Income from House Property: Tax Implications for AY 2025-26
Mr. B owns multiple properties - a self-occupied house in Bangalore, a rented apartment in Mumbai, and a vacant property in Chennai. He is confused about how to report these properties in his tax return and what deductions he can claim. This article explains the tax implications of income from house property.
How to Approach:
- Part 1 – Understanding Income from House Property
- Part 2 – Types of House Properties & Their Taxation
- Part 3 – Calculating Net Annual Value
- Part 4 – Deductions Available
- Part 5 – Special Cases & Tax Planning
PART 1 – UNDERSTANDING INCOME FROM HOUSE PROPERTY
Any income derived from a house property that you own is taxable under the head "Income from House Property" as per Section 22 of the Income Tax Act, 1961. This includes rental income as well as deemed rental income from self-occupied or vacant properties.
Key Conditions for Taxation under House Property
- The property must be a building or land appurtenant thereto
- The taxpayer must be the owner of the property
- The property should not be used for business or profession carried on by the owner
PART 2 – TYPES OF HOUSE PROPERTIES & THEIR TAXATION
For tax purposes, house properties are categorized into three types, each with different tax treatment:
| Type of Property | Tax Treatment |
|---|---|
| Self-Occupied Property (SOP) | Annual Value considered as NIL |
| Let-Out Property (LOP) | Actual rent received/receivable is taxable |
| Deemed Let-Out Property (DLOP) | If you own more than two houses, houses beyond the two self-occupied ones are treated as deemed let-out, and taxed accordingly |
Important Change for AY 2025-26
Effective from assessment year 2020-21 (and continuing for AY 2025-26), taxpayers can claim two houses as self-occupied properties with nil annual value. Previously, only one house could be designated as self-occupied.
PART 3 – CALCULATING NET ANNUAL VALUE
The Net Annual Value (NAV) is the base amount on which tax is calculated for house property. The calculation differs based on property type:
For Self-Occupied Property:
The NAV is taken as NIL
For Let-Out / Deemed Let-Out Property:
NAV is determined as the highest of:
- Municipal Value (as determined by local authorities)
- Fair Rent (rent similar properties would fetch)
- Standard Rent (if applicable under Rent Control Act)
If the property is actually let out, compare the Expected Rent (highest of the above three) with Actual Rent received/receivable:
- If Actual Rent > Expected Rent: NAV = Actual Rent
- If Actual Rent < Expected Rent: NAV = Actual Rent (if the reason for lower rent is vacancy period)
- Otherwise: NAV = Expected Rent
Municipal taxes paid by the owner are deducted from the Gross Annual Value to arrive at NAV.
PART 4 – DEDUCTIONS AVAILABLE
Deductions under Section 24:
- Standard Deduction (24a): 30% of Net Annual Value (not available for self-occupied property with NIL annual value)
- Interest on Housing Loan (24b):
- For Self-Occupied Property: Maximum ₹2,00,000 per annum for both houses combined
- For Let-Out/Deemed Let-Out Property: No upper limit, entire interest is deductible
- Pre-construction period interest can be claimed in 5 equal installments starting from the year of completion
Interest Deduction for Self-Occupied Property
For loans taken on or after April 1, 2019, the combined interest deduction limit for self-occupied houses is ₹2,00,000.
For loans taken before April 1, 1999, the deduction limit is ₹30,000.
Special Cases for Housing Loan Interest
- Additional deduction of up to ₹1,50,000 under Section 80EEA for first-time homebuyers (subject to conditions)
- Interest on borrowed capital for construction/acquisition of property is deductible from the year in which construction is completed or acquisition is made
- Principal repayment is eligible for deduction under Section 80C (up to ₹1,50,000)
PART 5 – SPECIAL CASES & TAX PLANNING
Co-Owned Property
When a property is co-owned, each co-owner is entitled to claim deductions on their share of income proportionate to their ownership share.
For example, if Mr. B and his spouse jointly own a property with 50% share each, both can claim interest deduction of up to ₹2,00,000 each for a self-occupied property, effectively doubling the benefit.
Unrealized Rent
If you have included rental income in your previous year's return but have been unable to recover it despite taking reasonable steps for recovery, you can claim a deduction under section 25A in the year in which it becomes irrecoverable.
Tax Planning Tips
- Designate two houses with higher loan interest as self-occupied to maximize the ₹2,00,000 deduction
- Consider joint ownership with spouse to increase deduction limits
- Ensure you collect and preserve rent receipts, loan interest certificates, and property tax payment receipts
- If you have let-out properties, maintain proper documentation of expenses like repairs, maintenance, and insurance
- Consider restructuring loans to maximize tax benefits based on property usage
Losses from House Property
If your interest payment exceeds your rental income (common in let-out properties), you can set off the loss against other heads of income up to a maximum of ₹2,00,000 per assessment year.
Any excess loss can be carried forward for up to 8 assessment years and set off against future income from house property.
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