Vacant Property: When and How It’s Taxable as Deemed Rent

Farheen Mukadam
Sep 12
10 min read

In India, property owners are subject to tax obligations based on the properties they own. While most property taxes are straightforward, the taxation of vacant properties often raises questions. The concept of taxing vacant properties as deemed rent is particularly important under Indian tax laws, as it impacts the taxable income of property owners. The introduction of the new Income Tax Bill 2025 has brought about significant changes in how vacant properties are taxed. Let us explore when a vacant property is considered taxable as deemed rent, how the new Income Tax Bill 2025 affects vacant properties, and how property owners can determine the taxable value for their vacant properties. Additionally, we will discuss how TaxBuddy can assist in navigating these changes to ensure compliance and accurate filing.

When Is Vacant Property Taxable as Deemed Rent?

Under the Indian Income Tax Act, property owners are required to pay tax on income generated from property. For properties that are rented out, the rental income is taxable. However, for vacant properties, the government assumes that the property could generate income if rented out. As a result, vacant properties are taxed as deemed rent under Section 23(1) of the Income Tax Act. This is known as "deemed rent," and it applies to property owners who choose not to rent out their vacant properties.

Even though the property is not actually generating rental income, the owner is still expected to report a notional rent, which is deemed to be the potential rent the property could earn if rented out. The deemed rent is calculated based on the municipal value or fair rent of the property, whichever is higher. Property owners must report this deemed rent in their income tax returns, and it is subject to income tax under the head "Income from House Property."

How the New Income Tax Bill 2025 Affects Vacant Properties

The Income Tax Bill 2025 introduces several changes that affect how vacant properties are taxed. One of the key changes is the introduction of stricter norms regarding vacant properties that are not generating any rental income. Under the new bill, property owners who have vacant properties for extended periods without making any genuine efforts to rent them out may face higher taxation. This amendment aims to discourage hoarding of properties and promote efficient use of available real estate.

The new bill provides clarity on the treatment of vacant properties, ensuring that property owners who are deliberately keeping properties vacant without valid reasons will be taxed more rigorously. Additionally, the bill introduces provisions for determining fair rent more accurately and includes measures to close loopholes where owners previously undervalued their vacant properties.

As part of the changes, property owners are now required to provide more detailed disclosures about the status of their properties in their tax filings, including whether the property is genuinely vacant or if the owner is actively attempting to rent it out. This move aims to bring greater transparency to the taxation process for vacant properties.

How to Determine the Taxable Value for Vacant Properties

When it comes to vacant properties, the Income Tax Act requires property owners to calculate the taxable value of the property for tax purposes. This value is determined based on the higher of two factors: the municipal value assigned by the local authorities and the fair rent that the property could reasonably fetch in the market. Here’s how you can go about calculating the taxable value for your vacant property:

Municipal Value

Municipal value refers to the value of the property that is assigned by the local municipal authority for property tax purposes. This value is used to calculate the annual property tax and is usually based on factors such as the size, area, and location of the property. Local authorities determine this value based on several factors like:

Size and Layout of the Property: Larger properties or properties with better layouts may be assigned a higher municipal value.
Location: Properties in more desirable locations (e.g., urban areas or commercial zones) may have a higher municipal value compared to properties in less sought-after areas.
Infrastructure and Amenities: The availability of amenities such as water supply, sewage systems, and roads in the vicinity can influence the municipal value.

The municipal value is typically lower than the actual market value of the property, but it provides a consistent and recognized basis for property tax assessment in your local area.

Fair Rent

Fair rent is defined as the rental value that the property could reasonably fetch in the open market if it were rented out. It is important to note that fair rent is not based on the actual rent received from tenants but on the potential rental income the property could earn if leased at market rates.

To determine fair rent, you need to consider various factors such as:

Location: The demand for rental properties in the area and the location's desirability (e.g., proximity to schools, shopping centers, and transportation hubs).
Condition of the Property: The age of the property, its condition (renovated or in need of repairs), and the amenities it offers can impact its potential rental income.
Market Demand: The general rental demand in the area, such as whether the area is a high-demand zone or a place with fewer rental properties, will also play a role in determining fair rent.

Unlike the actual rent that might be charged for the property, the fair rent is based on what the property would be worth if rented out under normal market conditions.

Determining the Taxable Value of Vacant Property

Once you have both the municipal value and fair rent, the next step is to calculate the taxable value of the vacant property. According to tax laws, the taxable value is the higher of the two: the municipal value or the fair rent.

For example:

If the municipal value assigned by the local authorities is ₹20,000 annually, but the fair rent (based on market conditions) is ₹25,000, the taxable value will be ₹25,000.
If the municipal value is ₹30,000 but the fair rent is ₹28,000, the taxable value will be ₹30,000.

This deemed rent will be treated as income under the head "Income from House Property" and will be taxed accordingly, just as if the property were generating actual rental income.

Claiming Deductions

While vacant properties are taxed on their deemed rent (the higher of municipal value or fair rent), property owners can also claim deductions against this income to reduce their tax liability. The key deductions include:

Property Taxes: You can claim a deduction for the municipal taxes or property taxes paid during the year. This deduction can only be claimed if you have actually paid these taxes to the local authorities.
Repairs and Maintenance: You can also claim a deduction for the expenses incurred on repairs and maintenance of the property, provided these expenses are genuine and well-documented. This includes costs for routine repairs, upkeep, and necessary improvements to maintain the property in good condition.
Interest on Home Loan: If you have taken a home loan for purchasing, constructing, or repairing the property, the interest paid on the loan can be claimed as a deduction under Section 24(b) of the Income Tax Act. However, this deduction is only available for properties that are rented out or deemed to be let out, including vacant properties where the deemed rent is being calculated.

It’s important to note that deductions can only be claimed if the expenses are legitimate and well-documented. For example, you need to keep invoices and receipts for repairs, property tax payments, and other related expenses.

Common Issues and Considerations

While determining the taxable value for vacant properties is fairly straightforward, there are some important considerations to keep in mind:

Deemed Rent and Non-Occupancy: Even if the property is not rented out, it still attracts tax based on the deemed rent. Therefore, property owners cannot escape tax liability by simply leaving their property vacant.
Disputes on Municipal Value: In some cases, the municipal value assigned to the property may be disputed by the owner, especially if they feel it is too high. If the municipal value is contested, it may require appealing to the local authorities or filing for a reassessment.
Accuracy of Fair Rent: Determining the fair rent can be subjective. If there are discrepancies or differences in opinion regarding what the fair rent should be, it is advisable to have a professional property valuation to substantiate your claim.

TaxBuddy: Your Resource for Tax Filing Assistance

Navigating the complexities of property tax laws, especially concerning vacant properties, can be challenging. TaxBuddyprovides a comprehensive platform to help property owners file their taxes accurately and efficiently. With its user-friendly interface, TaxBuddy simplifies the process of calculating and reporting deemed rent, ensuring compliance with the latest regulations, including those introduced by the Income Tax Bill 2025.

TaxBuddy also offers expert assistance for property owners who need help with more complex tax situations, such as determining fair rent or understanding new provisions under the 2025 tax laws. Whether you're filing taxes for the first time or looking for professional guidance, TaxBuddy can help you avoid costly mistakes and ensure that your tax filings are accurate and timely.

Conclusion

The taxation of vacant properties as deemed rent can be a complex and often misunderstood area of tax law. However, with the introduction of the new Income Tax Bill 2025, property owners will need to ensure they are compliant with stricter regulations regarding vacant properties. By understanding how to determine the taxable value of vacant properties and leveraging platforms like TaxBuddy, property owners can navigate these changes more effectively. TaxBuddy’s expert support makes the process easier, ensuring accurate reporting and timely filing. For anyone looking for assistance in managing their tax filing and ensuring compliance, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: Is vacant property taxable under the new Income Tax Bill 2025?

Yes, vacant properties are subject to tax under the Income Tax Act, even if they are not rented out. According to the new Income Tax Bill 2025, vacant properties are considered to have a "deemed rent," which is taxable. The bill introduces stricter rules to discourage property owners from leaving properties vacant without attempting to rent them out. This ensures that owners pay taxes based on the potential rental income the property could generate, even if it is unoccupied.

Q2: How do I calculate deemed rent for a vacant property?

The deemed rent for a vacant property is calculated based on the higher of two values: the municipal value and the fair rent. The municipal value is the value assigned by the local authority for property tax purposes, while the fair rent is the market rental value a property could fetch based on factors like location, condition, and size. If the property is vacant, the higher of these two values is considered to determine the deemed rental income, which is then taxed accordingly.

Q3: Can I claim deductions on a vacant property?

Yes, deductions can be claimed on certain expenses related to maintaining a vacant property. These can include municipal taxes, repairs, and maintenance costs. However, to claim these deductions, you must provide proper documentation and proof of these expenses. This helps reduce the taxable income from deemed rent, making it essential for property owners to keep track of their property-related expenses and retain receipts or invoices for verification.

Q4: What happens if I don’t file taxes for my vacant property?

Failing to file taxes for a vacant property can lead to penalties, interest charges, and potential scrutiny by the Income Tax Department. If the property remains vacant for an extended period without a valid reason or a rent attempt, it could raise concerns during tax assessments. If the taxes are not filed or paid, the authorities may initiate action, including fines, tax audits, or further investigations into your tax compliance.

Q5: How can TaxBuddy help with filing taxes for vacant properties?

TaxBuddy simplifies the process of filing taxes for vacant properties by providing tools to calculate and report deemed rent accurately. It helps ensure compliance with the latest regulations introduced by the Income Tax Bill 2025. If you are unsure about the process or need expert assistance, TaxBuddy also offers support from tax professionals to ensure that your filing is correct and free from errors, minimizing the risk of penalties or audits.

Q6: What is the fair rent of a property?

Fair rent is the rental value that a property could reasonably fetch in the open market, based on its location, size, condition, and demand for rental properties in the area. It is a critical factor in determining the deemed rent for a vacant property. If you are unable to rent out the property, the fair rent serves as a standard to calculate the rental income that the tax authorities assume the property could generate.

Q7: How do I prove that my property is vacant?

To prove that your property is vacant, you need to provide evidence such as rental agreements, notices of vacancy, or any official communication that indicates the property has been available for rent but remains unoccupied. This proof helps ensure that the property is treated as vacant under tax laws and may prevent issues with the tax authorities if there are discrepancies or questions regarding its status.

Q8: What is the municipal value of a property?

The municipal value is the value assigned to a property by the local municipal authority for property tax purposes. It is typically based on factors like the property’s location, size, and condition. The municipal value is used to determine the property’s tax liability and serves as one of the key components in calculating the deemed rent for vacant properties.

Q9: Can I avoid paying deemed rent on vacant properties?

While you cannot avoid paying deemed rent, you can reduce your tax liability by ensuring that all related expenses—such as maintenance and repairs—are properly documented and claimed as deductions. By accurately calculating and reporting the municipal value or fair rent, you can minimize the taxable amount. It’s essential to follow the tax guidelines and file your returns correctly to avoid penalties.

Q10: How do I file taxes for vacant properties on TaxBuddy?

Filing taxes for vacant properties on TaxBuddy is simple and efficient. The platform helps you calculate the deemed rent based on municipal value or fair rent and assists with claiming allowable deductions such as maintenance and municipal taxes. TaxBuddy’s easy-to-use interface guides you through the filing process, and if you require expert support, professionals are available to ensure that your return is filed accurately and in compliance with the latest regulations.

Q11: What documents do I need to file taxes for a vacant property?

To file taxes for a vacant property, you need to have a few key documents ready. These include proof of the property’s ownership, municipal tax receipts, maintenance and repair invoices, and any other documents that substantiate expenses related to the property. You will also need to provide proof that the property is vacant, such as rental agreements or vacancy notices. Keeping accurate records of all related documents will help facilitate the filing process and ensure that deductions are properly claimed.

Q12: Is there a tax benefit for renting out a vacant property?

Renting out a vacant property can provide tax benefits, as the rental income you earn is subject to tax, but you can also claim deductions for maintenance costs, repairs, and other property-related expenses. This rental income may reduce the taxable amount from deemed rent, and renting the property out may also allow you to avoid the tax burden associated with vacant properties. Additionally, renting out the property could help you reduce the risks of penalties or audits due to non-compliance with vacant property tax rules.