The Income Tax Act has a specific chapter dedicated to taxing income from house property. Many people believe you get taxed only when you actually earn rent. But the law goes deeper. It considers something called “annual value” — the notional income your property could generate.
Section 22 establishes the basis for charging tax on income from house property, while sub-section 2 of that section specifically defines “annual value”. This definition is what helps the tax department determine how much a property is “supposed” to earn, even if no actual rent comes in."
It may sound complex, but once you understand the logic, it becomes surprisingly simple.
What Is Section 22 of the Income Tax Act?
Section 22 lays down the foundation:
If you own a building or land attached to a building, the income from it is taxable under the head ‘Income from House Property’.
But the tax is not on actual income alone. It's on the annual value of the property — and that is where Section 22(2) enters the picture.
Section 22(2): The Heart of “Annual Value”
The law needs an objective way to decide how much income a house could generate.
Section 22(2) defines “annual value” — the amount for which the property might reasonably be expected to be let out year after year.
In simpler words, it answers the question:
“If this house were rented, what is the fair rent it would get?”
This annual value becomes the foundation for calculating income from house property."
Annual Value =
- Expected Rent (based on market value, municipal valuation, etc.)
- Subject to higher/lower adjustments depending on actual rent
Even if the house is vacant, locked, or unused — annual value still applies unless it is treated as self-occupied.
Also Read: Understanding Annual Value of Self-Occupied House Property
Why the Law Uses “Annual Value” Instead of Actual Rent
I once spoke to a landlord who said his tenant was a distant cousin paying a symbolic rent of ₹1,000 per month. Legally, this creates a loophole — a great property could artificially appear as low-income. To avoid such manipulation, the law uses a notional number instead of blindly relying on actual rent.
Think of annual value as the tax system’s way of saying:
“We won’t let your personal relationships or special arrangements reduce your tax liability unfairly.”
This ensures fairness across all taxpayers.
How Annual Value Is Determined
Assessing annual value usually involves:
- Municipal valuation
- Fair market rent
- Standard rent under the Rent Control Act
- Actual rent received
The highest of these (with some adjustments) becomes the annual value.
For self-occupied property, however, annual value is treated as nil — which is a relief for most homeowners.
Other Relevant Interpretation Connected With Section 22
You may wonder why “interim dividend shall be deemed to be the income of the previous year” is related here. It’s because the Income Tax Act often uses the phrase “shall be deemed to be the income of the previous year” to specify timing rules — determining when income is taxed.
Similarly, Section 22(2) uses a “deemed” concept by defining notional income (annual value), even without real cash flow."
Both provisions follow the same philosophy:
Taxing income based on legal occurrence, not merely actual receipt.
Also Read: How the Tax Department Decides Your Home’s ‘Annual Value’
Practical Scenarios Where Section 22(2) Applies
Scenario 1: You own a vacant flat
- Even if nobody is living in it, it may still attract notional taxation unless you classify it as self-occupied.
Scenario 2: You rent your house at below-market rate
- The tax calculation might use annual value instead of actual rent.
Scenario 3: You have multiple houses
- Only one can be self-occupied. Others may be taxed using annual value, even if vacant.
Scenario 4: You receive rent for only a few months
- The annual value calculation still applies, with deductions for vacancy.
These situations confuse taxpayers every year — but they become clearer when you understand Section 22(2).
Why Section 22(2) Matters
1. Prevents tax manipulation: Owners can’t artificially reduce rent to escape tax.
2. Ensures uniformity: Annual value creates a standard benchmark for taxation."
3. Helps assess property income even without tenants: Important for investors with multiple properties.
4. Builds transparency: The system stays fair for everyone — whether you rent to a stranger or a family member.
Real-Life Moment:
A client once told me, “My second house isn’t rented. Why should I pay tax for money I’m not earning?”
And I replied gently, “You’re not paying tax on rent. You’re paying tax on the value of renting that house. That’s what Section 22(2) is about.”
The moment he understood the notional concept, the frustration melted away.
Also Read: Section 22 of the Income Tax Act: Taxing Property Even When It’s Vacant?
Key Takeaways About Section 22(2)
- Section 22 defines the basic rule of taxing income from house property.
- Section 22(2) specifically defines “annual value”, which is the backbone of property taxation.
- Annual value is based on fair rent — not necessarily actual rent.
- The concept of “deemed income,” similar to phrases like interim dividend shall be deemed to be the income of the previous year, ensures consistent taxation.
- Self-occupied property gets major relief, with annual value taken as nil.
- Annual value helps the law maintain fairness even in complex rental situations.
Conclusion
Section 22(2) may look technical, but it explains one of the most fundamental ideas behind property taxation — the concept of annual value. Once you understand this, navigating house property income becomes much simpler & less stressful.
If you ever feel confused about annual value, rental taxation, or property declarations, the experts at CallMyCA.com are always ready to guide you with clarity, accuracy, & genuine care.
