Higher tax on vacant properties: Select Committee proposed changes to Clause 21 in Income Tax Bill 2025

On Friday, Finance Minister Nirmala Sitharaman withdrew the Income Tax Bill, 2025, from the Lok Sabha. The Bill, initially introduced in the Lower House on February 13 this year, was meant to replace the Income-Tax Act of 1961. The government announced plans to present an updated version of the Bill that incorporates recommendations from the Select Committee.

Explaining the reasons for the withdrawal, Sitharaman told Parliament that several suggestions needed to be incorporated to ensure the correct legislative intent.

She highlighted that the changes involve “corrections in the nature of drafting, alignment of phrases, consequential changes, and cross-referencing.” Due to these necessary revisions, the government has withdrawn the Bill and will introduce a fresh version in the Lok Sabha in due course to replace the existing Income-Tax Act.

The earlier draft of the Income Tax Bill, 2025, had several drafting errors flagged by legal experts and chartered accountants. Additionally, the Lok Sabha Select Committee also identified issues that needed correction.

Vacant residential properties

In a significant development, the Lok Sabha Select Committee has recommended crucial amendments to Clause 21 of the Income Tax Bill, 2025, aimed at ensuring fair taxation of vacant residential properties. The proposed changes seek to align the new Bill with the established principles of the Income-Tax Act, 1961, and address concerns that the original draft could lead to an unintended increase in tax liability for property owners whose properties remained vacant during the year.

Background: The Issue with Clause 21

Clause 21 of the Income Tax Bill, 2025, deals with determining the “annual value” of residential house properties for tax purposes. Under the current law—Section 23(1) of the Income-Tax Act, 1961—the annual value is calculated by comparing the notional rent (the amount a property might reasonably fetch if let) with the actual rent received or receivable. If a property is vacant for part or all of the year, and the actual rent is lower because of this vacancy, the lower actual rent is taken as the annual value, providing relief to property owners.

However, the original Clause 21 in the new Bill proposed a revision where the annual value would be the higher of the notional rent or actual rent received, and introduced a condition involving the phrase “let in the normal course” for vacant properties. This change raised alarms among stakeholders who feared it would remove vacancy-related tax relief and lead to inflated taxable values.

Phrase: In Normal Course

The phrase “let in normal course” was criticized as vague and open to interpretation, potentially leading to unfair denials of vacancy relief. For example, properties being let for the first time or let irregularly might not qualify under this ambiguous term, forcing owners to pay higher taxes despite genuine vacancies. Legal precedents have favored vacancy allowance when genuine efforts to let the property were demonstrated, even if the property remained unoccupied.

Experts warned that this vague wording could invite litigation and inconsistent tax treatment. Many argued for a return to the clearer and more inclusive language of the existing law, which does not require proving that a property was “let in normal course” but rather simply recognizes vacancy if the property was let and remained vacant for some part of the year.

Committee’s recommendations

After reviewing stakeholder inputs and concerns, the Select Committee agreed that Clause 21 required revision to prevent unfair taxation. It made two key recommendations:

Deletion of the phrase “in normal course”: Removing this ambiguous wording would ensure that genuine cases of vacancy are recognized without unnecessary hurdles, simplifying tax assessments and minimizing disputes.

Reinstating the comparative framework: The Committee advised that the Bill explicitly provide for a comparison between actual rent received or receivable (which may be lower due to vacancy) and the deemed rent (notional rent). This mirrors the existing Section 23(1)(c) of the Income-Tax Act, ensuring property owners are taxed on the lower value when vacancies reduce rental income.

These changes aim to preserve the balance between reasonable tax collection and taxpayer fairness.

Experts’ take

CA Dr. Suresh Surana welcomed the Select Committee’s recommendations, saying, “The changes avoid unfair tax burdens on property owners by correcting a drafting issue in Clause 21 that could have increased taxes on vacant homes.” He added that the amendments provide much-needed clarity and reduce ambiguity, preventing future litigation.

By reinstating the comparison between actual rent and deemed rent, the revised Bill safeguards property owners from being taxed on inflated annual values due to vacancies, which were not accounted for in the original draft.

What does this mean for property owners

Under the updated Clause 21, property owners will have tax relief when their properties remain vacant during the year. The annual value for such properties will be calculated by comparing the actual rent received with the notional rent, allowing the lower figure to apply. This is especially relevant for owners who rent out their properties irregularly or face genuine vacancy periods.

Without these amendments, vacant property owners might have faced higher tax bills based on notional rents rather than the actual lower income from their properties.