Three Properties, Two Regimes: Interest, Recovery of Unrealised Rent and Unsold Stock
Mr. Basu has taxable salary of ₹22,00,000 for FY 2024-25 and owns three properties. Property A (Pune) was let out throughout the year at ₹40,000 per month. Its municipal value is ₹4,60,000, fair rent ₹5,10,000 and standard rent under the Rent Control Act ₹5,00,000. He paid municipal taxes of ₹20,000 in June 2024 and interest of ₹2,30,000 on the housing loan for the year, besides pre-construction interest of ₹1,20,000 which has not been claimed earlier; the property was first let out in April 2024. A former tenant who had defaulted on rent of ₹40,000 in FY 2022-23 (allowed as a deduction then) paid ₹30,000 in September 2024. Property B (Mumbai) is self-occupied, with housing loan interest of ₹2,80,000 for the year. Property C is a flat completed on 30 June 2024, held as stock-in-trade by Mr. Basu as a dealer in flats and lying unsold and vacant on 31 March 2025. He has no Chapter VI-A investments. He wants to know his house property income and which regime he should adopt.
1. Compute income from house property for each property and in aggregate, under both regimes.
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Property A (let out)
- Expected rent = higher of municipal value ₹4,60,000 and fair rent ₹5,10,000 = ₹5,10,000, but capped at standard rent → ₹5,00,000
- Actual rent = ₹4,80,000. Annual value under section 23(1) = higher of expected rent and actual rent = ₹5,00,000 (a common error is to take ₹4,80,000)
- Less municipal taxes paid by owner ₹20,000 → ₹4,80,000
- Less 30% standard deduction ₹1,44,000 → ₹3,36,000
- Less interest: current year ₹2,30,000 + one-fifth of pre-construction interest ₹24,000 = ₹2,54,000 (the balance ₹96,000 is allowed in the next four years) → ₹82,000
- Add: recovery of unrealised rent ₹30,000 under section 25A – taxed in full, with no 30% deduction → ₹1,12,000
Property B (self-occupied) – annual value nil. Old regime: interest deductible up to ₹2,00,000 → loss ₹2,00,000. Default regime: no interest deduction for a self-occupied house → nil.
Property C (stock-in-trade) – completed 30 June 2024 and not let out, hence within two years of completion: annual value is nil under section 23(5). Being inventory, it is not entered in house property at any notional rent.
| Old regime | Default regime | |
|---|---|---|
| Property A (incl. 25A) | 1,12,000 | 1,12,000 |
| Property B | (2,00,000) | Nil |
| Property C | Nil | Nil |
| Net | (88,000) | 1,12,000 |
2. How much of the loss can be set off against salary, and what happens to any excess? Compute total income under both regimes.
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Set-off: Under section 71(3A), loss from house property can be set off against other heads only up to ₹2,00,000 in a year. Under the old regime the loss is ₹88,000, which is below the cap and is therefore set off in full against salary. Any excess would have been carried forward for eight years, to be set off only against future house property income – but no excess arises here.
Old regime: Salary 22,00,000 – standard deduction 50,000 = 21,50,000; less house property loss 88,000 → total income ₹20,62,000 (no Chapter VI-A claims). Tax = 12,500 + 1,00,000 + 30% of 10,62,000 (3,18,600) = 4,31,100 + cess 17,244 = ₹4,48,344.
Default regime (115BAC): Salary 22,00,000 – 75,000 = 21,25,000; add house property income 1,12,000 → total income ₹22,37,000. Tax = 20,000 + 30,000 + 30,000 + 60,000 + 30% of 7,37,000 (2,21,100) = 3,61,100 + cess 14,444 = ₹3,75,544.
Observation for the recommendation: Despite a higher total income, the default regime produces lower tax (₹3,75,544 against ₹4,48,344) because the old regime loses the wider 115BAC slabs and the ₹2,00,000 interest deduction does not compensate. The old regime would overtake the default regime only if he had Chapter VI-A deductions of roughly ₹2.5 lakh or more (80C, 80D, 80CCD(2) etc.). Since he has none, the default regime should be adopted.
3. Mr. Basu asks whether Property C would have been treated differently if it had remained unsold until FY 2027-28. Advise, and also state what changes if he converts it into his own residence.
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Unsold stock beyond two years: Section 23(5) gives a nil annual value to a house held as stock-in-trade and not let out, but only for a maximum of two years from the end of the financial year in which the completion certificate is obtained. Property C was completed on 30 June 2024, so the nil-value window runs to the end of FY 2026-27. From FY 2027-28 the protection ends and the property becomes chargeable under house property on its expected rent (municipal value/fair rent, subject to standard rent) even though it is vacant and remains inventory in his books. The 30% standard deduction and interest on any loan for the property would then be available; the flat continues to be valued as stock-in-trade in the business accounts.
If he occupies it himself: It ceases to be 'not let out' stock-in-trade in the commercial sense and becomes a self-occupied house. Its annual value is nil, no notional rent arises, and – importantly – a dealer holding a flat as stock-in-trade cannot claim the section 24(b) interest deduction for a self-occupied house in the default regime. In the old regime the interest would be capped at ₹2,00,000 and would create a loss subject to the ₹2,00,000 set-off cap.
Planning point: The two-year window under section 23(5) is a genuine tax-planning lever for a dealer with slow-moving stock; letting the flat out during the window instead of keeping it vacant would bring the actual/expected rent into charge immediately, so vacancy is preferable while the window lasts.