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Introduction

Income from a property is not always taxed according to the rent actually received. The tax treatment depends on factors such as:

• whether the taxpayer owns the property;
• whether it is self-occupied, rented or treated as deemed let out;
• its reasonable letting value;
• the period for which it remained vacant;
• municipal taxes actually paid;
• housing-loan interest;
• unrealised or subsequently recovered rent; and
• whether the property is let with furniture, machinery or services.

Legal Provision Mapping

What Is a House Property for Income-tax Purposes?

Income is generally taxable under the head Income from House Property when:

1. the property consists of a building or land attached to a building;
2. the taxpayer is its legal or deemed owner; and
3. the property is not used by the taxpayer for their own taxable business or profession.

The property may be residential or commercial. A flat, house, office, shop, warehouse or similar building can fall under this head.

Bare land that is not attached to a building is generally not taxed under this head. Income from such land may be taxable under another head depending on the circumstances.

A building used by its owner for carrying on their own business or profession is excluded from the house-property charge because the related business result is taxed under the head Profits and Gains of Business or Profession.

Ownership Is Important

House-property income is normally taxed in the hands of the owner, not merely the person who collects the rent.

A taxpayer may also be treated as a deemed owner in specified situations, including certain transfers to a spouse or minor child without adequate consideration, possession under part-performance arrangements, long-term property rights and ownership through a co-operative society or similar entity.

A tenant who sublets a property is generally not taxed under Income from House Property because the tenant is not its owner. Subletting income may instead be taxable as business income or income from other sources, depending on the facts.

Types of House Property

Self-Occupied Property

A property is treated as self-occupied when it is:

• occupied by the owner for their own residence; or
• not actually occupied because the owner resides elsewhere for employment, business, profession or another qualifying reason.

Let-Out Property

A property is let out when it is actually rented during the year.

Its taxable value is not necessarily limited to the rent collected. The computation compares:

• reasonable expected rent; and
• actual rent received or receivable,

subject to the vacancy and unrealised-rent provisions.

Deemed Let-Out Property

A property may be treated as deemed let out even when no tenant occupies it.

This commonly arises when a taxpayer has more than two houses eligible for self-occupied treatment. Houses other than the two selected properties are computed as if they had been let, based on their reasonable expected rent.

Because there is no actual tenant, expected rent ordinarily becomes the gross annual value. The taxpayer may still claim eligible municipal taxes, the 30% standard deduction and housing-loan interest.

Vacant Property

A let-out property may remain vacant for part of the year. Where the vacancy causes the actual rent received or receivable to fall below the expected rent, the actual rent may be adopted as the gross annual value.

Vacancy relief should be distinguished from personal occupation. A property rented for part of the year and occupied by the owner for the remaining period is generally treated as let out for the year; the owner-occupied months do not automatically receive proportionate self-occupied treatment.

Property Let Out for Part of the Year

Where a property is self-occupied for part of the year and rented for the remaining period:

• it is treated as a let-out property;
• expected rent is ordinarily determined for the full year;
• actual rent is considered for the period for which the property was rented; and
• gross annual value is determined under the usual annual-value rules.

Even letting the property for a short period can prevent it from being treated as self-occupied for that year.

Partly Self-Occupied and Partly Let-Out Property

Where independent portions of the same property are used differently—for example, one floor is occupied by the owner and another is rented—the portions should ordinarily be treated as separate units.

Municipal value, fair rent, municipal taxes and interest should be apportioned on a reasonable basis, such as built-up area, and each portion should be computed separately.

Property Held as Stock-in-Trade

Where a completed property is held as stock-in-trade by a builder or developer and is not let, its annual value may remain nil for up to two years from the end of the financial year in which the completion certificate is obtained.

After that period, the normal annual-value provisions may apply.

How Is Annual Value Calculated?

The tax computation for a let-out or deemed-let-out property broadly follows these steps.

Step 1: Determine Expected Rent

Expected rent is the amount for which the property may reasonably be expected to be let from year to year.

Relevant indicators generally include:

• municipal value;
• rent of similar properties in the locality;
• fair rent; and
• standard rent where the property is covered by rent-control legislation.

Where standard rent applies, expected rent generally cannot exceed the legally permissible standard rent.

Step 2: Determine Actual Rent

Actual rent means the rent received or receivable for the year.

Eligible unrealised rent may be excluded from the actual-rent figure if the prescribed conditions are satisfied.

Step 3: Determine Gross Annual Value

For a property let throughout the year, gross annual value is broadly the higher of:

• expected rent; or
• actual rent received or receivable.

Where the property was let but remained vacant and the vacancy caused actual rent to fall below expected rent, the actual rent may be taken as the gross annual value.

Step 4: Deduct Municipal Taxes

Municipal taxes are deductible only when they are:

• borne by the owner; and
• actually paid during the relevant financial year or tax year.

Taxes merely due but not paid cannot be deducted. Taxes paid by the tenant also cannot be claimed by the owner.

Society maintenance, repair expenses, insurance, brokerage and similar expenses should not be treated as municipal taxes.

Step 5: Calculate Net Annual Value

Step 6: Claim Permitted Deductions

From the net annual value, the taxpayer may claim:

• standard deduction equal to 30% of net annual value; and
• eligible interest on borrowed capital.

The general formula is:

Deductions from House-Property Income

Municipal Taxes

Municipal or local-authority taxes are deducted while calculating net annual value.

The deduction is based on actual payment, not the date on which the tax became payable. Therefore, arrears of municipal taxes paid during the year may be considered in the year of payment, subject to the statutory conditions.

Standard Deduction of 30%

A flat deduction equal to 30% of net annual value is allowed for a let-out or deemed-let-out property.

The deduction is fixed. The taxpayer does not have to prove actual repair or maintenance expenditure.

Conversely, a larger deduction cannot be claimed merely because the owner spent more than 30% on repairs, painting, insurance, brokerage or maintenance.

No 30% deduction arises for a self-occupied property because its annual value and net annual value are nil.

Interest on Housing Loan

Interest may be claimed where borrowed capital is used for:

• acquisition;
• construction;
• repair;
• renewal; or
• reconstruction of the property.

The deduction is for the interest component, not the total EMI.

Self-Occupied Property under the Old Tax Regime

The aggregate deduction for qualifying self-occupied properties may be up to ₹2,00,000 where:

• the loan is for acquisition or construction;
• the prescribed borrowing condition is satisfied;
• acquisition or construction is completed within five years from the end of the financial year in which the capital was borrowed; and
• the taxpayer obtains the required interest certificate.

The lower aggregate limit of ₹30,000 generally applies where:

• the loan is for repairs, renewal or reconstruction
• the conditions for the ₹2,00,000 limit are not satisfied.

The limit is aggregate and does not separately apply to each self-occupied house.

Let-Out and Deemed-Let-Out Property

For a let-out or deemed-let-out property, eligible interest is deductible while computing house-property income without the ₹2,00,000 property-level ceiling.

However, the use of any resulting loss is subject to the tax-regime and set-off restrictions discussed later.

Pre-Construction Interest

Interest for the period before the property is acquired or construction is completed is generally allowed in five equal annual instalments.

The first instalment is claimed in the year in which acquisition or construction is completed. It is claimed in addition to the eligible current-year interest, subject to the applicable self-occupied-property limit.

The entire accumulated pre-construction interest should not be claimed in one year.

Unrealised Rent

Unrealised rent is rent that has become due but could not be recovered from the tenant.

It may be excluded from actual rent only when the prescribed conditions are fulfilled. Broadly:

• the tenancy must be genuine;
• the defaulting tenant must have vacated, or steps must have been taken to compel the tenant to vacate;
• the defaulting tenant must not occupy another property belonging to the same owner; and
• the owner must have taken reasonable recovery steps, or legal action must have been shown to be useless.

Documentary evidence such as the rent agreement, rent ledger, notices, correspondence and recovery action should be retained.

Composite Rent

Composite rent arises when a building is let along with furniture, machinery, plant, fixtures or services.

Where the Components Are Separable

Where separate consideration can reasonably be identified:

• rent attributable to the building is generally taxable under Income from House Property; and
• consideration for furniture, machinery or services may be taxable as business income or income from other sources.

Where the Letting Is Inseparable

Where the building and movable assets are let as one inseparable arrangement, the entire receipt is generally taxable as:

• business income, where the letting forms part of the taxpayer’s business; or
• income from other sources in other cases.

The entire inseparable receipt should not be artificially divided merely to claim the 30% house-property deduction.

Jointly Owned Property

Where a property is owned by two or more persons and their ownership shares are definite:

• income is computed for the property as a whole;
• the resulting income or loss is divided according to each co-owner’s legal share; and
• each co-owner reports their respective share in their own return.

Municipal taxes, rent and housing-loan interest should also be restricted to the taxpayer’s share or actual eligible contribution.

For an eligible self-occupied property, each co-owner may claim the applicable interest deduction subject to their ownership, borrowing, repayment and other statutory conditions.

House-Property Loss

A loss may arise when eligible housing-loan interest exceeds the net annual value after the 30% deduction.

How to Report House-Property Income in myITreturn

Step 1: Start the Return

On the myITreturn website:

1. Sign in to your account.
2. Select the relevant member.
3. Click Continue Self filing.
4. Complete or review the tax profile and imported information.
5. Open House Property.

Step 2: Add the Property

1. Click Add House Property.
2. Select the property type:
   • Self-Occupied;
   • Let-Out; or
   • Deemed Let-Out.
3. Enter the property address.
4. Enter your ownership percentage.
5. Add co-owner details, where applicable.

Each property should be added separately.

Step 3: Enter Rental Details

For a let-out or deemed-let-out property, enter the applicable details:

• gross rent received or receivable;
• reasonable lettable value;
• tenant details requested in the return;
• eligible unrealised rent;
• vacancy period;
• municipal taxes actually paid; and
• ownership share.

Step 4: Enter Housing-Loan Details

Enter the housing-loan information against the relevant property, including:

• purpose of the loan;
• sanction date;
• lender details;
• loan account number;
• annual interest;

Step 5: Review the Computation

After entering all properties:

1. Open Detailed Computation.
2. Review the income or loss calculated for each property.
3. Confirm the 30% deduction.
4. Check municipal taxes and housing-loan interest.
5. Confirm the treatment of vacancy and unrealised rent.
6. Verify the ownership percentage.
7. Review the result under the selected tax regime.
8. Confirm that myITreturn has selected the appropriate ITR form based on the complete income profile.

The detailed computation should show whether the final result is taxable house-property income or a house-property loss.

Common Mistakes to Avoid

Conclusion

Income from house property is based on statutory annual value rather than rent collection alone. Correct treatment requires identifying the property type, calculating expected and actual rent, considering vacancy and unrealised rent, deducting eligible municipal taxes, and applying the standard deduction and housing-loan interest rules.

The tax regime is particularly important where a housing loan creates a loss. Under the old regime, a limited house-property loss may reduce income from other heads and the balance may be carried forward. The default new regime applies stricter restrictions and does not permit a deduction for interest on a qualifying self-occupied property.

Accurate property-wise reporting in myITreturn helps ensure that rental income, interest, co-ownership, vacancy and deemed-let-out values are reflected in the correct computation.