No additional tax on vacant properties recommended in the revised Income Tax Bill 2025 following a select committee review.
The select committee of Lok Sabha has identified several drafting problems in Clause 21 of the Income Tax Bill 2025, which pertains to the annual valuation of residential properties. They have proposed two significant amendments. The first is the removal of the phrase “in normal course,” and the second pertains to the provisions regarding deemed housing rental. Chartered Accountants remarked that if the Income Tax Bill 2025 was enacted without these revisions, property owners would face increased annual valuations, leading to a greater tax burden. Fortunately, these amendments help maintain the current tax treatment in line with the Income Tax Act of 1961.
Insights from the Select Committee
Reflecting on the recommendations regarding the Income Tax Bill, 2025, the select committee provided the following observations:
- The Committee found that drafting ambiguities in Clause 21(2) could hinder accurate determination of the annual value for properties that are vacant.
- Thus, they propose two crucial adjustments: the deletion of the phrase “in normal course” and an explicit amendment to allow a comparative analysis of actual rent received against the “deeming rent,” consistent with the terms of the existing Act.
- The committee argued that these modifications are essential to enhance fairness, clarify the evaluation process for vacant properties, and ensure equitable tax treatment for property owners. The committee also recommended the acceptance of the remaining clauses without changes.
Comparing the Income Tax Act of 1961 and Income Tax Bill of 2025 on Vacant Properties
Deepashree Shetty, Partner at Global Employer Services, Tax & Regulatory Services, BDO India, explains:
Income Tax Act, 1961
Under the Income Tax Act of 1961, if a rented property was vacant during a given financial year, its annual value would be assessed as follows:
- The reasonable expected rent; or
- The actual rent received/receivable, when that amount is lower than the reasonable expected rent.
Income Tax Bill 2025
The provisions outlined in the Income Tax Bill 2025 state that the annual value of any House Property shall be determined by the greater of the following:
- The reasonable expected rent; or
- The actual rent received/receivable, provided the House Property or any of its portions is rented.
Also read: How to determine the gross annual value of house property for ITR filing
Implications of the Select Committee’s Recommendations for Property Owners
Shalini Jain, Tax Partner at EY India, clarifies:
- Removal of the phrase “in normal course”: “Eliminating this phrase clarifies the typical nature of property letting, making the provision applicable to any property that has been rented at some point. Retaining the phrase could introduce subjectivity, potentially leading to disputes about whether the property was let in normal business circumstances.”
- Establishment of explicit provisions for actual rent versus “deeming rent”: “This guarantees that for properties that were rented but remained vacant during any time, the annual valuation will involve a comparison between actual rent received during occupancy and the “deeming rent” (the potential rent for which the property might actually be let). The lower value would likely serve as the basis for assessing the vacant period or the actual rent received over the year, provided it is genuinely lower than the deemed rent due to vacancy.”
Chartered Accountant Dr. Suresh Surna states, “These committee recommendations clarify the relationship between actual and deemed rents. They are crucial for enhancing fairness, clarifying the valuation of vacant properties, and ensuring just tax treatment for property owners.”
The Consequences of Ignoring the Committee’s Suggestions
Shetty elaborates:
- In contrast to the Income Tax Act, 1961, the original Income Tax Bill, 2025, omitted the comparison between actual rent versus the reasonable expected/deeming rent. This omission becomes apparent due to the absence of provisions addressing situations where actual rent/receivable is less than the reasonable rent.
- Without these provisions, taxpayers are forced to present a reasonable rental value even in instances of lower or no rent (due to vacancies), potentially leading to a reporting of a higher deemed income from House Property and subsequent tax liabilities.
According to Shetty, “To address this issue, the committee has recommended reinstating the comparison of reasonable rent against actual rent, thus ensuring fairness in the tax treatment of vacant properties.” The following example illustrates this point:
| Particulars | IncomeTax Act, 1961 | Income Tax Bill, 2025 | Suggestions by the Select Committee |
| Reasonable rent receivable | Rs 1,00,000 | Rs 1,00,000 | Rs 1,00,000 |
| Actual rent received by a partially vacant House Property | Rs 30,000 | Rs 30,000 | Rs 30,000 |
| Annual value of such House Property | Rs 30,000 | Rs1,00,000 | Rs 30,000 |
Jain concurs with Shetty and adds: “The initial Section 21(2) of the Income Tax Bill 2025 deviated from this comparison by stating that the annual value for vacant properties “shall be computed as per sub-section (1)(b)” (i.e., determined solely by actual rent).”
Jain further explains: “The Committee observed that this could create confusion and fairness issues, where taxpayers might end up paying taxes based solely on actual rents without any comparison to reasonable rents. By reinstating the comparison between actual rent and the ‘deeming rent’, the Committee effectively advocates for a principle deeply embedded in Indian tax law regarding house properties, emphasizing a balance between revenue interests and taxpayer concerns in cases of vacancy.”
