Two Self-Occupied Properties Tax-Free: Budget 2025's Hidden Gift for NRIs Explained
How the removal of "deemed let out" provisions allows NRIs to keep two properties vacant or family-occupied without notional rent taxation, documentation required, and planning opportunities for inherited properties
Written by
CA Ashama Rajawat
The Game-Changing Amendment
Budget 2019 (effective FY 2019-20 onwards) made a crucial change that significantly benefits NRIs: the removal of "deemed let out" provisions for the second self-occupied property. This means you can now own two residential properties in India, keep both vacant or family-occupied, and pay ZERO tax on notional rent.
Old vs New Rules
Before Budget 2019
- • Only 1 property: Self-occupied
- • 2nd property: Deemed let out
- • Tax on notional rent even if vacant
- • Taxable: Fair rental value
After Budget 2019
- • Up to 2 properties: Self-occupied
- • 3rd+ property: Deemed let out
- • No tax on notional rent for 2 properties
- • Taxable: Only interest on loan (if any)
What This Means for NRIs
1. Keep Property for Family Use
Let your parents, siblings, or children stay rent-free in your property. No notional rent tax applies. This is particularly valuable for NRIs who maintain a "home base" in India.
2. Inherited Property Flexibility
If you inherit your parents' home while already owning one property abroad or in India, you don't need to immediately rent or sell it. Keep both without tax implications.
3. Vacation Homes
Maintain a vacation property in hill stations or beaches for your periodic visits to India. No deemed rent taxation even if used only 2-3 times a year.
4. Future Planning
Buy a property for retirement without immediate rental income pressure. Hold it till you're ready to return to India permanently.
How the Taxation Works
Scenario 1: Two Self-Occupied Properties
Property Details:
- • Property 1: Flat in Mumbai (kept for parents, no rent)
- • Property 2: Apartment in Bangalore (kept vacant for own use during India visits)
- • Both purchased without home loan
Tax Treatment:
- • Annual Value of both properties: NIL
- • Notional rent: NIL
- • Income from house property: NIL
- • Tax liability: ₹0
Scenario 2: Two Properties with Home Loans
Property Details:
- • Property 1 & 2: Both self-occupied
- • Property 1 home loan interest: ₹2,50,000/year
- • Property 2 home loan interest: ₹1,80,000/year
- • Total interest: ₹4,30,000/year
Tax Treatment:
- • Annual Value: NIL
- • Less: Interest deduction allowed: ₹2,00,000 (max limit for self-occupied)
- • Income from house property: (₹2,00,000) - Loss
- • This loss can be set off against other income
Note: The ₹2 lakh limit is combined for both properties. Remaining interest of ₹2.30 lakh cannot be claimed in the same year but can be carried forward for 8 years.
Scenario 3: Three or More Properties
Property Details:
- • Property 1 & 2: Can be treated as self-occupied
- • Property 3, 4, 5...: Deemed let out (even if vacant)
Tax on 3rd+ Properties:
- • Annual Value = Expected Rent or Municipal Value (whichever higher)
- • Less: Municipal taxes (30% standard deduction + actual)
- • Less: Interest on home loan (full amount allowed)
- • Net amount taxable as "Income from house property"
Choosing Which Two Properties to Declare Self-Occupied
If you own 3+ properties, you can choose which 2 to treat as self-occupied. This choice can save significant tax:
Strategic Selection Criteria
1. Higher Home Loan Interest
If both properties have home loans, consider treating properties with LOWER interest as self-occupied (since deduction capped at ₹2L) and higher interest property as deemed let out (where full interest is deductible).
2. Lower Rental Value Properties
Declare properties with higher expected rental value as self-occupied to avoid notional rent taxation.
3. Actually Occupied Properties
Properties where family members stay or you stay during India visits should logically be declared self-occupied.
Documentation and Compliance
1. In Your Income Tax Return
In Schedule HP (House Property):
- • Declare both properties as "Self-Occupied"
- • Annual Value: Show NIL for both
- • If home loan: Claim interest deduction (combined max ₹2 lakh)
- • Provide complete address of both properties
2. Property Tax Payment
Continue paying municipal property taxes for both properties even if they're self-occupied. Keep payment receipts for records.
3. Proof of Self-Occupation
While not always required, maintain evidence:
- • Utility bills in your or family member's name
- • Property insurance documents
- • Maintenance receipts
- • For family occupation: Affidavit/letter stating family member stays rent-free
Special Situations for NRIs
Inherited Property
Inheriting your parents' property doesn't change the rule. You can declare up to 2 properties (including inherited one) as self-occupied. No capital gains tax on inheritance, but future sale will attract capital gains.
Under-Construction Property
Property under construction can be declared self-occupied once construction is complete and occupancy certificate is obtained. Till then, you cannot claim any deductions.
Jointly Owned Property
If property is jointly owned (with spouse/sibling), each co-owner can declare it as one of their 2 self-occupied properties. Joint ownership counts as one property for each owner.
Property in Foreign Country
Foreign property doesn't count toward the 2 self-occupied limit. This rule applies only to properties in India. However, if you're an ROR (Resident & Ordinarily Resident), foreign property details must be disclosed in Schedule FA.
Common Mistakes to Avoid
- ✗Not declaring the property in ITR thinking "if no income, no need to file" - all property holdings must be disclosed
- ✗Claiming ₹2 lakh interest deduction for each property separately (it's a combined limit)
- ✗Renting out the property informally (to friends "below market rate") and still claiming self-occupied - if ANY rent is received, it must be declared
- ✗Changing which 2 properties are self-occupied each year arbitrarily - maintain consistency unless genuine reasons
Conclusion
The ability to treat two properties as self-occupied is a significant tax benefit for NRIs who often maintain properties in India for family use, future retirement, or investment. Understanding this provision allows you to optimize your property portfolio without unnecessary tax burden. Ensure proper documentation and ITR filing to stay compliant while enjoying this benefit.