Rental Income : Overview

Rental Income : Overview

For FY 2026-27 (Assessment Year 2027-28), rental income from a house property follows a fixed five-step sequence: Gross Annual Value → minus municipal taxes paid → minus 30% standard deduction → minus interest on borrowed capital → equals taxable income from house property. The framework has not changed dramatically, but the new tax regime now defaults for most individual filers, tenant TDS rates were revised effective October 2024, and the Annual Information Statement (AIS) captures virtually every digitally routed rent receipt. Getting the basics right first — before worrying about optimisation — saves you from the two most expensive mistakes: under-reporting gross rent and over-claiming deductions that the regime you chose does not actually allow.

How Annual Value is Computed

Annual value is the engine of the whole computation. Get it wrong and every figure downstream is wrong.

The Three-Way Comparison

For a let-out property, Annual Value is determined as follows:

1. Find Expected Rent (ER): Take the higher of (a) Municipal Value and (b) Fair Rent (what a similar property in the same locality commands). If the property is subject to a Rent Control Act, cap this figure at the Standard Rent fixed under that Act. The result is Expected Rent.
2. Compare ER with Actual Rent Received (ARR): Annual value is normally the higher of the two.
3. Vacancy exception: If actual rent is less than Expected Rent solely because the property was vacant for part of the year, Annual Value drops to actual rent received — not Expected Rent.

Worked illustration of the vacancy rule: Your flat's Expected Rent is Rs. 6,00,000 per year. It was vacant for three months and you received only Rs. 4,50,000 in actual rent (Rs. 50,000 × 9 months). Because the shortfall is entirely due to vacancy, Annual Value = Rs. 4,50,000. If, however, the tenant paid below-market rent (say Rs. 40,000/month even when occupied), you must check whether the lower rent is due to vacancy or to below-market pricing. Only vacancy reduces Annual Value to actual rent.

Self-Occupied and Deemed Let-Out

Annual Value is treated as nil for up to two self-occupied properties you own. The moment you own a third residential property (or more), every additional property beyond your two nil-AV choices is treated as deemed let-out — you must compute Annual Value using Expected Rent even if it sits empty or is used by family members. There is no third nil-AV slot; this is one of the most consistently mis-filed areas on returns.

Step-by-Step: Computing Taxable Income from a Let-Out Property

Here is the exact sequence you fill into Schedule HP of your ITR:

1. Gross Annual Value (GAV): Higher of Expected Rent and Actual Rent Received (vacancy rule applied where relevant).
2. Less: Municipal taxes paid during the year — only amounts actually paid by the owner (not the tenant) and paid during FY 2026-27, not merely accrued.
3. = Net Annual Value (NAV)
4. Less: 30% standard deduction on NAV (Section 24(a)) — this is a flat allowance covering all maintenance, repairs, insurance, depreciation. You cannot claim actual repair costs separately in addition to this.
5. Less: Interest on borrowed capital (Section 24(b)) — see the next section for limits.
6. = Income / (Loss) from House Property

Deductions Under Section 24 — What Each Regime Allows

Municipal Taxes (Section 23)

Only taxes actually paid by you (the owner) during FY 2026-27 are deductible. If the tenant pays them directly under the lease, you cannot claim the deduction. If you pay two years' property tax in one year as arrears, the full amount paid is deductible in the year of payment — accrual basis does not apply here.

Standard Deduction — Section 24(a)

Fixed at 30% of NAV. Available under both the old and new tax regimes for let-out property. There is no documentation requirement; it is automatic. Do not attempt to claim actual repairs separately — ITR processing systems will flag the error.

Interest on Borrowed Capital — Section 24(b)

This is where the two regimes diverge significantly:

Pre-construction interest is the aggregate interest paid from the date the loan was drawn until 31 March of the year prior to possession. You divide this total by five and claim one instalment each year for five consecutive years starting from the year of possession. If you forget to claim it in years one or two, you cannot claim the unclaimed instalments retroactively — file a revised return within the deadline.

Loss Set-Off: The Critical Regime Difference

Under the old regime: Net loss from house property can be set off against salary, business income, or capital gains — but only up to Rs. 2,00,000 per year. The balance that exceeds this cap is carried forward for up to eight assessment years and can only be set off against future house property income.

Under the new regime (default from AY 2024-25 onward): Loss from house property — even for let-out properties — cannot be set off against any other head of income, and the unabsorbed loss cannot be carried forward either. For anyone with a large outstanding home loan on a let-out property, this single restriction can make the old regime decisively more tax-efficient.

Worked Example: Let-Out Flat in Pune, FY 2026-27

Facts:

• 2BHK flat let out for 12 months at Rs. 38,000/month.
• Fair rent in the locality: Rs. 36,000/month. Municipal value: Rs. 3,30,000/year.
• Expected Rent: higher of municipal value (Rs. 3,30,000) and fair rent (Rs. 4,32,000) = Rs. 4,32,000.
• Actual rent received: Rs. 4,56,000 (Rs. 38,000 × 12).
• Municipal taxes actually paid by owner during FY 2026-27: Rs. 14,400.
• Home loan outstanding; annual interest for FY 2026-27: Rs. 2,95,000.
• Pre-construction interest total: Rs. 90,000 (property possessed in FY 2024-25 — Year 2 of 5 instalments).

Computation:

This small loss of Rs. 3,880 can be set off against salary in the same year under the old regime (within the Rs. 2 lakh cap — easily). Under the new regime, it is simply lost.

If interest were Rs. 4,00,000 instead of Rs. 2,95,000, the loss would be Rs. 1,07,880. Old regime: set off against salary, saving tax at the applicable slab. New regime: zero benefit, loss lapsed.

Tenant's TDS Obligations Under Section 194-IB

Who Must Deduct

An individual or HUF tenant who is not subject to tax audit under Section 44AB must deduct TDS if monthly rent payable to a resident landlord exceeds Rs. 50,000 per month (or part thereof). This threshold applies per property, not per financial year.

Tenants required to get their accounts audited fall under Section 194-I instead — with a lower threshold of Rs. 2,40,000 per annum and rates of 10% for land/building/furniture and 2% for plant and machinery.

Rate and Timing (FY 2026-27)

The TDS rate under Section 194-IB is 2% (revised downward from 5%, effective 1 October 2024 per Finance Act 2024). TDS is deducted once per financial year — on the rent paid for the last month of the financial year or the last month of the tenancy, whichever comes first.

Importantly, the 2% is applied to the full annual rent (or the rent for the period of tenancy during the year), not just one month's rent. The deduction simply happens at one point in time.

Worked TDS calculation:

• Monthly rent: Rs. 60,000. Tenancy for full FY 2026-27.
• Total annual rent: Rs. 7,20,000.
• TDS @ 2% = Rs. 14,400, deducted when paying March 2027 rent.

Filing Obligation: Form 26QC

After deducting TDS, the tenant must:

1. Pay the TDS using Form 26QC (challan-cum-statement — no separate TDS return required) on the NSDL/TIN portal or via net banking.
2. Due date: Within 30 days from the end of the month in which TDS was deducted. For March 2027 TDS, the deadline is 30 April 2027.
3. Issue Form 16C (TDS certificate) to the landlord within 15 days of Form 26QC filing.

If the tenant fails to deduct or deposit TDS, they face interest at 1% per month (failure to deduct) or 1.5% per month (failure to deposit), plus a penalty equal to the TDS amount under Section 271C. The landlord still owes the tax — but the tenant bears the interest and penalty.

For non-resident landlords: Section 195 applies instead, requiring TDS at the applicable treaty rate or the standard rate (typically 30% + surcharge + cess on gross rent, or the reduced DTAA rate if a valid Form 15CA/15CB package is obtained).

Regime Choice — Which Works Better for Rental Property Owners

The new tax regime (Section 115BAC) is the default from AY 2024-25. You must opt into the old regime in your ITR — if you miss doing so, you get new-regime rates and lose the Section 24(b) interest deduction on self-occupied property entirely.

Go with the old regime if:

• You have a home loan on a self-occupied property with annual interest above approximately Rs. 2,00,000 (the direct saving at 30% slab is Rs. 60,000+ from just this deduction).
• You have a let-out property generating a net loss, and you want to set off that loss against salary income.
• Combined deductions under Chapter VI-A (80C, 80D, HRA, etc.) plus Section 24(b) exceed the effective tax saving from new-regime slab benefits.

The new regime may be better if:

• Your properties generate net positive income (all deductions still allowed, better slab rates help).
• You have no significant home loan interest or it is on a let-out property already netting out within the property head.
• You have minimal Chapter VI-A deductions to claim anyway.

Run the computation both ways before filing — the break-even varies by income level and debt load.

Joint Ownership: Splitting Rental Income Legitimately

Where two or more co-owners hold a property, rental income is assessed in the hands of each co-owner in proportion to ownership share, and each co-owner independently claims their share of deductions (including Section 24(b) interest on their own share of any joint loan).

This can be effective tax planning where one co-owner is in a lower slab — for example, spouses where one earns significantly less. However, you must satisfy these conditions:

• Ownership proportions must be stated in the sale deed or conveyance deed (not just a later private agreement).
• Each co-owner must have contributed to the purchase — either through own funds or by servicing loan EMIs from their own bank account. Paper co-ownership without actual contribution invites clubbing under Section 64(1)(iv) (transfer to spouse) or Section 64(1)(vi) (transfer to son's wife).
• EMI payments from a joint account are traced by proportion of contribution to that joint account. Maintain bank statements documenting the source of repayment.
• Both co-owners must file separate returns disclosing their share. A single co-owner filing and showing 100% income (or one filing nil) triggers AIS mismatch notices if the registration deed shows joint names.

Furniture, Maintenance Charges and GST — Getting the Classification Right

Furniture Rented Separately

If your lease agreement bifurcates rent into a property component and a furniture-and-fixture component (common in furnished-flat leases), the property portion is taxed under "Income from House Property." The furniture portion — if documented separately — is taxable under "Income from Other Sources," not house property. This matters because the 30% standard deduction does not apply to the furniture component; only actual depreciation at prescribed rates (10% on furniture) is permissible under that head.

Society Maintenance Charges

Where the tenant pays maintenance directly to the housing society and this is explicitly excluded from the lease rent, it is neither your income nor your deductible expense. Do not gross it up in your rental income computation. If you receive it and then pay it out, show it as a pass-through (income and identical expenditure under "Other Sources"), netting to nil — do not net it at the gross rental income stage.

GST on Rental Income

Residential property rented to an individual for residential use: Exempt from GST, regardless of rent amount or the landlord's registration status.

Residential property rented to a registered entity (company, LLP, firm) for commercial use or as accommodation for employees: GST at 18% applies and the registered tenant must discharge tax under the reverse-charge mechanism (RCM) — the landlord need not register solely for this.

Commercial property: GST at 18% applies if your aggregate turnover from taxable supplies (including commercial rent) exceeds Rs. 20 lakh (Rs. 10 lakh in specified states). Registration is then mandatory, and quarterly or monthly returns must be filed. Income tax and GST are computed on the same gross rent — there is no deduction of GST paid from rental income in the income-tax computation.

Capital Gains When You Sell a Let-Out Property

When you sell a let-out residential property held for more than 24 months, the gain qualifies as Long-Term Capital Gain (LTCG).

Rate for FY 2026-27: 12.5% without indexation — the rate rationalised by Finance (No. 2) Act 2024 for transfers on or after 23 July 2024. If the property was acquired before 23 July 2024, you may compute tax under both methods and pay whichever is lower: 12.5% without indexation, or 20% with indexation using the Cost Inflation Index notified for the year of acquisition and year of sale.

Cost basis for a let-out property includes:

• Original purchase price plus stamp duty and registration costs.
• Brokerage paid at purchase.
• Capital improvements (structural additions, new fittings) — documented by bills and bank payments.
• Not routine repairs, which were already absorbed by the 30% standard deduction year by year.

Exemptions available:

• Section 54: Invest LTCG (or sale proceeds if higher) in one new residential property in India. Purchase within one year before or two years after sale; construct within three years.
• Section 54EC: Invest up to Rs. 50 lakh in notified bonds (NHAI, REC) within six months of sale. Bonds are locked in for five years; no indexation benefit on the bond investment itself.

Maintain all original documents — sale deeds, improvement bills, home-loan statements — for at least six years after the year of sale to substantiate cost basis in any scrutiny.

Common Mistakes and How to Fix Them

1. Reporting rent on a net basis. Deducting maintenance, repairs, broker fees or society charges from rent before filling in Schedule HP is wrong. Always start with gross rent received; claim only the permitted deductions (municipal taxes + 30% standard deduction + interest).

2. Skipping the vacancy cross-check. Many filers automatically take Expected Rent as Annual Value without checking whether actual rent was lower due to vacancy. If you had a genuine vacancy period, compute both figures — the vacancy rule can reduce Annual Value and therefore NAV and standard deduction.

3. Claiming a third nil-AV property. If you own three or more residential properties, at most two can have nil Annual Value. Choosing which two to treat as self-occupied requires deliberate planning (typically whichever two would generate the largest deemed rent if treated as let-out). Filing all three as nil is a common audit trigger.

4. Missing the AIS reconciliation step. If your tenant filed Form 26QC, the rent appears in your AIS (accessible on the income-tax e-filing portal under AIS/TIS). If you report a different figure in your ITR — either due to timing differences or honest error — the system generates a mismatch query. Download your AIS before computing income, reconcile differences, and if you have a genuine explanation (e.g., tenant overstated rent), file with the correct figure and respond to the mismatch online.

5. Pre-construction interest claimed in wrong years. The five-instalment window starts from the year of completion/possession, not the year the loan was taken. Claiming it before possession (or skipping Year 1 and doubling in Year 2) are both errors. Track your possession date in the possession letter and set reminders for all five years.

6. Not issuing Form 16C. Tenants who correctly file Form 26QC often forget to generate and hand over Form 16C to the landlord. Without it, the landlord cannot cross-check TDS credit in their Form 26AS / AIS and may inadvertently under-report credit, leading to a demand.

7. Claiming actual repairs separately in addition to standard deduction. The 30% standard deduction is in lieu of all maintenance and repair expenses. You cannot separately deduct painting costs, plumbing bills, or pest-control charges. If you have done this in a past return, it is advisable to verify whether the return was processed under scrutiny before deciding whether a revised return is needed.

Key Takeaways

• Annual Value is always the starting point — compute it carefully using the three-way comparison, and apply the vacancy rule where applicable. Do not assume it equals actual rent received.
• Both regimes allow the 30% standard deduction and municipal-tax deduction for let-out property, but only the old regime allows you to set off the resulting house property loss (up to Rs. 2 lakh) against salary or other income.
• Section 24(b) interest on self-occupied property is zero under the new regime — this alone can make the old regime more valuable if you carry a meaningful home loan.
• Tenant TDS under Section 194-IB applies when monthly rent exceeds Rs. 50,000; the 2% rate is applied to annual rent but deducted in the last month of the tenancy or financial year. Form 26QC is due within 30 days of that month-end.
• AIS/TIS will capture your rental income from Form 26QC, 26Q, and registrar data — always reconcile before filing to prevent mismatch notices.
• Joint ownership works for income-splitting only when co-owners genuinely funded the purchase — maintain bank-level evidence of contribution and ensure the sale deed reflects ownership proportions correctly.
• When you sell, the 12.5% LTCG rate (no indexation) applies for FY 2026-27; properties acquired before 23 July 2024 carry a grandfathered option to choose 20% with indexation if that produces a lower tax — compute both before deciding.