The Indian Income Tax Act contains several provisions that affect the taxation of income from house property. One such important concept is Deemed Let Out Property (DLOP), a rule that applies when a person owns more than one residential house. While many people invest their money in real estate for long-term appreciation, rental income or personal use, they usually leave their additional homes vacant. However, even if these properties do not generate actual rent, the Income Tax Act may treat them as if they do.
This blog explains in detail what a deemed let-out property means, why the concept exists, how the notional rental income is calculated, relevant legal provisions, examples, deductions, misconceptions, and practical tax planning strategies.
What Does “Deemed Let Out Property” Mean?
Under the Income Tax Act, a taxpayer can treat only one of the residential houses as self-occupied. A self-occupied property is one used by the taxpayer for the purpose of their own residence, and its annual value is considered Nil. If a particular taxpayer owns more than one residential property, the additional houses cannot all be treated as self-occupied. Even if the property is not actually rented out, not generating income, or is lying vacant, the law assumes that these additional houses have a rental value. Such properties are called Deemed Let Out Properties.
Why Does the Concept of Deemed Let Out Property Exist?
The primary reason behind this provision is to prevent tax avoidance. Without this rule, individuals could buy multiple houses, leave them vacant, and still claim zero rental income while enjoying deductions on interest and other benefits.
The deemed let out rule serves two purposes:
- Promotes efficient use of housing: The government encourages the various property owners to rent out additional houses instead of keeping them vacant.
- Ensures fair taxation: Taxpayers with multiple properties contribute to tax revenue based on the potential rental value of their assets, even if they choose not to rent them out.
Thus, the rule creates a balance between tax planning and preventing misuse of exemptions.
How is the Annual Value of Deemed Let Out Property Calculated?
For a deemed let out property, the annual value is not based on the actual rent received. Instead, it is based on the expected rent, the rent the property would reasonably fetch in the market.
The calculation considers:
- Municipal value (valuation by local authorities)
- Fair rent (market rent for similar properties)
- Standard rent (if Rent Control Act applies)
Step 1: Calculate Expected Rent
Expected Rent = Higher of (Municipal Value or Fair Rent)
but capped at Standard Rent, if applicable
Step 2: Determine Gross Annual Value (GAV)
Since there is no actual rent, GAV = Expected Rent.
Step 3: Deduct Municipal Taxes Paid
Only taxes actually paid during the year can be deducted.
Net Annual Value (NAV) = GAV – Municipal Taxes
Step 4: Apply Deductions Under Section 24
You can claim:
- 30% standard deduction under Section 24(a)
- Interest on home loan under Section 24(b) (No upper limit for DLOP)
Step 5: Calculate Taxable Income
Taxable income = NAV – (Standard Deduction + Interest on Home Loan)
Example to Understand Deemed Let Out Property Calculation
Situation
You own two properties:
- House A – Self-occupied
- House B – Vacant but considered deemed let out
House B details:
- Municipal Value: ₹2,40,000
- Fair Rent: ₹2,60,000
- Standard Rent: Not applicable
- Municipal Taxes Paid: ₹20,000
- Home Loan Interest: ₹1,50,000
Step-by-step calculation
- Expected Rent = Higher of MV (₹2,40,000) or Fair Rent (₹2,60,000)
→ ₹2,60,000 - Gross Annual Value (GAV) = ₹2,60,000
- Net Annual Value (NAV) = ₹2,60,000 – ₹20,000
→ ₹2,40,000 - Less: 30% Standard Deduction = ₹72,000
- Less: Home Loan Interest = ₹1,50,000
Taxable Income = ₹2,40,000 – ₹2,22,000 = ₹18,000
So, even though the property is vacant, you still pay tax on the deemed rental income.
Deductions Available for Deemed Let Out Property
You can claim the following deductions:
- Standard Deduction (30% of NAV) – This deduction is meant to cover repairs, maintenance, and other expenses.
- Interest on Home Loan – There is no upper limit on home loan interest for a deemed let-out property. This is a big advantage compared to a self-occupied property, where the limit is ₹2,00,000.
- Municipal Taxes – Only those taxes actually paid during the year are allowed.
Common Misconceptions About Deemed Let Out Property
| Myth | Reality |
| “If my second home is empty, it is not taxable.” | False — it becomes deemed let out. |
| “I can declare both houses as self-occupied if I use them occasionally.” | No — only one property can be claimed as self-occupied. |
| “Home loan interest deduction is limited for all properties.” | The ₹2 lakh limit applies only to self-occupied property. |
| “No rent means no income tax.” | Deemed rent is taxable. |
Special Cases to Consider
- Property Under Construction – If the construction is not complete, it is not treated as deemed let out.
- Co-owned Property – Deemed let out rules apply to each owner based on their share.
- House Given to Parents or Children – Even if family members occupy the house, it may still be considered a deemed let-out unless you choose it as your self-occupied house.
- Job Transfer or Frequent Relocation – Even if you live in a rented home in another city due to employment, you can claim only one owned property as self-occupied.
How to Reduce Tax on Deemed Let Out Property?
1. Choose the Best Property for Self-Occupied
Pick the house with:
- Higher expected rent
- Lower home loan interest
2. Actually, Rent Out the Property
In many cases, actual rent may be lower than deemed rent, reducing tax.
3. Claim Full Home Loan Interest
For deemed let out property, the entire interest amount can reduce taxable income.
4. Opt for Joint Ownership
Splitting ownership helps divide the tax burden.
5. Invest in Properties Wisely
Before buying a second house, consider the tax impact of deemed rent.
Conclusion
A Deemed Let Out Property is any residential property (other than a self-occupied house) that the Income Tax Act treats as if it is rented out, even when it is not. The law assumes that such types of properties have the potential to earn rental income, and taxes are calculated accordingly. To understand this rule is important for homeowners, investors and anyone planning to buy a second house.
By calculating expected rent correctly, using permissible deductions wisely and also planning real-estate investments strategically, you can reduce your tax liability and ensure compliance with tax laws.
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