How Rental Income is Taxed in India — the House Property Head
Rental income received from letting out any immovable property — residential flat, commercial premises, office space, shop, or land — is taxable under the head Income from House Property under Sections 22 to 27 of the Income Tax Act 1961. This applies to owners of property who let it out, regardless of whether the property is in India or abroad (for resident taxpayers).nnThe computation of taxable income under House Property follows a specific sequence. The starting point is the Gross Annual Value (GAV) — defined as the higher of the actual rent received/receivable and the fair rental value (the rent the property can reasonably fetch in the open market). From GAV, municipal taxes paid by the owner during the year are deducted to arrive at the Net Annual Value (NAV). From NAV, two deductions are available under Section 24: a standard deduction of 30% of NAV under Section 24(a) and home loan interest under Section 24(b).nnFor FY 2025-26, rental income computation applies under both old and new tax regimes but with an important difference. Under the old regime, loss from house property (when interest exceeds NAV after deductions) can be set off against salary and other income up to Rs.2 lakh per year. Under the new regime, such loss cannot be set off against other income — it can only be carried forward for 8 years to set off against future house property income. This restriction makes the old regime more beneficial for property owners with large home loans on let-out properties.
Step-by-Step Calculation of Tax on Rental Income
Computing taxable rental income follows a structured step-by-step process. Here is a worked example for a residential flat let out at Rs.25,000 per month (Rs.3,00,000 per year) with municipal taxes of Rs.15,000 paid by the owner and a home loan interest of Rs.1,80,000 during FY 2025-26.nnStep 1 — Gross Annual Value (GAV): Rs.3,00,000 (actual annual rent received, assuming it is the higher of actual rent and fair rental value). Step 2 — Less: Municipal taxes paid by owner: Rs.15,000. Net Annual Value (NAV) = Rs.2,85,000. Step 3 — Less: Standard deduction under Section 24(a) at 30% of NAV: 30% of Rs.2,85,000 = Rs.85,500. Step 4 — Less: Home loan interest under Section 24(b): Rs.1,80,000 (for let-out property, the full interest is deductible with no Rs.2 lakh cap). Taxable income from house property = Rs.2,85,000 minus Rs.85,500 minus Rs.1,80,000 = Rs.19,500. This Rs.19,500 is added to the owner's other income and taxed at applicable slab rates.nnNote the contrast with a self-occupied property: for a self-occupied property there is no GAV (it is deemed nil) and no rental income. The only deduction available is home loan interest under Section 24(b) capped at Rs.2 lakh, creating a loss from house property of up to Rs.2 lakh which can be set off against salary under the old regime.
| Computation Step | Amount (Rs.) | Notes |
|---|---|---|
| Annual rent received | 3,00,000 | Rs.25,000 per month x 12 |
| Less: Municipal taxes paid by owner | (15,000) | Only taxes paid by owner qualify |
| Net Annual Value (NAV) | 2,85,000 | GAV minus municipal taxes |
| Less: Standard deduction 30% of NAV (Sec 24a) | (85,500) | Fixed 30% — no actual expense needed |
| Less: Home loan interest (Sec 24b — let out) | (1,80,000) | Unlimited for let-out; Rs.2L cap for self-occupied |
| Taxable income from house property | 19,500 | Added to total income; taxed at slab rates |
Section 24(b) — Home Loan Interest Deduction for Let-Out Property
Section 24(b) is the most significant deduction available against rental income. For let-out properties, the entire home loan interest paid during the year — with no upper limit — is deductible from the NAV. This unlimited deduction is one of the few remaining unlimited deductions in Indian income tax and makes let-out property with home loans a significant tax planning tool.nnFor a property with a large home loan where interest is Rs.8 lakh per year and rental income after 30% standard deduction is Rs.5 lakh, the taxable income from house property is Rs.5 lakh minus Rs.8 lakh = negative Rs.3 lakh (a loss). Under the old regime, this Rs.3 lakh loss can be set off against salary income up to Rs.2 lakh in the current year (maximum set-off limit of Rs.2 lakh per year for house property losses against other heads), with the balance Rs.1 lakh carried forward for 8 years.nnPre-construction period interest — interest paid on a home loan before the property is ready for possession or let-out — is not deductible in the year it is paid. Instead, it is aggregated and allowed as a deduction in five equal instalments starting from the year of completion of construction. For a property under construction from FY 2020-21 to FY 2023-24 with Rs.10 lakh in pre-construction interest, Rs.2 lakh per year is deductible from FY 2023-24 to FY 2027-28 as part of the overall Section 24(b) deduction.
TDS on Rental Income — Section 194I and 194IB for Tenants
Tenants paying commercial rent to a landlord are required to deduct TDS under Section 194I when annual rent exceeds Rs.2,40,000. The TDS rate is 10% for land and building rent. This TDS obligation applies to corporate and business tenants — individuals and HUFs not subject to tax audit under Section 44AB are generally exempt from Section 194I deduction unless they are businesses above the audit threshold.nnFor individual tenants paying monthly rent above Rs.50,000 on residential or commercial premises, Section 194IB requires TDS at 5% to be deducted once a year in the last month of tenancy or March. This is deposited via Form 26QC on the TIN-NSDL portal. No TAN is required for Section 194IB — PAN of both tenant and landlord suffices.nnThe TDS deducted by tenants is reflected in the landlord's Form 26AS as advance tax credit. Landlords must reconcile their Form 26AS with expected TDS from all tenants before filing ITR. Where commercial tenants have deducted TDS, the landlord should receive Form 16A from the tenant within 15 days of the quarterly return due date. Landlords who do not receive Form 16A should contact their tenants — the TDS deducted must be deposited and returned must be filed for the credit to appear in Form 26AS.
How to Report Rental Income in ITR and Legal Ways to Save Tax
Rental income is reported in the ITR under Schedule HP (House Property). For each property let out during the year, the taxpayer provides: property address, type of property (residential/commercial), GAV, municipal taxes paid, Section 24(a) standard deduction, and Section 24(b) interest. The net taxable income from each property is computed and the aggregate is carried forward to the total income computation.nnITR-1 can be used for rental income from a single residential house property where the taxable income from all sources is below Rs.50 lakh. ITR-2 must be used for multiple properties, commercial properties, or when total income exceeds Rs.50 lakh. ITR-3 is required when rental income combines with business income.nnLegal tax-saving strategies for rental income include: claiming municipal taxes paid promptly before 31 March to maximise the deduction in the current year; ensuring the home loan is structured on the let-out property rather than a self-occupied property to access the unlimited Section 24(b) interest deduction; maintaining receipts for all municipal tax payments; and for high-income taxpayers, considering placing the property in an HUF structure where the HUF's separate basic exemption and 80C deductions can shelter a portion of rental income. Where applicable, the 30% standard deduction automatically reduces taxable rental income regardless of actual expenses — this benefit is available even if no actual repair or maintenance expenses were incurred.
