Section 21
Section 21: determination of annual value
Section 21 lays out the mechanics for computing a property's "annual value" - the figure taxed under section 20. It covers the basic reasonable-rent test, adjustments for vacancy and unrealised rent, deduction of local taxes actually paid, a special rule for unsold stock-in-trade property, and the well-known nil-value rule for a self-occupied house.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
The basic test
The annual value is 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, where the property or any part is let (section 21(1)).
Vacancy adjustment
If a let property was vacant for the whole or part of the tax year, and because of that vacancy the actual rent received/receivable is less than the reasonably-expected rent, the annual value is taken as the actual (lower) amount received or receivable (section 21(2)).
Deduction for local taxes and unrealised rent
The annual value is reduced by local-authority taxes (including service taxes) actually paid by the owner during the tax year, regardless of when they became payable (section 21(3)).
Rent that cannot be realised by the owner is excluded from the computation of actual rent received/receivable, subject to prescribed rules (section 21(4)).
Unsold stock-in-trade property
Where a property is held as stock-in-trade and is not let out (wholly or partly) at any time in the tax year, its annual value is nil for up to two years from the end of the financial year in which the completion certificate for construction was obtained (section 21(5)).
Self-occupied property - nil annual value
The annual value of a house (or part of it) is taken as nil if the owner occupies it for their own residence, or cannot actually occupy it for any reason (section 21(6)).
This nil-value treatment applies only to a maximum of two houses specified by the assessee, and does not apply if the house is actually let at any time during the tax year or if the owner derives any other benefit from it (section 21(7)).
Frequently asked questions
How many self-occupied houses can I claim nil annual value for?
A maximum of two houses, as specified by the assessee - see section 21(7).
Is the annual value always equal to the actual rent I receive?
Not necessarily - it is the higher of the reasonably expected rent and the actual rent received/receivable, except in the specific vacancy situation under section 21(2), where the lower actual figure applies.
What happens to unsold stock-in-trade flats built by a builder?
Their annual value is treated as nil for up to two years from the end of the financial year in which the completion certificate was obtained, as long as they remain unlet.
Related sections
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Talk to our tax team about this sectionLast updated 9 September 2026