What is notional rent in income tax?

Notional rent is a deemed or hypothetical rental income that the Income Tax Act imposes on a property that is neither self-occupied nor actually rented out — typically a vacant property or a third (or more) residential property owned by a taxpayer. The government taxes this deemed income to discourage holding of idle property.

When Does Notional Rent Apply?

• When a taxpayer owns more than two residential properties.
• The third property (and beyond) is treated as 'deemed let-out' even if vacant or used by family.
• The Annual Value is determined as if the property were let out at the prevailing market rent.

How Notional Rent is Calculated

• Expected Rent: Higher of municipal value or fair rent — but capped at standard rent if applicable.
• Actual Rent vs. Expected Rent: If actual rent is higher, actual rent is taken.
• Annual Value: This is the taxable base — after 30% standard deduction and home loan interest.

Deductions Available Even on Deemed Let-Out Property

• Standard deduction of 30% on net annual value.
• Full home loan interest (no ceiling) under Section 24(b).

Budget Amendment (FY 2019-20)

• Two residential properties can now be declared as self-occupied with zero annual value.
• Third property onwards: notional rent applies.

Notional rent can create an unexpected tax liability for property investors who hold multiple homes. However, the unlimited interest deduction available on such properties often absorbs much of this tax burden, especially when loans are outstanding against them.