Library / Income-tax Act, 2025: The Professional's Master Guide

8. Income from House Property (Sections 20 to 25)

Rental income from a building or land attached to it, owned by the taxpayer and not used for his own business, is taxed under this head. If the property is used in the owner's business, there is no income under this head.

8.1 The computation (sections 21 and 22)

Step	What to do
Gross annual value	Higher of expected rent (municipal value or fair rent, capped by standard rent) and actual rent received or receivable
Less: municipal taxes	Only if actually paid by the owner during the year
Net annual value (NAV)	Result of the above
Less: standard deduction	30% of NAV, whatever the actual repairs cost
Less: interest on borrowed capital	Actual interest for let out property. For self-occupied: up to Rs. 2,00,000 (old regime only). Pre-construction interest in 5 equal instalments

Illustration 26: Let out flat

Mr. Desai lets out a flat in Ahmedabad at Rs. 30,000 per month. He pays municipal tax of Rs. 12,000 and home loan interest of Rs. 2,80,000 in Tax Year 2026-27.

Actual rent (30,000 x 12)	3,60,000
Less: municipal tax paid	(12,000)
Net annual value	3,48,000
Less: 30% standard deduction	(1,04,400)
Less: interest on home loan	(2,80,000)
Loss from house property	(36,400)

Old regime: the loss is set off against salary (limit Rs. 2,00,000 a year against other heads). New regime: loss from house property cannot be set off against any other head, a frequent error in returns.

8.2 Self-occupied property

The annual value of up to two self-occupied houses is nil. In the old regime, interest up to Rs. 2,00,000 is allowed (Rs. 30,000 for certain older loans). In the new regime no interest is allowed on self-occupied property.

8.3 Arrears, unrealised rent and co-owners (sections 23 and 24)

Arrears of rent or unrealised rent received later are taxed in the year of receipt after a deduction of 30%, even if the person no longer owns the property. Where co-owners have definite shares, each is taxed on his share and each can claim his own interest limit on a self-occupied house.

Illustration 27: Arrears

An old tenant pays Rs. 50,000 of pending rent in January 2027. Taxable in Tax Year 2026-27 = 50,000 less 30% = Rs. 35,000.

Practice note

Rent received from letting a commercial complex along with services (such as a business centre) may be business income rather than house property income. Look at the main intention and the nature of the activity, and document it.

8.4 Who is the owner?

Tax under this head is on the owner. Besides the legal owner, the Act treats some persons as deemed owners:

An individual who transfers a house to his spouse (other than under an agreement to live apart) or to a minor child (other than a married daughter) without adequate consideration.
The holder of an impartible estate.
A member of a co-operative society or company who is allotted a flat under a house building scheme.
A person who takes possession under part performance of a contract (section 53A of the Transfer of Property Act) after paying consideration.
A person who acquires property under a lease of 12 years or more (other than month to month or yearly leases).

Judicial view: Meaning of owner

CIT v. Podar Cement (P) Ltd. (Supreme Court, 1997): the owner for this head is the person entitled to receive the income from the property in his own right. A person who has paid the price and taken possession is the owner for tax purposes even if the registered conveyance is not yet executed.

8.5 Gross annual value step by step

The annual value is determined in three stages:

Expected rent: the higher of municipal valuation and fair rent, but not more than the standard rent under a rent control law.
Actual rent received or receivable for the let out period, after reducing unrealised rent if the prescribed conditions are met (tenancy bona fide, defaulting tenant has vacated or steps taken to vacate, tenant not occupying another property of the owner, legal steps taken or reasonable grounds).
Gross annual value: higher of expected rent and actual rent; but if actual rent is lower because of vacancy, actual rent is taken.

Illustration 28: Vacancy

A flat has municipal value Rs. 3,00,000, fair rent Rs. 3,60,000, standard rent not applicable. It was let at Rs. 35,000 a month but remained vacant for 3 months. Expected rent = Rs. 3,60,000. Actual rent = 35,000 x 9 = Rs. 3,15,000. Actual rent is lower only because of vacancy, so gross annual value = Rs. 3,15,000.

8.6 Pre-construction interest

Interest on a loan taken for acquisition or construction, for the period before the year in which construction is completed, is allowed in five equal instalments starting from the year of completion. The pre-construction period begins on the date of borrowing and ends on 31 March before the year of completion. For self-occupied property in the old regime, the total of current and pre-construction interest is within the Rs. 2,00,000 limit.

Illustration 29: Pre-construction interest

Nitin borrows Rs. 40 lakh at 9% on 1 July 2023 to construct a house, completed on 15 August 2026. He lets it out from September 2026.

Pre-construction period: 1 July 2023 to 31 March 2026 = 33 months. Interest = 40,00,000 x 9% x 33/12 = Rs. 9,90,000. One fifth = Rs. 1,98,000 a year for Tax Years 2026-27 to 2030-31.

Current year interest for Tax Year 2026-27 = Rs. 3,60,000. Total interest deduction = Rs. 5,58,000 (let out property, so no cap on the deduction; the resulting loss can be set off against other heads only up to Rs. 2 lakh in the old regime).

8.7 Unsold flats held as stock-in-trade

Builders holding completed flats as stock-in-trade do not pay tax on notional rent for two years from the end of the year in which the completion certificate is obtained. After that, the annual value of unsold flats is taxed under this head even if they are not let out.

8.8 Composite rent and business use

Where a building is let along with furniture, machinery or services and the lettings are inseparable, the entire rent is taxed as business income or other sources. If separable, the building portion is house property and the rest is other income. Property used for the owner's own business or profession is not taxed under this head at all.

Judicial view: House property or business income

Sultan Brothers (P) Ltd. v. CIT (Supreme Court, 1964): where a building is let along with furniture and fittings and the lettings are inseparable, the income is not taxed as house property income but as business income or other sources.

Shambhu Investment (P) Ltd. v. CIT (Supreme Court, 2003): where the primary object is to earn rent from letting the property, the income is house property income even if some facilities are provided.

Chennai Properties and Investments Ltd. v. CIT (Supreme Court, 2015): where letting of properties is the main business of a company, the rent can be business income. In Raj Dadarkar and Associates v. ACIT (Supreme Court, 2017), the Court stressed that the answer depends on the facts of each case, and held the income to be house property income on the facts.

Practice note

For clients claiming home loan interest in the old regime, obtain the lender's certificate showing principal and interest separately, and the completion or possession certificate. For loans from friends or relatives, keep the lender's confirmation with PAN; interest paid is also subject to TDS if the payer is required to deduct.

Chapter summary

• Taxable on the owner, including deemed owners.

• Gross annual value, less municipal taxes, less 30% standard deduction, less interest.

• Self-occupied: nil annual value; interest up to Rs. 2 lakh only in the old regime.

• Pre-construction interest is allowed in five instalments.

• House property loss: Rs. 2 lakh set off in old regime; no set off against other heads in the new regime.