Published 9 May 2026
Sub-section (5) of section 23 of the Income-tax Act, 1961 -- the deemed-rent charge on builder-held unsold flats two years after completion; the interaction with section 22 (House Property head) and section 28 (Profits and Gains of Business or Profession); the Real Estate (Regulation and Development) Act, 2016 completion certificate as the trigger; and the practitioner's strategy for builders managing the inventory tail
Taxpayer Brief
When a developer / builder holds completed but unsold flats as stock-in-trade, the natural assumption is that no House Property income arises -- the flats are inventory awaiting sale, not let-out income-yielding assets. Sub-section (5) of section 23 of the Income-tax Act, 1961, inserted by the Finance Act, 2017 with effect from Tax Year 2017-18 onwards, disturbed that assumption. Where the property is held as stock-in-trade and is not let out during the year, the Annual Value is deemed to be NIL for a TWO-YEAR window from the end of the financial year in which the completion certificate was obtained. Beyond the two-year window, the property's deemed Annual Value (typically the fair rental value) becomes taxable as House Property income in the builder's hands. This article walks through the framework, the completion-certificate trigger, the practitioner's planning for the inventory tail, and the interaction with the section 28 / section 22 head distinction.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Newly completed inventory (within 2 years) | Low | Annual Value deemed nil under sub-section (5) of section 23 |
Inventory beyond 2-year window | High | Deemed rent on fair rental value; interest deduction under section 24(b) available |
Mixed inventory (some sold, some unsold beyond 2 years) | Very High | Per-flat tracking; per-flat deemed-rent computation |
Inventory let out during 2-year window | Medium | Actual rent taxable; sub-section (5) inapplicable |
1. The Statutory Framework -- Sub-Section (5) of Section 23
Element | Effect |
|---|---|
Inserted by Finance Act, 2017 | Effective from Tax Year 2017-18 onwards |
Deemed-Annual-Value charge on stock-in-trade property | Applies where property is held as stock-in-trade and not let out |
Two-year carve-out window | From the end of the financial year in which the certificate of completion of construction is obtained from the competent authority |
Deemed Annual Value during the window | NIL |
Deemed Annual Value beyond the window | Computed as for any other property -- typically the fair rental value |
Interaction with section 28 / 22 / 56 | The income falls under House Property head despite the property being held as business inventory |
The 2017 amendment changed the inventory economics Before the Finance Act, 2017 amendment, builders could hold completed inventory indefinitely without triggering any income-tax charge -- the flats were business inventory awaiting sale. The 2017 amendment penalises slow-moving inventory beyond the two-year window. The policy objective was to push builders to clear inventory promptly, encouraging market liquidity. The practitioner's planning is to either accelerate sales, let out the inventory, or reclassify the holding through legal restructuring within the two-year window. |
2. The Completion-Certificate Trigger
The two-year clock starts from the end of the financial year in which the certificate of completion of construction is obtained from the competent authority -- typically the local Municipal Corporation under the relevant State Town and Country Planning Act, or the Real Estate Regulatory Authority (RERA) registration completion record. For example -- completion certificate obtained 15 January 2024: financial year ends 31 March 2024; two-year window runs 1 April 2024 to 31 March 2026; from 1 April 2026 onwards, deemed rent applies.
Case Law Reference: Pune Income Tax Appellate Tribunal -- the trigger date The Pune Bench has examined disputes over which 'completion certificate' triggers the two-year window where multiple certificates exist (occupancy certificate, completion certificate, RERA registration). The Bench has typically taken the earliest certificate that establishes legal completion as the trigger. The builder's records must clearly identify the trigger date for each project. [VERIFY: confirm specific Tribunal decisions on this point.] |
3. Worked Example -- Builder with Mixed-Age Inventory
MahaCity Builders Pvt Ltd, a Pune-based developer, has the following inventory profile as on 31 March 2026 (end of Tax Year 2025-26).
Project | Completion Certificate Date | Two-Year Window Ends | Status as on 31 March 2026 | Section 23(5) Treatment |
|---|---|---|---|---|
Pearl Heights -- 5 unsold flats | March 2024 | 31 March 2026 | Within window | Annual Value deemed NIL |
Crystal Towers -- 12 unsold flats | December 2023 | 31 March 2026 | Within window (just) | Annual Value deemed NIL |
Diamond Apartments -- 3 unsold flats | August 2023 | 31 March 2026 | Within window (last quarter) | Annual Value deemed NIL |
Emerald Residences -- 8 unsold flats | October 2022 | 31 March 2025 | Beyond window from 1 April 2025 onwards | Deemed rent applicable for Tax Year 2025-26 |
Ruby Villas -- 2 unsold flats | March 2022 | 31 March 2024 | Two years past window | Deemed rent applicable; no further escalation |
The deemed-rent computation For Emerald Residences and Ruby Villas, the builder must compute the deemed Annual Value of each unsold flat based on fair rental value (per locality benchmarks) or municipal valuation. For (say) 8 Emerald flats with a fair rental value of ₹35,000 per month each = ₹4.2 lakh per flat per year × 8 = ₹33.6 lakh aggregate. After section 24(a) 30% standard deduction (₹10.08 lakh), net House Property income = ₹23.52 lakh. The builder's section 24(b) interest on the project loan can also be claimed against this -- often substantially compressing or wiping out the deemed-rent income. |
4. The Section 22 vs Section 28 Head Question
A subtle but important point -- section 23(5) explicitly characterises the income from stock-in-trade property as House Property income, applying section 22 / 23 / 24 framework. This overrides the natural classification as Business Income under section 28 (since the stock is held in the course of business). The builder, who would otherwise compute profit on sale of the flat as Business Income, must compute the holding-period deemed rent under House Property head. This results in two parallel computations -- the eventual sale produces Business Income, while the holding period produces House Property deemed rent.
5. Strategic Responses to the Two-Year Window
Strategy | Mechanism | Effectiveness |
|---|---|---|
Accelerate sales within the window | Aggressive pricing / financing offers to clear inventory before the trigger | Most direct |
Let out the unsold flats during the window | Actual rental income replaces deemed rent; sub-section (5) is in any event inapplicable to let-out properties | Effective if rental market supports |
Convert inventory to investment portfolio (legal restructuring) | Move the flats from stock-in-trade to capital-asset; avoids section 23(5) but triggers conversion-tax under section 45(2) | Complex; tax-positive only in specific scenarios |
Bulk sale to a single corporate buyer | Disposes inventory at potentially lower margin but eliminates the deemed-rent tail | Useful for large inventory tails |
Joint venture / development agreement with another builder | Transfers the inventory to a new entity; may reset the completion-certificate clock under specific conditions | Specialist advice required |
6. The Income-tax Act, 2025 Treatment
The Income-tax Act, 2025 carries forward the same architecture in its corresponding provision. The two-year window, the completion-certificate trigger, and the deemed-Annual-Value treatment continue. The provision has not been substantively expanded or contracted by the Finance Acts of 2024-2025.
7. Practitioner Documentation Discipline
- Per-project register -- completion certificate date, project address, total flats, sold flats, unsold flats.
- Per-flat tracking of the two-year window expiry and deemed-rent applicability.
- Fair rental value benchmarking -- locality reports, broker quotations, comparable rentals.
- Section 24(b) interest computation -- per-project loan interest applicable to unsold flats.
- Schedule HP entry in the company's Income Tax Return for the deemed-rent income.
- Annual reconciliation between book profit (treating inventory at cost) and tax computation (deemed rent + business profit on sale).
8. Key Takeaways
- Sub-section (5) of section 23 inserted by Finance Act, 2017 deems Annual Value NIL for stock-in-trade property within 2 years from end of FY of completion certificate.
- Beyond the 2-year window, deemed rent (typically fair rental value) is taxable as House Property income.
- The 2-year clock runs from the completion certificate date; multiple-certificate projects trigger on the earliest legal-completion certificate.
- Strategic responses -- accelerate sales, let out, convert classification, bulk sale, joint venture restructuring.
- Section 24(b) interest on project loan deductible against deemed rent -- often compresses or eliminates the charge.
- Income-tax Act, 2025 carries forward the same framework.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.