Section 21 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 21 tells you what "annual value" means for the charge on house property under section 20. This explanation is as per the Income-tax Act, 2025 as amended by the Finance Act, 2026. It covers let houses, vacancy, local taxes, unrealised rent, property held as stock-in-trade and the nil annual value of a self-occupied house.
The annual value of a property is the higher of the rent it might reasonably be expected to fetch and the actual rent received or receivable, if any part is let. A vacancy can pull the figure down to the rent actually received. Local taxes actually paid are deducted. A house you occupy for your own residence, or cannot actually occupy, has a nil annual value, but only for two houses that you specify, and not if the house is let at any time or you derive any other benefit from it.
One line to remember: later amendments, rules and notifications should be checked before you act on any provision explained here.
Where section 21 fits
The annual value you arrive at goes into your house property computation when you do income tax return filing. Section 20(1) charges the annual value of buildings or lands appurtenant to them, owned by the assessee, under the head "Income from house property". Section 21 supplies the number. The deductions from that number come in section 22, which is explained in our article on house property deductions. For the charging section itself, read section 20. If you want the chapter in one view, see Chapter IV of the Act.
Section 21(1): the higher of two figures
For the purposes of section 20, the annual value is deemed to be the higher of:
- (a) the sum for which the property might reasonably be expected to let from year to year; or
- (b) the actual rent received or receivable by the owner, if the property or any part of it is let.
So a let property is never valued below the rent actually received or receivable, and where the market-based figure is higher, that figure is used. If the property is not let, only limb (a) is available.
Section 21(2): the vacancy rule
If the property or any part of it is let and was vacant for the whole or any part of the tax year, and because of the vacancy the actual rent received or receivable is less than the figure in section 21(1)(a), the annual value is deemed to be the amount so received or receivable. Three conditions therefore apply together: the property is let, it was vacant for some period in the tax year, and the vacancy is the reason the rent is lower than the expected-rent figure.
Section 21(3): local taxes
The annual value is reduced by the taxes (including service taxes) levied by a local authority on the property, actually paid during the tax year by the owner, irrespective of when those taxes became payable. The test is payment by the owner in the tax year, not the year to which the tax relates.
Section 21(4): rent that cannot be realised
Rent that cannot be realised by the owner is not included in computing the actual rent received or receivable, subject to the rules made in this behalf. The detail is left to the Income-tax Rules, 2026; see our rule-wise guides.
Section 21(5): property held as stock-in-trade
Where a property is held as stock-in-trade and is not let wholly or partly at any time during the tax year, the annual value of the property or part of it is nil up to two years from the end of the financial year in which the certificate for completion of construction is obtained from the competent authority.
The words "nil up to" in this sub-section were substituted for "nil for" by the Finance Act, 2026, w.e.f. 1-4-2026. The sub-section as printed now speaks of nil annual value "up to" the two-year point, measured from the end of the financial year in which the completion certificate is obtained. The text does not say what happens after that period; it is silent on the point in this sub-section, so read the rest of the section and the Act's other provisions on the subject.
Section 21(6) and (7): a house you occupy
Section 21(6) takes the annual value of a house, or any part of it, as nil if the owner occupies it for his own residence or cannot actually occupy it due to any reason.
Section 21(7) limits this:
- (a) sub-section (6) applies only in respect of two such houses, as specified by the assessee in this behalf; and
- (b) it does not apply if the house or any part of it is actually let during any time of the tax year, or if the owner derives any other benefit from it.
Where a person owns more than two such houses, he chooses which two get the nil annual value; the rest are valued under section 21(1). Section 22(2) and (5) cap the interest deduction for the properties referred to in section 21(6), as discussed in the companion article.
At a glance
| Situation | Annual value under section 21 |
|---|---|
| Let property, no vacancy | Higher of expected rent and actual rent received or receivable, less local taxes paid by the owner |
| Let property, vacant for some time, rent lower because of it | Actual rent received or receivable, less local taxes paid |
| Rent that cannot be realised | Left out of actual rent, subject to rules |
| Stock-in-trade, not let at any time in the tax year | Nil up to two years from the end of the financial year of the completion certificate |
| Own-residence house (up to two specified) | Nil |
| Own-residence house that is let at any time, or gives any other benefit | Not covered by sub-section (6); valued under sub-section (1) |
Worked example
The names and amounts are assumed. Ritu owns a flat that is let. The sum for which it might reasonably be expected to let is Rs. 2,40,000 a year. The actual rent received is Rs. 2,70,000. She paid Rs. 20,000 as local taxes during the tax year.
- Higher of Rs. 2,40,000 and Rs. 2,70,000 = Rs. 2,70,000
- Less local taxes actually paid: Rs. 20,000
- Annual value after reduction = Rs. 2,50,000
Suppose instead the flat was vacant for part of the year and the rent received or receivable fell to Rs. 1,80,000 because of that vacancy. Under section 21(2) the annual value would be Rs. 1,80,000, and the local taxes of Rs. 20,000 would still be deducted, leaving Rs. 1,60,000.
Now take Arjun, who owns three houses and lives in one of them while the other two stand empty and are not let. He specifies two of the three under section 21(7)(a); those two have nil annual value, while the third is valued under section 21(1)(a), because there is no actual rent.
Common mistakes
- Treating the vacancy rule as automatic. It applies only to a let property, and only where the vacancy is the reason the rent is lower.
- Specifying more than two self-occupied houses. The nil annual value is only for two.
- Letting a self-occupied house for even part of the tax year and still claiming nil. Section 21(7)(b) takes the house out of sub-section (6).
- Deducting local taxes that the owner did not pay in the tax year.
Need help with house property income?
If your return includes house property income, a tenant who has not paid, or more than two houses, our team can check the computation before you file. See our income tax return filing service, or speak to us about tax planning advice for your property holdings.
Key takeaways
- Annual value of a let property is the higher of expected rent and actual rent received or receivable.
- A vacancy can reduce the figure to the rent actually received or receivable.
- Local taxes paid by the owner in the tax year are deducted.
- Stock-in-trade property has nil annual value up to two years from the end of the financial year in which the completion certificate is obtained, if it is not let.
- Nil annual value for self-occupied houses applies to two houses only.
Read next
- Section 20: income from house property
- Section 22: house property deductions
- Section 23: arrears of rent and unrealised rent
- Section 24: property owned by co-owners
- Section 25: who is a deemed owner
- Where the earlier Act's house property provisions sit in the 2025 Act
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.