Income from House Property: How Rental Income Is Actually Taxed

Own a property you've rented out, and the tax on that rental income isn't simply the rent you actually collected. It runs through a specific computation, Net Annual Value, a flat 30% deduction, and home loan interest, that regularly produces a taxable figure quite different from the rent that landed in your bank account. Here's how income from house property is actually worked out.

The Starting Point: Net Annual Value, Not Actual Rent

Tax law starts from a concept called Net Annual Value (NAV), not the rent you actually received. For a let-out property, NAV is generally the higher of the actual rent received and the property's reasonable expected rent (broadly, what it could fetch based on municipal valuation and similar properties nearby), reduced by any property tax you've actually paid during the year. In most straightforward cases where a property is rented at a fair market rate, NAV simply works out close to the actual rent received minus property tax paid, but the reasonable-expected-rent comparison matters more if a property is let out below market rate, say, to a family member.

The Standard 30% Deduction, No Questions Asked

Once NAV is worked out, a flat 30% deduction applies automatically, regardless of your actual maintenance, repair, or other property-related costs. You don't need bills or receipts to claim it, and you can't claim a higher deduction even if your actual expenses genuinely exceeded 30% of NAV in a given year. It's a blunt, simplified stand-in for real property expenses, similar in spirit to how the standard deduction works for salary income.

Home Loan Interest Under Section 24(b)

Interest paid on a loan taken to buy, build, repair, or reconstruct the property is deductible against rental income, and unlike the interest cap that applies to a self-occupied house, there's no upper limit on this deduction for a let-out property. The entire interest paid during the year, even if it exceeds the rental income itself and creates a loss, can be claimed. Interest for the period before construction was completed (pre-construction interest) is treated differently: it isn't deducted in the years it was actually paid, but accumulated and claimed in five equal instalments starting from the year construction finishes.

A Self-Occupied House Works Completely Differently

A property you live in yourself, rather than renting out, is treated as having a Net Annual Value of nil, so there's no rental income to tax in the first place. What survives is only the home loan interest deduction, capped at ₹2,00,000 a year under Section 24(b) for a self-occupied house, dropping to ₹30,000 if construction isn't completed within five years of taking the loan. The 30% standard deduction doesn't apply here at all, since there's no positive NAV for it to apply against. This interest deduction is available only under the old tax regime; the new regime doesn't allow it for a self-occupied property.

When a Loss From House Property Can Offset Other Income

If deductions, mainly home loan interest, exceed a property's net rental income (or, for a self-occupied house, simply exceed the nil NAV), the result is a loss from house property. This loss can be set off against your other income, salary included, up to ₹2,00,000 in a year under the old regime. Anything beyond that ₹2,00,000 cap can't be set off in the same year but carries forward for up to 8 assessment years, to be set off specifically against future house property income in those years, not against other heads of income once carried forward.

A Worked Example

A property rented out at ₹30,000 a month (₹3,60,000 a year), with ₹10,000 in property tax paid and ₹1,50,000 in home loan interest for the year:

Notice that ₹95,000 gets taxed, not the ₹3,60,000 that was actually collected as rent, and not even the ₹3,50,000 NAV figure. The 30% deduction and the loan interest together shrink the taxable amount well below what many owners assume they'll owe tax on.

This computation applies per property, so someone with multiple rented properties works through it separately for each one before combining the results. It's a meaningfully different calculation from what applies when you sell property rather than rent it out; capital gains rules take over entirely at that point, so it's worth being clear on which situation you're actually in before assuming either set of rules applies.