Income From House Property: How Your Property Is Taxed in FY 2025-26
If you own a house in India, you need to know how the income tax law treats it. It does not matter whether you live in it, rent it out, or leave it empty. The tax department has a specific way of looking at every property you own, and ignoring this can mean filing an incorrect return or missing out on deductions you were entitled to claim. If you need professional guidance, consulting an experienced CA in Gurgaon can help you correctly compute taxable income, claim eligible deductions, and avoid mistakes while filing your Income Tax Return
This article explains everything in simple terms. What counts as house property income, how it is calculated, what you can deduct, and how home loan interest fits into the picture.
Which Properties Are Covered
The tax head “Income from House Property” covers any building and the land directly attached to it. This includes residential flats and houses as well as commercial shops and offices. It does not matter whether you are renting it to a family or to a business. The rules apply equally to both.
A few things are not covered here. If you own a plot of land with no building on it, that is not house property income. If you use a property entirely for running your own business or profession, the income from it is taxed under a different head. And if you rent out a property together with furniture or machinery as a combined package, that rental income may also be taxed differently depending on the facts.
Who Pays the Tax
The tax is paid by the owner of the property. But the tax law also has a concept called “deemed ownership” which means in some cases, even if you have given away or transferred a property to someone else, the tax department may still treat you as the owner for tax purposes.
The most common example is when you transfer a property to your spouse or minor child without receiving adequate money in return. In that case, you are still treated as the owner and the rental income from that property is included in your own income, not your spouse’s or child’s. A person who has been allotted a flat by a housing society is also treated as the owner of that flat for tax purposes.
Three Types of Properties and How Each Is Treated
Self-Occupied Property
If you live in the house yourself, it is called a self-occupied property. The good news is that a self-occupied property has no taxable income. The law treats its annual value as nil, which means nothing is added to your income just because you own it.
For AY 2026-27, you can treat up to two properties as self-occupied. So if you own two homes and live in one while the other is also kept for personal use, both are exempt from rental income tax.
Let-Out Property
If you have rented out your property to a tenant, it is a let-out property. Here, a taxable income is computed based on the rent you receive or the market rent of the property, whichever is higher. After computing this, you get certain deductions, which are explained below.
Deemed Let-Out Property
If you own more than two properties, any property beyond the first two must be treated as if it has been rented out, even if it is actually sitting empty. The tax department computes a notional rent on it and taxes that amount. You cannot avoid this by simply leaving the third property unused.
How the Taxable Income Is Calculated for a Rented Property
The starting point is something called the annual value. This is essentially the rental earning potential of your property for the full year. It is calculated by looking at four things: what the municipal authority values your property at, what similar properties in your area are rented for, any standard rent fixed under Rent Control Act, and the actual rent you are receiving.
Generally the annual value is the higher of the expected market rent or the actual rent you are getting. Once the annual value is fixed, two deductions are allowed before arriving at the taxable income.
The first deduction is municipal taxes. If you have paid property tax or house tax to the municipal corporation during the year, that amount can be deducted.
The second deduction is a flat 30 percent of the remaining amount. This standard deduction covers repairs, painting, maintenance, and all other property expenses. You do not need to produce any bills for this. It is given automatically.
After these two deductions, whatever is left is your taxable income from house property.
Home Loan Interest Deduction
This is the section that most property owners care about the most, and it works differently depending on whether the property is rented out or self-occupied.
For a Rented Property
If you have a home loan on a property that is rented out, you can deduct the full interest paid during the year. There is no upper limit. Even if the interest is higher than the rent you received and results in a loss, you can still claim the full interest.
For a Self-Occupied Property
If the property is self-occupied, the home loan interest deduction is capped. The maximum you can claim is Rs 2,00,000 per year, provided the loan was taken on or after 1st April 1999 for purchasing or constructing the property, and the construction was completed within five years of taking the loan. If the loan was taken for repair or renovation, or if the five-year condition is not met, the deduction is limited to just Rs 30,000 per year.
There is also a rule about interest paid before the property was ready. This is called pre-construction interest. You cannot claim it in the year you paid it. Instead, it is split into five equal parts and deducted over five years starting from the year the property was completed.
One important point for taxpayers under the new tax regime: if you have chosen the new tax regime for FY 2025-26, you cannot claim the home loan interest deduction for a self-occupied property at all. For rented properties the full deduction remains available under both regimes.
What Happens When You Cannot Collect Rent
If a tenant has not paid rent and it qualifies as unrealised rent under the tax rules, you are allowed to deduct that unpaid amount from your rental income while computing the annual value. You do not pay tax on money you never received.
But if that same tenant pays you the rent later in a future year, you have to include it as income in the year you actually receive it. The good news is that when this happens, you get a flat 30 percent deduction on the recovered amount before it is taxed.
The same rule applies to rent arrears. If a former tenant pays you rent that was due from an earlier period, it is taxed in the year you receive it, with the same 30 percent deduction available.
What Happens When You Have a Loss
Sometimes the home loan interest on a rented property is so high that it exceeds the rental income after deductions, leaving you with a loss under the house property head. This loss can be set off against your other income such as salary in the same year, but only up to Rs 2,00,000. If the loss is more than Rs 2,00,000, the remaining amount is carried forward and can be adjusted against house property income in future years, for up to eight years.
However, if you are under the new tax regime, this set-off is not available. House property losses cannot be adjusted against salary or any other income under the new regime. They can only be set off against house property income.
Key Things to Check Before Filing ITR for FY 2025-26
If you own more than two properties, make sure you have identified which two are self-occupied and treated the rest as deemed let-out with the correct annual value.
If you have a home loan on a self-occupied property and you are filing under the new tax regime, do not claim the Section 24(b) interest deduction. It is not available and claiming it will create a mismatch.
If your rented property shows a loss after the home loan interest deduction, check whether you have applied the Rs 2,00,000 set-off limit correctly and are carrying forward the balance.
If you received any old unpaid rent or rent arrears during FY 2025-26, include it in this year’s return with the 30 percent deduction applied before computing the taxable amount.
Frequently Asked Questions
1. Is rental income from a shop or commercial property taxed the same way as from a house? Yes. Both residential and commercial properties are taxed under the same head using the same method, as long as the owner is not using the commercial property for their own business.
2. I own two houses and live in one. Do I pay tax on the second one? Not if it is also treated as self-occupied. Up to two properties can be designated as self-occupied with nil annual value. Only a third property or beyond would attract deemed let-out taxation.
3. Can I claim home loan interest and HRA at the same time? Yes, if the home loan is on a property in a different city from where you are currently paying rent and living. If both the owned and rented properties are in the same city, the HRA claim may be questioned.
4. What is the maximum home loan interest I can claim for my own home? Rs 2,00,000 per year if the loan was taken after 1st April 1999 for purchase or construction completed within five years. Rs 30,000 per year for renovation loans or where the five-year condition is not met.
5. Is the home loan interest deduction available in the new tax regime? For rented properties, yes. For self-occupied properties, no.
6. My tenant has not paid rent for three months. Do I still pay tax on it? No. Rent that genuinely could not be collected and qualifies as unrealised rent can be deducted from actual rent while computing annual value. If it is recovered later, it becomes taxable in the year of recovery.
7. Can I carry forward a house property loss if I file my return late? Yes. House property loss can be carried forward for up to eight assessment years. However under the new tax regime, it cannot be set off against other income heads.
8. I transferred my house to my wife without taking any money. Is the rental income hers or mine? It remains yours for tax purposes. Transferring property to a spouse without adequate consideration makes the transferor the deemed owner, so the rental income is included in your hands, not your wife’s.
