No more higher tax on vacant property as recommended in New Income Tax Bill 2025 due to suggestions by select committee
Aug 7, 2025
Synopsis
The Lok Sabha's Select Committee identified drafting issues in Clause 21 of the Income Tax Bill 2025, concerning the annual value of residential properties. Their key suggestions, including deleting "in normal course" and explicitly comparing actual rent with "deeming rent," prevent a higher tax liability for vacant house property owners. Read more.
The select committee of Lok Sabha has found a couple of drafting issues in Clause 21 of the Income Tax Bill 2025, which talks about the annual value of residential house properties and has recommended two key changes. The first change is the deletion of the phase “in normal course” and the second relates to deeming house rent provisions. Chartered Accountants we spoke to said that if the provisions of the Income Tax Bill 2025 were implemented without incorporating these suggestions, the annual value of a house property would have gone up, resulting in a higher tax liability. Thankfully, because of these suggestions, the tax treatment remained the same as it was under the Income Tax Act, 1961.
What did the Select Committee say?
Based on the suggestions from the Income Tax Bill, 2025, here’s what the select committee had to say:
The Committee, after a careful review of Clause 21, identified drafting issues in 21(2) that could lead to ambiguity in determining the annual value of properties experiencing vacancy.
The committee, therefore, recommend two key changes: first, that the phrase "in normal course" be deleted, and second, that the clause be amended to explicitly provide for a comparison of the actual rent received with the "deeming rent," as was available in the existing Act.
The committee believes these adjustments are vital for enhancing fairness, reducing ambiguity in the valuation of vacant properties, and leading to a more equitable tax treatment for property owners. The Committee, further, recommended that the rest of the Clauses may be accepted in their current form.
What did the Income Tax Act, 1961 and Income Tax Bill, 2025 say about vacant house properties?
Deepashree Shetty Partner, Global Employer Services, Tax & Regulatory Services, BDO India explains:
Income Tax Act, 1961
As per the provisions of the Income Tax Act, 1961 in case of a let-out (rent) house property which was vacant during the year, the annual value of such house property would be:
The reasonable expected rent; or
The actual rent received/receivable if the actual rent received/receivable is less than the reasonable expected rent.
Income Tax Bill 2025
As per the provisions of the Income Tax Bill, 2025, the annual value of any House Property shall be higher of the below:
The reasonable expected rent; or
The actual rent received/receivable, if the House Property or any part of it is let.
What do these two suggestions by the select committee mean for house property owners?
Shalini Jain, Tax Partner, EY India, explains:
Deletion of the phrase "in normal course": “This removes ambiguity regarding the typical nature of letting a property, making the provision applicable more broadly to any property that was let at some point. Retention of the phrase “in normal course” could have introduced an element of subjectivity leading to litigation on whether or not the property is let out in normal course.”
Explicit provision for comparing actual rent with "deeming rent": “This ensures that for properties that were rented out but remained vacant for any period, the annual value will be determined by comparing the actual rent received or receivable during the occupied period with the "deeming rent" (the sum for which the property might reasonably be expected to let). The lower of the two would likely be considered for the vacant period, or the actual rent received for the entire year if genuinely lower than the deemed rent for the whole year due to vacancy.”
Chartered Accountant Dr Suresh Surna says: “These recommendations by the committee would ensure that the comparison between the actual rent received, and the deemed rent is clearly specified, and are important for enhancing fairness, reducing ambiguity in the valuation of vacant properties, and leading to a more equitable tax treatment for house property owners.”
Without the committee’s suggestions, taxpayers would have had to face a higher tax outgo
Shetty explains:
As compared to the Income Tax Act, 1961, the Income Tax Bill, 2025 had removed the comparison of the actual rent vs. the reasonable expected/deeming rent. This is evident from the exclusion of the situation where the actual rent/receivable is lesser than the reasonable rent.
The result would be that taxpayers would have to consider the reasonable rental value even in cases where they receive lesser or no rent (due to vacancy). This would render a higher deemed income from HP and a higher tax.
According to Shetty, “to combat this, the committee has suggested including the comparison of the reasonable rent vs the actual rent allowing fairness in taxability of vacant house properties.” The following illustration explains this:
Source: BDO India
Jain agrees with Shetty and adds: “The Income Tax Bill 2025's original Section 21(2) initially has moved away from this comparison by stating that for vacant properties, the annual value "shall be computed as per sub-section (1)(b)" (i.e., solely the actual rent).”
Jain says: “The Committee observed that this could lead to ambiguity and impact fairness as the taxpayers may end up paying taxes on actual rent received or receivable without comparing it with the reasonable rent. By recommending the reintroduction of the comparison of the actual rent with the ‘deeming rent’, the Committee effectively suggests reverting to a principle that has been a part of the Indian tax law for house property for a significant period, known for balancing the interests of both the revenue and the taxpayer in vacancy scenarios.”
[The Economic Times]
