New Change for Income Tax on Self Occupied House Property from AY 2025-26

Income Tax on Self Occupied House Property has been changed from Assessment Year (AY) 2025-26,  Here’s a summary:

Key Changes:

• Broader Definition:
  • The definition of “self-occupied” has been expanded. Now, a property can be considered self-occupied not only when the owner resides there or due to employment/business/profession, but also if they cannot occupy it “due to any reason.” This provides greater flexibility.
• Simplification:
  • The aim is to simplify the process for taxpayers to claim the self-occupied status for their properties.

What Remains the Same:

• Two-Property Limit:
  • Crucially, the existing limitation of allowing only two self-occupied properties with a “nil” annual value remains in effect. Taxpayers owning more than two properties must still designate only two as self-occupied.
• Tax Planning:
  • Tax payers will still need to plan which two houses they will claim as self occupied, and it is still optimal to claim the two houses with the highest notional rental value.

Impact:

• Increased Flexibility:
  • Taxpayers gain more flexibility in determining which properties qualify as self-occupied.
• Simplified Compliance:
  • The process of claiming self-occupied status is simplified.
• No Change to Property Limit:
  • It’s essential to note that the amendment does not alter the rule limiting the “nil” annual value benefit to two properties.

In essence, while the rules regarding what qualifies a house as self occupied have been relaxed, the limit of two self occupied houses remains.

To understand the situation regarding unoccupied property before the AY 2024-25 amendments, it’s essential to look at the previous interpretation of Section 23(2) of the Income Tax Act. Here’s a breakdown:

Why there was need of Change of Section 23(2):

• Self-Occupation:
  • The primary condition for a “nil” annual value was that the property was occupied by the owner for their own residence.
• Occupation Due to Employment/Business/Profession:
  • A specific exception was provided: if the owner could not occupy the property because their employment, business, or profession required them to reside elsewhere, the property could also be considered self-occupied.
• Limitations:
  • This meant that if a property was unoccupied for any other reason (e.g., it was a second home that was rarely used, it was being held for future use, or the owner was simply not residing there for personal reasons), it did not qualify for the “nil” annual value under Section 23(2).
  • Also, the existance of section 23(4) limited the amount of houses that could be claimed as self occupied to two.
• Deemed Let Out:
  • In such cases, if the property was not considered self-occupied, it would often be “deemed to be let out.” This meant that the Income Tax Department would calculate a notional rental income for the property, and the owner would be taxed on that income, even if they had not actually received any rent.

Therefore, before the amendment:

• If a property was vacant for reasons other than employment, business, or profession, the owner faced the possibility of being taxed on a notional rental income.
• The rules where very restrictive as to what qualified as a self occupied property.

The amendment aims to address this by:

• Broadening the scope of Section 23(2) to include situations where the property “cannot actually occupy it due to any reason.” This provides more flexibility for homeowners.

Scenario: Mr. Sharma Owns Multiple Properties

• Before AY 2025-26:

  • Mr. Sharma owns three houses:
    • House 1: Self-occupied for his primary residence in Chandigarh.
    • House 2: Self-occupied, used as a vacation home in Shimla.
    • House 3: Self-occupied (in Delhi), but sometimes used when he works in a different city.
  • Therefore, before AY 2025-26, if Mr. Sharma designated House 1 as his primary self-occupied residence, and house 3 as the second self occupied property, then House 2, being a vacation home, would likely be “deemed to be let out.”
  • This means that the tax authorities would calculate a notional rental value for House 2, and Mr. Sharma would be liable to pay income tax on that amount, even if he didn’t actually rent it out.

• After AY 2025-26:

  • Mr. Sharma still owns the same three houses.
  • Now, with the amended Section 23(2), and the continuation of the allowance of two self occupied properties, Mr. Sharma can still only claim two of the three houses as self occupied.
  • The difference is that the wording of section 23(2) has been broadened.
  • The key change is the broadening of the reason as to why a property can be classed as self occupied.
  • This makes it easier for the tax payer to claim the self occupied status.