House Property Deductions Under Income Tax Act, 2025

Section 22 of the Income-tax Act, 2025 mainly provides for two important deductions:

1. 30% deduction from Net Annual Value (NAV); and
2. Interest on borrowed capital used for specified purposes relating to the property.

The amount of deduction available can differ significantly depending on whether the property is let out, deemed let out or self-occupied and whether the taxpayer is paying tax under the default tax regime or has opted out of it.

1. Standard Deduction of 30% of Net Annual Value

Section 22(1)(a) allows a deduction equal to 30% of the Net Annual Value of the property.

This is a statutory deduction. It is not linked to the amount actually spent by the owner on repairs, maintenance, painting or other routine expenses.

Example

Suppose the Net Annual Value of a let-out property is ₹6,00,000.

Deduction under section 22(1)(a):

₹6,00,000 × 30% = ₹1,80,000

The owner can claim ₹1,80,000 even if actual repair and maintenance expenses were lower or higher than this amount.

When is the 30% deduction not available?

Where the Annual Value itself is Nil, there is no NAV on which the 30% deduction can be calculated.

This commonly applies to:

• Qualifying self-occupied or unoccupied properties having Nil Annual Value; and
• Qualifying house property held as stock-in-trade during the specified period for which Annual Value is treated as Nil.

2. Deduction for Interest on Borrowed Capital

Interest payable on money borrowed for certain purposes relating to a house property can be claimed as a deduction under section 22.

The borrowing should generally relate to:

• Acquisition of the property
• Construction of the property
• Repair of the property
• Renewal of the property
• Reconstruction of the property

Example

Aman borrows ₹40 lakh from a bank to purchase a residential property and pays ₹3,20,000 as interest during the tax year.

Subject to the nature and use of the property and the applicable tax regime, such interest can qualify for deduction while computing income from house property.

Interest on a Fresh Loan Taken to Repay the Original Loan

A taxpayer may refinance an existing housing loan by taking a new loan and using it to repay the earlier borrowing.

Interest on the fresh loan can also qualify for deduction where the original borrowing was used for an eligible purpose such as acquisition, construction, repair, renewal or reconstruction of the property.

Example

Divya originally borrowed ₹30 lakh from Bank A to purchase a house. Three years later, she transfers the loan to Bank B because it offers a lower interest rate.

The loan from Bank B is used to repay the original housing loan.

Subject to the applicable conditions, interest payable on the replacement loan can continue to qualify as interest on borrowed capital.

What is Pre-construction Interest?

A person may borrow money before a house is acquired or before its construction is completed.

Interest relating to the period before the relevant tax year in which the property is acquired or construction is completed is commonly referred to as pre-construction or pre-acquisition interest.

Such eligible interest is not normally claimed entirely in one year.

It is allowed in five equal instalments, beginning from the tax year in which the property is acquired or construction is completed, followed by the next four tax years.

Example: Pre-construction Interest

Rohan takes a housing loan on 1 July 2024 for constructing a house. Construction is completed during Tax Year 2026-27.

Assume eligible interest relating to the pre-construction period is ₹5,00,000.

The deduction relating to such pre-construction interest would be spread as follows:

• Tax Year 2026-27: ₹1,00,000
• Tax Year 2027-28: ₹1,00,000
• Tax Year 2028-29: ₹1,00,000
• Tax Year 2029-30: ₹1,00,000
• Tax Year 2030-31: ₹1,00,000

Interest Deduction for Let-Out Property

In the case of a let-out or deemed let-out property, interest on eligible borrowed capital is deductible without the ₹2,00,000 or ₹30,000 ceiling applicable to certain self-occupied properties.

This treatment applies to eligible interest on loans used for acquisition, construction, repair, renewal or reconstruction.

Example

Sneha owns a flat which is let out throughout the tax year.

The computation is:

• Net Annual Value: ₹7,00,000
• 30% deduction: ₹2,10,000
• Eligible home-loan interest: ₹4,25,000

Since the property is let out, the ₹4,25,000 interest is not restricted to ₹2,00,000 merely because it exceeds that amount.

Interest Deduction for Self-Occupied Property

The treatment of interest for a self-occupied or qualifying unoccupied property depends significantly on the tax regime selected by the taxpayer.

Default Tax Regime under Section 202(1)

Under the default tax regime, deduction for interest on borrowed capital is not available in respect of a self-occupied or qualifying unoccupied property whose Annual Value is Nil.

Example

Kunal owns a self-occupied house and pays ₹1,75,000 as eligible home-loan interest during Tax Year 2026-27.

If he pays tax under the default tax regime under section 202(1), he cannot claim this interest as a house-property deduction in respect of the self-occupied property.

Optional Tax Regime

Where the assessee exercises the option under section 202(4) to shift out of the default tax regime, interest deduction for a qualifying self-occupied property may become available, subject to the prescribed limits and conditions.

Maximum Deduction of ₹2,00,000

A maximum aggregate deduction of ₹2,00,000 can apply for one or two qualifying self-occupied properties where:

• The borrowing is for acquisition or construction of the house;
• Acquisition or construction is completed within five years from the end of the tax year in which the capital was borrowed; and
• The assessee furnishes the required interest certificate from the lender.

The ₹2,00,000 ceiling includes eligible current-year interest as well as the relevant instalment of pre-construction interest.

Example

Priyanka borrowed money to construct her self-occupied residence. Construction was completed within the prescribed five-year period.

For Tax Year 2026-27:

• Current-year interest: ₹1,70,000
• Eligible instalment of pre-construction interest: ₹60,000
• Total eligible interest before ceiling: ₹2,30,000

Assuming the required conditions are satisfied and she has opted out of the default tax regime, the deduction would be restricted to ₹2,00,000.

When is the ₹30,000 Limit Applicable?

In other cases involving a self-occupied property, the maximum deduction may be restricted to ₹30,000.

This can include situations such as:

• Loan taken for repairs;
• Loan taken for renewal;
• Loan taken for reconstruction; or
• Acquisition or construction not completed within the prescribed five-year period.

Example: Loan for Repairs

Mohit takes a loan to carry out major repairs to his self-occupied house.

The interest payable during the year is ₹58,000.

Assuming he is eligible to claim interest under the optional tax regime, the deduction relating to this category would be restricted to ₹30,000.

Aggregate Limit for Two Self-Occupied Properties

The ₹2,00,000 ceiling does not operate separately for every self-occupied property.

Where the taxpayer has one or two qualifying self-occupied properties, the aggregate deduction under the relevant provisions cannot exceed ₹2,00,000.

Example

Arvind owns two self-occupied houses:

• House A: eligible acquisition-loan interest of ₹1,60,000
• House B: eligible repair-loan interest of ₹30,000

Total eligible interest = ₹1,90,000.

Since the combined amount does not exceed ₹2,00,000, the full ₹1,90,000 may be considered, subject to satisfaction of all applicable conditions.

Now assume instead:

• House A eligible interest: ₹1,90,000
• House B eligible interest: ₹30,000

Aggregate = ₹2,20,000.

The overall deduction would be restricted to ₹2,00,000.

Interest Certificate from the Lender

For claiming the higher deduction applicable to qualifying acquisition or construction loans, the taxpayer should obtain a certificate from the person to whom the interest is payable.

The certificate should specify the relevant interest payable on:

• The original borrowed capital; and
• Any subsequent loan used for repayment of the whole or part of the original borrowing, where applicable.

The interest certificate is therefore an important supporting document for the house-property deduction.

Is Interest Deductible Only When Actually Paid?

No. Eligible interest on borrowed capital is generally deductible on an accrual basis.

This means that interest which has accrued and become payable during the tax year can qualify even where the amount has not yet been physically paid, subject to the applicable provisions.

Example

A taxpayer has eligible interest of ₹2,40,000 for a let-out property during the tax year.

By 31 March, only ₹2,10,000 has actually been paid and ₹30,000 remains payable.

Since the deduction operates on the basis of eligible interest payable, the unpaid ₹30,000 does not automatically become ineligible merely because payment is pending.

Interest on Unpaid Interest is Not Deductible

A distinction must be made between:

• Interest on the original borrowed capital; and
• Further interest charged because earlier interest itself remained unpaid.

Interest on unpaid interest does not qualify as deduction merely because the original loan was taken for the house property.

Example

Ravi has ₹1,50,000 of eligible housing-loan interest. Due to delayed payment, the lender also charges ₹8,000 as interest on overdue interest.

The ₹8,000 does not become deductible as interest on borrowed capital simply because it is connected with the housing loan.

Unpaid Purchase Price Can Be Treated as Borrowed Capital

Borrowing does not always require a conventional housing loan from a bank.

Where a purchaser acquires a property and is permitted to pay part of the purchase consideration in instalments along with interest, the unpaid purchase price can, in appropriate circumstances, be regarded as borrowed capital.

Example

Anjali purchases a house for ₹75 lakh.

She pays ₹50 lakh immediately and agrees to pay the remaining ₹25 lakh to the seller in instalments together with interest.

In such a case, the seller effectively finances the unpaid consideration. Subject to the statutory conditions, eligible interest on that unpaid purchase price may be considered as interest on borrowed capital.

Interest Payable Outside India

Special restrictions apply where interest chargeable under the Act is payable outside India.

The interest may not be deductible where:

• Applicable tax has not been paid or deducted from such interest; and
• There is no agent in India in respect of such interest.

Taxpayers with overseas property financing or loans from non-resident lenders should therefore separately examine the withholding-tax requirements before claiming the deduction.

Default Regime vs Optional Regime: Quick Comparison

House Property Loss and Tax Regime

Interest on a let-out or deemed let-out property can sometimes result in a loss under the head "Income from house property".

The treatment of such loss differs between the tax regimes.

Under the default tax regime, the resultant house-property loss cannot be set off against income under another head.

Under the optional tax regime, house-property loss may be set off against income under other heads subject to the applicable limit of ₹2,00,000.

Complete Example: Let-Out Property

Suppose Neeraj owns a let-out property with:

• Net Annual Value: ₹8,00,000
• Eligible interest on housing loan: ₹5,20,000

Step 1: Deduct 30% of NAV

₹8,00,000 × 30% = ₹2,40,000

Step 2: Deduct Interest on Borrowed Capital

Eligible interest = ₹5,20,000

Step 3: Calculate Income from House Property

₹8,00,000 – ₹2,40,000 – ₹5,20,000 = ₹40,000

Therefore, Neeraj's income from this property before considering any other house property would be ₹40,000.

Complete Example: Self-Occupied Property under Optional Tax Regime

Suppose Riya owns a self-occupied house.

• Annual Value: Nil
• Current-year acquisition-loan interest: ₹1,65,000
• Eligible pre-construction interest instalment: ₹50,000
• Construction completed within the prescribed period
• Required interest certificate is available

Total eligible interest before restriction:

₹1,65,000 + ₹50,000 = ₹2,15,000

Since the property qualifies for the higher self-occupied property limit, deduction is restricted to ₹2,00,000.

The resulting income from the self-occupied property would therefore be:

Nil – ₹2,00,000 = Loss of ₹2,00,000

The further treatment of this loss would depend on the applicable set-off provisions.

Common Mistakes to Avoid

• Claiming actual repair expenditure separately: The 30% deduction is a standard deduction and is not based on actual repairs.
• Applying the ₹2 lakh ceiling to a let-out property: The self-occupied property ceiling does not apply in the same manner to eligible interest on a let-out or deemed let-out property.
• Claiming self-occupied home-loan interest under the default regime: Such deduction is not available under the default tax regime.
• Claiming ₹2 lakh for a repair loan: The higher limit relates to qualifying acquisition or construction loans satisfying the prescribed conditions.
• Ignoring the five-year construction condition: Failure to satisfy the prescribed completion requirement can reduce the self-occupied property ceiling.
• Claiming all pre-construction interest in one year: Eligible pre-construction interest is spread over five equal instalments.
• Ignoring the lender's interest certificate: Documentary support is important where the higher self-occupied property deduction is claimed.
• Including penal or interest-on-interest amounts: Such amounts should not automatically be treated as deductible housing-loan interest.

Documents to Keep for Home Loan Interest Deduction

Taxpayers should consider maintaining:

• Housing-loan sanction letter
• Loan account statement
• Annual interest certificate from the lender
• Purchase agreement or sale deed
• Construction completion certificate, where relevant
• Evidence of the date on which borrowing was made
• Documents relating to refinancing or replacement loans
• Working of pre-construction interest
• Evidence regarding use of borrowed funds for the property

Conclusion

Section 22 is one of the most important provisions in the computation of income from house property because it determines the deductions available after annual value has been calculated.

For a let-out property, the taxpayer can generally claim the 30% deduction from NAV along with eligible interest on borrowed capital without applying the self-occupied property interest ceiling.

For a self-occupied property, however, the tax regime becomes crucial. Interest deduction is not available under the default tax regime, while taxpayers who validly shift out of the default regime may claim eligible interest subject to the applicable ₹2,00,000 or ₹30,000 limits and prescribed conditions.

Correctly identifying the purpose of borrowing, the period of interest, the use of the property and the applicable tax regime is therefore essential before claiming any deduction.

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