Published 9 May 2026
Sub-section (1) of section 23 of the Income-tax Act, 1961, clauses (a), (b), (c) -- the Annual Value computation; the proviso for unrealized rent under sub-rule (1) of Rule 4 of the Income-tax Rules, 1962; the vacancy-allowance reduction to actual rent received; the Income Tax Appellate Tribunal jurisprudence on 'genuine effort to let out'; and the documentation discipline that survives scrutiny
Taxpayer Brief
Where a let-out property is vacant for part of the year, or the rent agreed is not realized despite genuine effort, the Annual Value computation under sub-section (1) of section 23 of the Income-tax Act, 1961 must be carefully made. Clause (c) of sub-section (1) of section 23 provides that where the property was let and was vacant during the whole or any part of the previous year, and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause (a), the actual rent so received or receivable is the Annual Value -- thereby compressing the deemed-letting-value down to actual receipt. The proviso to sub-rule (1) of Rule 4 of the Income-tax Rules, 1962 separately permits the deduction of unrealized rent. Both reliefs require documentation of 'genuine effort to let out'. This article maps the framework, the burden of proof, and the practitioner's defensive file.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Property let out fully throughout the year, full rent received | Low | Standard Annual Value computation |
Property let out part of the year, vacant for balance | Medium | Section 23(1)(c) reduction; documentation |
Property let out, tenant defaulted on rent | High | Unrealized rent under Rule 4; legal-action evidence |
Property held for letting but never tenanted in the year | Very High | Genuine-effort test; risk of deemed rent on the higher of fair value / municipal value |
1. The Annual Value Framework -- Sub-Section (1) of Section 23
Clause | Annual Value | When Applies |
|---|---|---|
Clause (a) | Sum for which the property might reasonably be expected to let from year to year (the Fair Rental Value or Municipal Valuation, whichever is higher, capped at the Standard Rent under Rent Control Act if applicable) | Default for let-out property where actually realised rent matches expectation |
Clause (b) | Higher of -- (i) clause (a) value; (ii) actual rent received or receivable | Where the actual rent exceeds the fair / municipal value |
Clause (c) | Actual rent received or receivable | Where the property was vacant during the whole / part of the year AND the actual rent is less than clause (a) value owing to such vacancy |
The clause (c) compression Clause (c) is the lifeline for the landlord whose property was vacant. Without it, the assessing officer could compute the Annual Value at the fair rental value for the entire year (i.e., as if let throughout) and tax the assessee on income that was never received. Clause (c) compresses the Annual Value down to actual receipt where vacancy is the cause -- but only if the landlord can demonstrate that the property was held for letting and that vacancy was due to inability to find a tenant despite effort. |
2. The Genuine Effort to Let Out Test
Clause (c) of sub-section (1) of section 23 begins with the words 'where the property was let and was vacant'. The Income-tax Department has historically read this as requiring (i) the property was actually let out at some point during the year, OR (ii) the property was held with genuine intent and effort to let out. The Income Tax Appellate Tribunal has, in a series of decisions, accepted the broader reading -- a property held with documented effort to let out qualifies for clause (c) treatment even if the year did not produce any actual letting.
Case Law Reference: Premsudha Exports Pvt Ltd v. ACIT (Mumbai Income Tax Appellate Tribunal) The Mumbai Bench has consistently held that 'genuine effort to let out' is established by documentary evidence -- broker engagement, online listings (99acres / Magicbricks / Housing.com), property-management contract, advertisement entries, and rejected tenant applications. Where the documentation is robust, clause (c) treatment is allowed even for properties that did not produce any actual rent in the year. [VERIFY: confirm exact case name and citation against the original Tribunal order.] |
3. Documentation Discipline for the Genuine-Effort Defence
Document | Evidentiary Weight |
|---|---|
Listing on multiple online property portals (99acres, Magicbricks, Housing.com, NoBroker) | High -- automated record of date, price, photos |
Engagement letter / commission agreement with a real-estate broker | High |
Newspaper advertisements with paid-advertisement receipts | Medium-to-high |
Email / WhatsApp correspondence with prospective tenants | Medium |
Property-management agreement with a corporate operator | High |
Tenant-application rejection records (creditworthiness checks failed) | Medium-to-high |
Photograph evidence of 'For Rent' signage at the property | Low-to-medium |
Lease drafts negotiated but ultimately rejected | Medium |
4. Unrealized Rent under Rule 4
Where the rent is agreed but not realized (tenant defaults on payment), sub-rule (1) of Rule 4 of the Income-tax Rules, 1962 permits the deduction of unrealized rent from the Annual Value -- effectively reducing the rent computed under clause (b) of sub-section (1) of section 23. The deduction is conditional on four cumulative tests.
Rule 4 Test | Documentation Required |
|---|---|
The tenancy is bona fide | Registered rental agreement; tenant identity verification |
The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property | Eviction notice; legal proceedings record |
The defaulting tenant is not in occupation of any other property of the assessee | Statement of properties owned; tenant-status declaration |
The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unrealized rent or has satisfied the assessing officer that legal proceedings would be useless | Court filings; legal opinion confirming pursuit would be futile (e.g., tenant traceless / insolvent) |
5. Worked Example -- Vacancy Allowance
Mrs. Pooja owns a 2 BHK apartment in Hyderabad. The property's fair rental value is ₹40,000 per month (₹4.8 lakh per year). She let it out from April 2025 to August 2025 at ₹35,000 per month; the tenant vacated on 31 August 2025. Despite listings on Magicbricks, Housing.com and engagement of two brokers, she could not find a new tenant for the remainder of Tax Year 2025-26.
Computation under Sub-Section (1) of Section 23 | Amount |
|---|---|
Clause (a) Annual Value -- fair rental value for full year | ₹4,80,000 |
Actual rent received (April to August 2025 -- 5 months × ₹35,000) | ₹1,75,000 |
Clause (b) value -- higher of (a) and actual | ₹4,80,000 (Clause (a) higher) |
Clause (c) trigger -- property was let AND vacant due to inability to re-let | Met -- documented effort |
Annual Value under clause (c) | ₹1,75,000 (actual rent received) |
Less: Section 24(a) 30% standard deduction | (₹52,500) |
Net Income from House Property (assuming no section 24(b) interest) | ₹1,22,500 |
The clause (c) saving Without clause (c), Mrs. Pooja would have been taxed on the fair rental value of ₹4.8 lakh -- ₹4.8 lakh minus 30% = ₹3.36 lakh. With clause (c), she is taxed on ₹1.22 lakh. Saving: ₹2.14 lakh of taxable income, approximately ₹65,000 of tax at 30% slab. The saving is achieved entirely through documented genuine effort to re-let. |
6. The Income-tax Act, 2025 Treatment
The Income-tax Act, 2025 carries forward the same architecture in its corresponding provision. The clause (a) / (b) / (c) framework continues; the proviso to Rule 4 continues; the genuine-effort test continues to be the key documentation discipline. Practitioners should cite the new section number in correspondence post Tax Year 2026-27.
7. Practitioner Documentation Checklist
- Annual property-letting log -- listings made, brokers engaged, advertisements placed, applications received and reviewed.
- Online portal listings preserved with date stamps -- screenshot or download.
- Broker engagement letter and commission record.
- Tenant-application records -- including rejected applications with reasons.
- Lease draft negotiations even if not finalised.
- For unrealized rent -- registered rental agreement, eviction proceedings record, legal-opinion file.
- Annual reconciliation -- compute clause (a) / (b) / (c) value, record the chosen position with rationale.
8. Key Takeaways
- Sub-section (1) of section 23 has three clauses -- (a) fair rental, (b) higher of fair and actual, (c) actual rent where vacancy compresses receipt.
- Clause (c) is the relief for properties vacant during part of the year; requires genuine effort to re-let.
- Mumbai Income Tax Appellate Tribunal Premsudha Exports and similar decisions support broader reading -- documented effort suffices even without actual letting in the year.
- Unrealized rent under Rule 4 requires four cumulative tests -- bona fide tenancy, vacating, no other property, legal proceedings.
- Documentation discipline -- portal listings, broker engagement, advertisements, tenant-application records, eviction proceedings -- is the foundation of the defence.
- The 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.