Use the owner’s actual payment for the tax year
Under section 21(3) of the Income-tax Act, 2025, reduce annual value for property taxes, including service taxes, levied by a local authority in respect of the property and actually paid by the owner during the tax year. The year in which the amount became payable does not control. This working covers company-owned premises taxed under the house-property head from tax year 2026–27. FY 2025–26 for AY 2026–27 falls under the 1961 Act; see sections 22–24 of that Act for the earlier computation.
Read the applicable text: Income Tax Department: Income-tax Act, 2025, sections 20–22 and 536 Income Tax Department: Income-tax Act, 1961, sections 22–24.
First determine the annual value before local taxes
For property within this guide, section 21(1) generally uses the higher of reasonable expected rent and actual rent received or receivable if the property or a part is let. Under section 21(2), use actual rent received or receivable if the statutory letting and vacancy conditions cause it to fall below expected rent. Exclude unrealised rent only where the prescribed conditions under section 21(4) are met. Establish the correct starting value before deducting local levies. Do not infer annual value from the bank’s rental collections alone. After applying section 21, compute the 30% deduction under section 22(1)(a) on the resulting annual value; evaluate interest separately.
Trace who paid what, when and for which premises
Match the assessment, property identifier, liability breakdown, local-authority receipt and bank settlement. Separate genuine qualifying taxes from private maintenance charges and other items that require their own analysis. A book provision or an unpaid demand is insufficient. If a tenant paid the authority, investigate whose obligation was discharged and in what capacity, rather than automatically treating it as an owner payment. Where a building has business-use and let areas, review the scope of section 20 and support any allocation; the house-property computation does not automatically absorb every property expense.
Keep a tax bridge separate from the expense ledger
Maintain opening unpaid levies, current demand, supported owner payments and closing unpaid amounts for each property. Tag prior-period arrears paid during the tax year and check that amounts used in the house-property working are not repeated elsewhere. A mismatch between the ledger expense and the allowable reduction is expected where an accrual and payment fall in different years.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Accrued and paid amounts differ
Annual value before local taxes is ₹1,200,000. Of ₹120,000 in qualifying levies booked, the owner paid ₹90,000 in the year. Annual value after the reduction is ₹1,110,000; the standard deduction is ₹333,000.
Illustrative example 2: Prior-period demand paid now
An owner pays ₹75,000 of qualifying arrears and ₹45,000 of current qualifying levies during the tax year. Against ₹900,000 before local taxes, the reduction is ₹120,000 and annual value is ₹780,000.
Illustrative example 3: Exclude private maintenance
A ₹130,000 outflow comprises ₹80,000 of qualifying local taxes and ₹50,000 of private maintenance charges. For this section 21(3) bridge, only ₹80,000 reduces ₹700,000 to ₹620,000.
Illustrative example 4: Apply the vacancy rule first
Assume expected rent is ₹800,000 and actual rent is ₹600,000 solely because of qualifying vacancy. With ₹40,000 in qualifying owner-paid local taxes, annual value after local taxes is ₹560,000; the 30% deduction is ₹168,000.
Illustrative example 5: Timing at the tax-year boundary
Of ₹100,000 of qualifying levies, ₹65,000 is paid by the owner in March 2027 and ₹35,000 in April 2027. The tax year 2026–27 bridge includes ₹65,000; the ₹35,000 is separately considered for the next tax year.
Illustrative example 6: Keep two properties separate
Property A has ₹500,000 before local taxes and eligible payments of ₹35,000. B has ₹750,000 and eligible payments of ₹55,000. Their annual values are ₹465,000 and ₹695,000; combined annual value is ₹1,160,000 before section 22 deductions.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm ownership and head of income | Title and premises-use analysis. |
| 2 | List properties and local authority identifiers | Property register and levy accounts. |
| 3 | Establish the starting annual value | Rent roll, expected rent evidence and vacancy working. |
| 4 | Split each assessment by charge type | Demand and supporting municipal breakdown. |
| 5 | Identify the payer and capacity | Receipt, bank entry and lease terms. |
| 6 | Check payment dates by tax year | Payment trail and closing cut-off test. |
| 7 | Match prior-period arrears | Opening unpaid balances and receipts. |
| 8 | Allocate only where supported | Property mapping and documented method. |
| 9 | Calculate annual value and standard deduction | Property-wise section 21 and 22 computation. |
| 10 | Tie to books and retain the review | Expense ledger, closing arrears and signed reconciliation. |
Sixteen practitioner FAQs
1. Does booking an expense qualify as payment?
No. Section 21(3) requires actual payment by the owner.
2. Can qualifying arrears be considered in the payment year?
Yes, the date they became payable does not control the reduction.
3. Do private society dues automatically qualify?
No. Identify the levy and levying authority.
4. Are service taxes always excluded?
No. Section 21(3) includes service taxes levied by the local authority in respect of the property, subject to payment by the owner.
5. What if the tenant paid directly?
Establish the obligation, payer capacity and legal treatment before making the claim.
6. Does a municipal demand establish the starting annual value?
No. Determine annual value under the applicable provisions separately.
7. Can vacancy be inferred from a fall in rent alone?
No. Support the statutory conditions and causal link.
8. Is the 30% deduction computed before local taxes?
It is computed on annual value determined under section 21.
9. Are financing costs included in the local-tax reduction?
No. Evaluate interest under its own provision.
10. What if the tax receipt covers multiple units?
Reconcile the units and support the allocation.
11. Does an April payment belong to the preceding year if the bill is dated March?
No. Verify the actual payment year.
12. Does mixed property use affect the analysis?
Yes. Verify which parts fall within the house-property head.
13. How should unpaid levies be tracked?
Keep them in a closing unpaid balance for future payment review.
14. Does the working determine final tax liability?
No. It supports the annual value and standard deduction components.
15. Does this section number apply to the FY 2025–26 return?
No. Use the enactment applicable to that earlier assessment year.
16. Which evidence is strongest for review?
A property-linked assessment and receipt matched to the owner’s payment and computation.
Official sources
Income Tax Department: Income-tax Act, 2025, sections 20–22 and 536 Income Tax Department: Income-tax Act, 1961, sections 22–24