One House, Two Houses or Three? The Changing Tax Story of Home Ownership
Owning a house is an emotion. Owning a second house is often called an investment. Owning a third house may make the Income Tax Department interested in the “Rent” you never received! Thankfully, the tax law has become considerably more taxpayer-friendly, giving taxpayers a better position than before. Let us understand the present tax position of owning more than one house property.
One House or Two? — The Rule Has Changed:
Just a few years ago, if a taxpayer owned more than one house for his own residence, only one could generally be considered as self-occupied property (SOP). The other house was treated as deemed let out and notional rent could become taxable even though the taxpayer had not actually received a single rupee of rent. The Finance Act, 2019 changed this position from AY 2020-21. Now, an individual can generally treat up to two house properties as self-occupied property (SOP), with their annual value taken as nil, subject to the prescribed conditions. Thus, owning two houses for own residence does not ordinarily result in notional rental income. Finance Act, 2025 has gone a step further. Earlier, the second house could qualify for nil annual value where the owner could not occupy it because of employment, business or profession at another place. With effect from 1 April 2025, the property can qualify even where the owner cannot actually occupy it for any reason. The benefit, however, continues to be restricted to two properties.
The Home-Loan Twist: Old Regime vs New Regime:
Under the Old Tax Regime (OTR), interest on a housing loan for a SOP is eligible for deduction under section 24(b), subject to the prescribed conditions and the overall cap of ₹2 lakh. Where two houses are treated as self-occupied, the ₹ 2 lakh limit is aggregate, and not ₹2 lakh for each house. For example, if interest on two houses is ₹1.40 lakh and ₹1.10 lakh respectively, the maximum eligible deduction is ₹2 lakh, assuming all conditions are satisfied.
But the position changes dramatically under the New Tax Regime (NTR).
A taxpayer opting for the NTR cannot claim deduction for interest on borrowed capital in respect of a SOP. In other words, the home loan may continue, the EMI may continue, the interest may continue—and the deduction may disappear! Thus, the same home loan can produce a very different tax result under the two regimes. The house remains the same; only the tax treatment changes. A taxpayer with substantial housing-loan interest should not assume that the NTR is automatically better merely because its slab rates are lower.
Interest Deduction Vs. Let-Out or Deemed Let-Out Property?
For a let-out or deemed-let-out property, interest on housing loan is generally allowable without the cap of ₹ 2 lakh applicable to SOP. Under the new regime too, such interest is deductible without a monetary ceiling; however, any resulting house-property loss cannot be set off against income under other heads. This distinction becomes particularly important when a taxpayer owns more than two houses, because the choice of properties treated as self-occupied can materially affect the tax outcome.
What If There Are Three or More Houses?
Up to two eligible house properties can be treated as SOP with nil annual value; the third is generally treated as deemed let out. The taxpayer can choose which two eligible properties are to be treated as self-occupied, making the choice an important tax-planning opportunity.
For example, suppose Mr. Ram owns three houses in Nagpur, Mumbai and Pune. He uses the Nagpur and Mumbai houses for his own residence, while the Pune house remains vacant. He can choose any two for nil annual value; the remaining property will generally be treated as deemed let out, with its expected rent potentially taxable despite no actual rent being received. A taxpayer should not make this choice mechanically. If one property has a very high expected rental value but little or no housing-loan interest, while another has substantial interest on borrowed capital, the tax consequences of treating either property as deemed let out can vary significantly. Thus, “Which two houses should be treated as SOP?” can itself become a tax-planning question.
A Simple Comparison
Consider a taxpayer owning three houses:
• House A – expected annual rent: ₹3 lakh; housing-loan interest: ₹1 lakh.
• House B – expected annual rent: ₹6 lakh; housing-loan interest: ₹5 lakh.
• House C – expected annual rent: ₹4 lakh; no housing loan.
If the House A and House C are treated as self-occupied, House B becomes deemed let out. Income from House B will be computed after the applicable 30% standard deduction and eligible interest. Alternatively, if House B and House C are treated as self-occupied, House A becomes deemed let out. Thus, despite its higher expected rent, House B may be better kept as the deemed-let-out property because its substantial housing-loan interest can be set off against its house-property income.
Rent Never Received, Yet Tax Payable?
Yes! For a deemed-let-out property as in above case, the expected rent is taken as annual value even though no actual rent may have been received.
The tax law, after all, does not always wait for the rent cheque to arrive! After applicable deductions, including the 30% standard deduction and eligible housing-loan interest, the resulting income is taxable. Thus, a vacant third house can still create a tax liability.
The Bigger Message:
The tax law has travelled quite a distance: today, two eligible houses can generally enjoy nil annual value, while the third can still bring notional rental taxation.
At the same time, the choice between the OTR and NTR has become extremely important for taxpayers with housing loans. The new regime may offer lower slab rates and a larger basic exemption structure, but it takes away several deductions—including interest on housing loans for self-occupied properties.
Therefore, before deciding whether to opt for the OTR or NTR, a taxpayer owning multiple houses should not look only at the tax slab rates. House property income, housing-loan interest, possible deemed rent and the restrictions on set-off of house-property loss should all be considered together. After all, a house may be made of bricks and cement, but for tax purposes, it can have quite a few layers!
The Tax Talk:
Two houses may give you a roof over your head without notional rent—but the third house may give the Income Tax Department a reason to ask, “Where is my Rent?” And if there is a home loan, choosing the right tax regime may matter as much as choosing the right house!
[The above discussion refers to the provisions applicable for FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961, as amended by Finance Act, 2025. Broadly, the same principles continue under the Income-tax Act, 2025, although the corresponding provisions have been renumbered].
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
