Your Roof, Your Tax — Decoded.
House property is one of the five heads of income under the Income Tax Act, 1961. Understanding how rental income — and even deemed income from self-occupied properties — is taxed is essential for every property owner and taxpayer.
When Does a House Attract Tax?
Section 22 is the gate. It declares that the annual value of any building or land appurtenant thereto — of which the assessee is the owner — shall be chargeable under the head “Income from House Property.” Three conditions must all be satisfied simultaneously.
- The property must consist of a building or land appurtenant thereto.
- The assessee must be the legal or deemed owner of such property.
- The property must not be used by the owner for his own business or profession, the profits of which are chargeable to tax.
- Rented residential house
- Rented commercial building
- Self-occupied house (Nil AV)
- Deemed let-out (3rd+ property)
- Vacant property
- Property used for own business
- Stock-in-trade property
- Sub-letting income (→ IFOS)
- Rent of machinery bundled with building
Who Really “Owns” It? The Deemed-Owner Rule
The law looks beyond the registered deed. Section 27 treats certain persons as owners even if they hold no formal title — preventing easy tax avoidance through name-transfers.
- Transfer to spouse without adequate consideration
- Transfer to minor child (not a married daughter)
- Holder of an impartible estate
- Co-operative society allottee
- Possession under Sec. 53A, Transfer of Property Act
- Lessee with lease ≥ 12 years
Co-owners with definite shares are taxed individually on their proportionate share (Section 26).
What is the Property Actually Worth? — Annual Value
Annual Value (AV) is the heart of this computation. It is the sum for which the property might reasonably be expected to be let out — not necessarily what it fetches today. Four figures play a role: Fair Rent, Municipal Value, Standard Rent, and Actual Rent Received.
| Property type | Annual Value rule | Governing sub-section |
|---|---|---|
| Let-out (full year) | Higher of Expected Rent or Actual Rent | 23(1)(a)(b) |
| Vacancy period | ARR reduced for vacant months | 23(1)(c) |
| Self-occupied (up to 2 houses) | Nil | 23(2) |
| 3rd property onward (deemed let-out) | Taxed at Expected Rent | 23(4) |
| Partly let-out / partly self-occupied | Proportionate AV | 23(3) |
From AY 2020-21 onwards, a taxpayer can declare up to two houses as self-occupied (Annual Value = Nil). A third house and beyond is treated as deemed let-out and taxed at expected rent.
Cut Your Tax Bill — Deductions You Must Know
Once the Net Annual Value (NAV = GAV − Municipal Taxes paid by owner) is computed, Section 24 provides the only two deductions permitted under this head.
A flat 30% of NAV is deducted — no bills required, no proof needed. Covers repairs, insurance, and maintenance notionally. Not available when AV is Nil (SOP).
Interest on capital borrowed to purchase, construct, repair, renew, or reconstruct is deductible. Limits vary by property type and loan date (see table below).
| Property use | Loan condition | Deduction limit |
|---|---|---|
| Let-out property | Any loan | No limit — full interest deductible |
| Self-occupied | Loan after 1 Apr 1999; construction within 5 years | Up to ₹2,00,000 |
| Self-occupied | Loan before 1 Apr 1999 | Up to ₹30,000 |
| Self-occupied | Loan after 1 Apr 1999 but construction exceeds 5 years | Up to ₹30,000 |
Interest accruing before the construction year is aggregated and then allowed as deduction in five equal annual instalments starting from the year of completion. It cannot be claimed as a lump sum.
The complete computation at a glance
When Old Rent Comes Back — Arrears & Unrealised Rent
- Arrears of rent or previously written-off unrealised rent, when actually received, are taxable in the year of receipt.
- A flat 30% deduction is allowed on such recovered amount.
- Taxable even if the assessee is no longer the owner of the property at the time of recovery.
Section 25 separately disallows: (a) interest payable outside India without TDS, and (b) penal interest on tax arrears.
Loss from Your House? Here’s How to Use It
When deductions — particularly home-loan interest on SOP — exceed the Annual Value, a loss arises. Section 71 and 71B govern how that loss can be utilised.
| Rule | Provision | Limit / Condition |
|---|---|---|
| Set-off in the same year against other heads | Section 71 | Maximum ₹2,00,000 per year (from AY 2018-19) |
| Carry forward of unabsorbed loss | Section 71B | Up to 8 Assessment Years |
| Set-off of carried-forward loss | Section 71B | Only against “Income from House Property” in future years |
Before AY 2018-19, the full loss from house property could be set off against salary, business income, or any other head. From AY 2018-19 onwards, the set-off is capped at ₹2,00,000. Any excess is carried forward for 8 years — but only settles against future house property income, not salary.
See It in Action — A Step-by-Step Worked Example
| Municipal Value | ₹1,20,000 |
| Fair Rent | ₹1,50,000 |
| Standard Rent (Rent Control Act) | ₹1,40,000 |
| Actual Rent Received (full year) | ₹1,60,000 |
| Municipal Taxes paid by owner | ₹10,000 |
| Interest on housing loan | ₹80,000 |
Every Section, One Table — Your Master Cheat Sheet
| Section | Subject | Core rule |
|---|---|---|
| 22 | Chargeability | Annual value of buildings/land owned by assessee |
| 23(1) | AV — Let-out | Higher of Expected Rent or Actual Rent Received |
| 23(2) | AV — Self-occupied | Nil (up to 2 houses from AY 2020-21) |
| 23(4) | Deemed let-out | 3rd+ house taxed at Expected Rent |
| 24(a) | Standard deduction | 30% of NAV — let-out only |
| 24(b) | Loan interest | Unlimited (let-out); ₹2L or ₹30K (SOP) |
| 25 | Disallowed deductions | Foreign interest without TDS; penal interest |
| 25A | Arrear / unrealised rent | Taxable in year of recovery; 30% deduction |
| 26 | Co-ownership | Each co-owner taxed on their own share |
| 27 | Deemed ownership | Spouse, minor child, 12-yr lessee, etc. |
| 71B | Loss carry-forward | Max ₹2L set-off; CF for 8 AYs (house property only) |
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