Taxpayers in India compute income from house property as one of the key heads under the Income Tax Act, 1961, which categorizes earnings from owned buildings or attached lands. You determine this income primarily through rental yields or deemed values for unoccupied properties. Expected rent is higher of municipal value & fair rent, subject to standard rent (if applicable). Final GAV is higher of expected rent or actual rent received. Subtract municipal taxes to get the Net Annual Value (NAV), then deduct 30% standard allowance for repairs and interest on home loans. Recent updates in the Income Tax Bill, 2025, propose applying the 30% deduction directly on GAV for simplicity. This process helps you optimize tax liability, especially for self-occupied or let-out homes. Understanding these steps empowers homeowners to claim deductions up to Rs. 2 lakh on interest which reduces overall taxes effectively.
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What is House Property and Its Type?
House property includes any building or land attached to it that is capable of generating income. This extends to residential houses, commercial buildings, factories, and even godowns. However, vacant land without a building does not qualify as a house property and income from such is taxed under the head of 'Income from Other Sources.' Sub-let properties by tenants are not considered as ownership. Following are the properties that are categorized based on usage:
Self-Occupied Property: When the property is used by the owner or their family for residential purposes throughout the year. Up to two such properties can be treated as self-occupied, with their annual value set to nil.
Let-Out Property: If the property is rented out for any part of the financial year, it falls here. Rental income is directly factored into computations.
Deemed Let-Out Property: Any additional properties beyond the two self-occupied ones are deemed to be let out, even if unoccupied, to prevent tax evasion through multiple ownerships.
These classifications ensure equitable taxation. For instance, if an individual owns three houses, two can be self-occupied with zero income, while the third is deemed let out and taxed on potential rental value. Deemed ownership applies in cases like properties held under long-term leases or by Hindu Undivided Families (HUFs).
Computation of Income from House Property under Income Tax Act, 1961
The computation follows Sections 22 to 27 of the Act, focusing on the property's annual value after deductions. As of 2025, the core rules remain intact, though the proposed Income Tax Bill, 2025, aims to replace the 1961 Act with minor clarifications. Given below is the step-by-step process and some important considerations.
Gross Annual Value (GAV): For let-out/deemed let-out, take higher of expected rent (municipal value, fair rent, or standard rent) or actual rent, minus unrealized rent. Self-occupied: GAV is nil.
Net Annual Value (NAV): GAV minus municipal taxes paid by owner.
Deductions (Section 24): Under Section 24, deductions include a standard 30% of the Net Annual Value for repairs without requiring proof, along with full interest on home loans for let-out properties or up to ₹2,00,000 for self-occupied properties.
Taxable Income: NAV minus deductions. Losses can be set off (up to ₹2,00,000) or carried forward 8 years.
Special Cases: Arrears or unrealized rent are fully taxable after a standard 30% deduction, and under the new tax regime, only interest on loans for let-out properties remains deductible.
2025 Updates: Proposed Income Tax Bill, 2025, clarifies 30% deduction on NAV and pre-construction interest for let-out properties.
Learn about more Income Tax Rules.
Determining the Gross Annual Value (GAV)
The foundation of computing income from house property is the Gross Annual Value (GAV), which represents the potential earning capacity of the property. GAV is calculated differently based on property type.
For let-out or deemed let-out properties, GAV is the highest of:
The actual rent received or receivable during the year.
The expected rent, which is the higher of the municipal valuation (value assigned by local authorities for tax purposes) and the fair market rent (reasonable rent for similar properties in the locality), but not exceeding the standard rent if regulated by the Rent Control Act.
Unrealized rent, such as amounts not collected despite efforts, can be deducted from actual rent if conditions like tenant vacancy or legal action are met. However, arrears of rent received later are taxed separately at 70% of the amount in the year of receipt.
For self-occupied properties, GAV is nil, simplifying the process but limiting deductions to interest on borrowed capital.
For example: Suppose a property has a municipal value of Rs. 1,20,000, fair rent of Rs. 1,50,000, and actual rent received of Rs. 1,40,000. The expected rent is Rs. 1,50,000 (higher of municipal and fair rent). Thus, GAV is Rs. 1,50,000 (higher than actual rent). If municipal taxes paid are Rs. 10,000, the Net Annual Value (NAV) becomes Rs. 1,40,000.
In cases of multiple properties, each is computed separately, and losses from one can be set off against income from another under the same head.
Deductions Allowed from House Property Income
Once NAV is determined, deductions are applied to arrive at taxable income. These are standardized to ease compliance.
First, municipal taxes paid by the owner during the financial year are subtracted from GAV to get NAV. Only taxes actually paid qualify; unpaid amounts or those borne by tenants do not.
A standard deduction of 30% of NAV is then allowed under Section 24(a) for repairs, maintenance, and other expenses. This is a flat rate, irrespective of actual costs incurred, and no further claims for depreciation or repairs are permitted.
The most significant deduction is for interest on borrowed capital under Section 24(b). For let-out properties, the entire interest paid on loans for acquisition, construction, repair, or renovation is deductible without limit. For self-occupied properties, the deduction is capped at Rs. 2,00,000 per year, provided the loan is for purchase or construction and possession is taken within five years.
Pre-construction interest is amortized over five years starting from the year of completion. In the new tax regime (default from AY 2024-25), most deductions are foregone, but interest on let-out properties remains allowable.
Example: For a let-out property with NAV of Rs. 4,80,000, standard deduction is Rs. 1,44,000 (30%), and interest paid is Rs. 1,00,000. Taxable income is Rs. 2,36,000. Joint owners can each claim proportional deductions, enhancing benefits for families.
Read Section 147 of Income Tax Act, 1961.
Special Cases and Loss from House Property
The Income Tax Act, 1961, has specific rules for certain situations and losses related to house property income. These are explained below in simple terms to help you understand how they work:
Arrears or Unrealized Rent Received Later (Section 25A): The tax authorities tax 70% of such rent in the year a person receives it, after a 30% deduction, even if they no longer own the property.
Co-Owned Properties (Section 26): The authorities apportion income based on each co-owner’s share, and each claims deductions proportionally.
Home Loan Benefits: Individuals can claim principal repayment up to ₹1,50,000 under Section 80C in the old regime. First-time buyers may claim an additional ₹1,50,000 interest under Section 80EEA for affordable housing, subject to conditions.
NRIs Renting Property: The tax system applies similarly to NRIs, but landlords deduct 30% TDS on rent; NRIs must file an ITR if income exceeds the exemption limit.
Summary
The computation of income from house property under the Income Tax Act, 1961 is designed to be fair and systematic by balancing revenue generation with taxpayer relief through deductions. Taxpayers calculate the Gross Annual Value (GAV) using actual rent or expected rent (municipal or fair market value). After subtracting municipal taxes, they derive the Net Annual Value (NAV). A 30% standard deduction and interest on borrowed capital reduce taxable income. Self-occupied properties have nil GAV but allow interest deductions up to Rs. 2,00,000. Losses offset other incomes in the old regime. The new regime limits deductions, impacting tax planning.
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Computation of Income from House Property: FAQs
Q1. How do you compute income from house property?
Calculate income by taking the property’s annual value, subtracting municipal taxes paid, and deducting 30% standard deduction and home loan interest (if applicable) from the net annual value.
Q2. What is the new rule for income from house property?
Under Budget 2023, the new tax regime doesn’t allow deductions for home loan interest or principal repayment for self-occupied properties, but the old regime still permits these.
Q3. Is income from house property taxable?
Yes, income from house property is taxable under the Income Tax Act, based on its annual value after deductions.
Q4. What is the computation of income?
Compute income by determining the property’s gross annual value, subtracting municipal taxes, and then deducting 30% standard deduction and interest on home loans (if applicable).
