option was introduced from assessment year 2020-21. Earlier years had a different limit; always check the applicable assessment year.

Section 23(5): Property held as stock-in-trade

For qualifying buildings or associated land held as stock-in-trade (for example, unsold completed units held by a developer), the annual value of an unlet property may be treated as nil for up to two years from the end of the financial year in which the completion certificate is obtained from the competent authority. This relief is subject to the precise conditions in Section 23(5) and the relevant assessment year; it is not a blanket exemption for every vacant investment property.

Illustrative calculations

Example 1: Rent higher than expected rent

Suppose reasonable expected rent is Rs. 2,40,000, actual annual rent is Rs. 3,00,000, and qualifying municipal taxes of Rs. 20,000 were paid by the owner. Subject to unrealised-rent rules, the annual value after municipal taxes is Rs. 2,80,000. Further deductions, such as those under Section 24, are considered separately.

Example 2: Qualifying vacancy

A house reasonably expected to earn Rs. 3,60,000 annually is let but vacant for several months, reducing rent to Rs. 2,10,000. If Section 23(1)(c)'s conditions are met, Rs. 2,10,000 may be the starting amount before deductible municipal taxes.

Example 3: Three houses used personally

An owner has three houses meeting the relevant conditions for personal residential use. Under the two-house rule, the owner can ordinarily select two for nil annual value; the third is evaluated as deemed let-out under Section 23(1).

These simplified illustrations do not account for every rent-control issue, co-ownership rule, loan-interest limitation or other deduction.

Related legal provisions

• Section 22: Charge of income from house property, including the owner-occupied business-use exclusion.
• Section 24: Standard deduction and eligible interest on borrowed capital, subject to conditions.
• Section 25: Certain amounts not deductible from house-property income.
• Section 25A: Tax treatment of arrears of rent and unrealised rent subsequently realised.
• Rule 4 of the Income-tax Rules, 1962: Conditions for excluding unrealised rent.

Practical documentation checklist

• Keep ownership documents and the relevant property-tax assessment.
• Retain rent agreements, bank statements, tenant correspondence and vacancy evidence.
• Preserve receipts proving the owner's actual payment of municipal taxes.
• For unsold developer inventory, retain completion certificates and stock-in-trade records.
• For multiple houses, document the self-occupied selection and deemed-rent working.
• Apply the correct law and rules for the tax year concerned.

Original Section 23 extract and amendment notes

The original page text is preserved below as a historical source. It contains earlier statutory wording and amendment notes and is not a complete consolidated statement of law as at October 2026.

Official legal sources

• Income Tax Department: Income-tax Act, 1961
• Income Tax Department: Income-tax Rules, 1962
• Income Tax Department: e-Filing portal
• India Code: Acts and amendments

Updated 24 October 2026. This is general legal information; verify official consolidated provisions and relevant judicial decisions before taking a tax position.