Choosing two self-occupied houses out of three

Assumptions

1. Ms. X has opted out of the default regime, as the question says. No business or professional income is given, so the option is taken as exercised in the prescribed manner along with her return under section 263(1) (section 202(4)(b)). Under the default regime the interest of section 22(1)(b) would not be allowed on a self-occupied house (section 202(2)(a)(v)); that clause does not name section 22(1)(c).
2. Municipal taxes, at the stated percentage of the municipal value, were paid by her during the tax year (section 21(3)).
3. Each house was finished no later than five years after the close of its borrowing year, and she furnishes the lender's certificate stating the interest payable on the capital borrowed and, if a new loan repaid any of it, the interest payable on that loan (section 22(2)(a)(ii), (4)), so the ceiling of ₹2,00,000 applies (section 22(2)(a)). For House II there was no pre-construction interest, so it was completed in the year of borrowing.
4. Houses I and III were completed in a year for which the tax year 2026-27 is one of the five years over which pre-construction interest is spread (section 22(1)(c)). No part of that interest is shown as allowed under any other provision, so it is not reduced first (section 22(3)).
5. Insurance and repairs are not deductible: the 30% deduction is the only allowance for them (section 22(1)(a)).

Step 1: each house if deemed let out

Only two houses can have a nil annual value as self-occupied (section 21(6)-(7)); the third is taxed on the rent it might reasonably fetch (section 21(1)(a)): the higher of municipal value and fair rent, but not more than the standard rent.

Step 2: each house if self-occupied

The annual value is nil, so the interest is a loss. Assumption (the question gives no completion dates or certificates): each house was completed within five years of the end of its borrowing year and she furnishes the lender's certificate, so the ₹2,00,000 ceiling of section 22(2)(a) applies, not ₹30,000. Two deductions are involved, and for the self-occupied houses together their aggregate may not exceed ₹2,00,000: Finance Act, 2026, section 38 amends section 22(2) so that the ceiling covers the deductions under clause (1)(b) and clause (1)(c) alike, and section 22(5) sets the same aggregate limit:

• the interest of the current year (section 22(1)(b)): House I ₹1,60,000, House II ₹1,00,000, House III ₹30,000;
• the one-fifth instalment of pre-construction interest (section 22(1)(c)): House I ₹68,000, House III ₹84,000.

Step 3: the three choices

Income from house property

Ms. X should specify Houses II and III as self-occupied, with House I deemed let out. Her income from house property for the tax year 2026-27 is ₹13,000 (₹2,13,000 from House I less ₹2,00,000, the ceiling on the ₹2,14,000 of current and pre-construction interest on Houses II and III), the lowest of the three.

What changed from the Income-tax Act, 1961

Under section 24(b) of the 1961 Act the ₹2,00,000 ceiling applied only to a loan taken on or after 1 April 1999; section 22(2) of the 2025 Act has no such date, so every house here qualifies. The as-set version (previous year 2023-24), in which House II's loan is dated before 1 April 1999, is given separately and reaches a different figure.