Computation of Income from a Self-Occupied Residential House Property [Section 23(2), (3), (4)]

Under Section 23(2) to (4) of the Income Tax Act, 1961, a self-occupied residential property (SOP) is taxed differently from let-out or deemed let-out properties. Here’s how the income is computed:

1. Basic Concept

For one self-occupied residential property (SOP), the Annual Value is considered NIL under Section 23(2). However, interest on home loan remains deductible.

2. Basic Rules for Self-Occupied Property (SOP)

• Only one propertycan be declared as self-occupied (tax-free)
• Annual Value (AV)is considered NIL for tax purposes
• Key benefit: Deduction for home loan interest (up to ₹2 lakh)

3. When Property Qualifies as Self-Occupied

A. Normally Self-Occupied [Section 23(2)]

• Property must be actually occupiedby owner for residence
• No rental income is generated

B. Deemed Self-Occupied [Section 23(3)]

Applies when:

• Owner cannot occupydue to employment/business
• Living in:
  • Rented accommodation
  • Employer-provided accommodation
  • Other city due to work
• Property remains unlet(not rented out)

C. Multiple Properties [Section 23(4)]

• Only onecan be declared as self-occupied
• Additional properties are deemed let-out(taxed on fair rental value)
  • Owner must be living in rented accommodation due to work

4. Computation Method

5. Special Cases

A.  Multiple Properties (Section 23(4))

• Only one propertycan be declared as self-occupied
• Additional properties are deemed let-out(taxed on fair rental value)

B.  Property Not Actually Occupied Due to Employment (Section 23(3))

• Still treated as self-occupied if:
  • Owner is posted elsewhere
  • Living in employer-provided accommodation
  • Maintains property for own use (not rented out)

C.  Partly Self-Occupied

• If portion is let out:
  • Self-occupied part: GAV = ₹0
  • Let-out part: Normal computation

6. Interest on Home Loan Deduction

• Pre-construction period interest:
  • Deductible in 5 equal instalmentsfrom construction completion year
• Current year interest:
  • Fully deductible (max ₹2L) for SOP
  • No limit if deemed let-out

7. Practical Example

Example 1: Standard SOP

• A owns 1 house in Delhi (self-occupied)
• Home loan interest: ₹2.5 lakh
• Computation:
  • GAV = ₹0
  • Deduction = ₹2 lakh
  • Taxable income = -₹2 lakh (loss)

Example 2: Unable to Occupy Due to Job

• B posted in Mumbai (lives in company flat)
• Owns locked house in Bangalore
• Interest: ₹3 lakh
• Computation:
  • Treated as SOP under Section 23(3)
  • Deduction = ₹2 lakh
  • Loss = ₹2 lakh

Example 3: Multiple Properties

• C owns:
  • House 1: Self-occupied (Delhi)
  • House 2: Vacant (Mumbai)
• Computation:
  • Delhi house: ₹0 income (₹2 lakh deduction)
  • Mumbai house: Deemed let-out (taxed on fair rent)

8. Key Points to Remember

✅ Only one SOP allowed per taxpayer

✅ Interest deduction is primary benefit (₹2L cap)

✅ Unoccupied due to work still qualifies as SOP

✅ Multiple properties trigger deemed let-out rule

✅ Loss can be set off against other income (max ₹2L/year)