Zerolev | FAQs on Income from House Property

1. Introduction

Income from house property is one of the core heads of income for individuals and small investors. It applies not only where you actually receive rent, but also in certain situations where a property could reasonably have earned rent and is treated as “deemed” to be let out.

This head interacts closely with self-occupied houses, second homes, vacant properties, home loans, interest deduction caps, co-ownership and the choice between old and new tax regimes. This explainer sets out the conceptual framework and then walks through detailed FAQs in plain language.

2. Meaning and Scope of “Income from House Property”

2.1 What Is Covered Under This Head?

“Income from house property” broadly covers income derived from buildings and the land appurtenant thereto – for example, a residential house, apartment, office, shop, or commercial building along with its compound, parking space or small garden.

Three conditions are important:

There must be a building or part of a building.
The taxpayer must be the owner or co-owner of that building.
The property must not be used for the owner’s own business or profession.

If these conditions are met, the rental or notional rental value is generally taxed under this head in the hands of the owner.

2.2 Types of Properties for Tax Purposes

For tax purposes, residential properties typically fall into three buckets:

Self-Occupied Property (SOP) – used by the owner or family for residence.
Let-Out Property (LOP) – actually rented out for all or part of the year.
Deemed Let-Out Property (DLOP) – treated as let out by law when you own more houses than can be treated as self-occupied.

Each category has distinct rules for annual value, interest deduction and computation.

3. Core Concept: Annual Value and Computation Flow

3.1 Gross Annual Value (GAV)

The starting point is the Gross Annual Value (GAV), which represents the reasonable annual rent the property can fetch. For a let-out property, this is generally based on:

Expected rent (as per municipal valuation or market rent), and
Actual rent received or receivable under the lease,

adjusted for genuine vacancy where the property remained vacant despite reasonable efforts to let it.

3.2 Municipal Taxes and Net Annual Value (NAV)

Municipal taxes (property tax) levied by a local authority and actually paid by the owner during the year are deductible from GAV. After deducting such taxes, we arrive at the Net Annual Value (NAV):

NAV = GAV – Municipal taxes actually paid by the owner

Only taxes that are both levied and actually paid by the owner, and not reimbursed by the tenant, qualify for this deduction.

3.3 Standard Deduction and Interest

From the NAV, two key deductions are permitted:

Standard deduction of 30% of NAV – meant to cover repairs and maintenance.
Interest on borrowed capital – for loans taken for acquisition, construction, repair or renovation.

The final computation is:

Income (or loss) from house property = NAV – 30% standard deduction – Interest

The result can be positive (income) or negative (loss from house property).

4. Self-Occupied House Property

4.1 Annual Value of Self-Occupied Property

For a self-occupied house used for your own residence, the law typically takes the annual value as nil. That means:

No GAV is computed and NAV is treated as zero.
Municipal taxes and the 30% standard deduction are not relevant.
Only interest on eligible home loans can be claimed, subject to limits.

Hence, the computation is essentially:

Income from house property = 0 – Interest (restricted to the cap)

which normally leads to a loss from house property within the allowed limit.

4.2 Number of Self-Occupied Properties

Only up to a specified number of houses (currently two) can be treated as self-occupied and given nil annual value treatment. If you own more than that, at least one extra property must be classified as deemed let-out, and notional rent on it becomes taxable.

Taxpayers can choose which houses to treat as self-occupied each year (within the limit), usually picking those that would otherwise attract the highest notional rent.

4.3 Interest on Borrowed Capital for Self-Occupied House

Interest on loans taken for purchase, construction, repair or reconstruction of a self-occupied house is allowed as a deduction, but subject to an overall annual cap per individual across all self-occupied properties.

The applicable cap depends on:

Purpose of loan – acquisition/construction vs repair/renovation.
Date of borrowing – older loans may have a lower limit.
Completion timeline – whether construction is completed within the prescribed period.

If conditions are satisfied, a higher cap applies; otherwise, a smaller cap may apply.

5. Let-Out and Deemed Let-Out Properties

5.1 Actual Let-Out Property

For a property that is actually let out:

Compute GAV based on expected rent and actual rent (with vacancy adjustment).
Deduct municipal taxes paid by the owner to get NAV.
Deduct 30% of NAV as standard deduction.
Deduct full interest on housing loan related to that property.

This can result in a positive income or a loss, especially where interest is high due to large borrowings.

5.2 Deemed Let-Out Property

Deemed let-out treatment arises when you own more houses than can be treated as self-occupied. The extra houses:

Are treated as if they were let out, even if they are actually vacant.
Are assigned a notional GAV based on reasonable expected rent.
Follow the same computation steps (NAV, 30% deduction, interest) as let-out properties.

5.3 Loss From Let-Out or Deemed Let-Out Properties

Often, where interest on home loans is high, the sum of 30% standard deduction and interest may exceed NAV, creating a loss from house property. Part of this loss can be set off against other income in the same year, and the remainder is carried forward for a specified number of years for set-off against future house property income.

6. Home Loans, Pre-Construction Interest and Special Situations

6.1 Basic Interest Deduction

Interest paid on borrowed capital for purchase, construction, repair or renovation is a major deduction under this head:

For self-occupied property – interest is allowed only up to the specified annual cap.
For let-out or deemed let-out properties – interest is generally allowed in full for computing house property income, subject to overall limits on how much loss can be set off against other heads each year.

6.2 Pre-Construction Interest

Interest for the period before acquisition or completion of construction is termed pre-construction interest. It is:

Not deductible in the years before completion, but
Accumulated and allowed in equal instalments over several years starting from the year of completion or acquisition.

For self-occupied houses, the annual cap continues to apply even after including the instalment of pre-construction interest.

6.3 Additional Interest Benefits for First-Time Buyers (Conceptual)

From time to time, special schemes grant additional interest deduction to first-time home buyers, subject to conditions such as:

Loan sanctioned within specified dates.
Property value within a specified threshold.
Property being a residential house used by the individual.

Such additional benefits are claimed separately from the main interest deduction and are conditional on meeting all criteria.

7. Joint Ownership and Joint Home Loans

7.1 Co-Ownership of Property

Where a property is jointly owned, each co-owner is taxable on their proportionate share of income from house property. The share is usually based on:

The ownership ratio in the title deed, or
A recognised agreement clearly identifying each person’s share.

7.2 Joint Loans and Interest Sharing

If a home loan is taken jointly and:

Each borrower is also a co-owner of the property, and
Each actually contributes to the EMIs,

then each co-owner can claim interest deduction up to their share of the interest, subject to:

The overall interest cap for self-occupied property, or
Full deduction rules for let-out properties.

8. Loss from House Property: Set-Off and Carry Forward

8.1 How Loss Arises

Loss from house property commonly arises when:

For self-occupied property, the allowed interest deduction exceeds the nil annual value.
For let-out/deemed let-out, the sum of 30% standard deduction and interest exceeds NAV.

8.2 Set-Off Against Other Income

There is a cap on how much loss from house property can be set off against other income (such as salary or business income) in the same year. Any loss beyond that limit remains unadjusted for that year.

8.3 Carry Forward to Future Years

Unabsorbed loss is carried forward for a specified number of assessment years (commonly eight) and can be set off only against income from house property in those future years.

9. Old vs New Tax Regime: Impact on House Property

9.1 Self-Occupied Property Under New Regime

Under the newer concessional tax regime with lower slab rates, many deductions are restricted. For self-occupied houses:

Interest deduction for self-occupied properties may not be available in the same way as under the old regime.
Some additional interest benefits for first-time buyers may also be curtailed.

Taxpayers with large home loans must carefully compare the tax saved from interest deductions under the old regime against the lower slab rates under the new regime.

9.2 Let-Out Properties Under New Regime

For let-out or deemed let-out properties, interest on housing loan is still an important deduction even under the new regime, though the cap on setting off losses against other income usually continues.

The regime choice is therefore more sensitive for those whose main benefit comes from self-occupied house interest deductions.

10. Practical Issues, Documentation and Risk Zones

10.1 Essential Documentation

Key documents to maintain include:

Sale deed, allotment letter, possession/completion certificate.
Loan sanction letter, interest certificate, EMI schedule.
Municipal tax receipts in the owner’s name.
Rent/lease agreement, rent receipts, or bank statements showing rent credits.
Evidence of co-ownership and co-borrowing, where applicable.

10.2 Common Risk Areas

Frequent areas of dispute or scrutiny include:

Claiming more self-occupied properties than allowed.
Declaring rent that is far below market rates for related-party tenants.
Claiming interest deduction on loans not genuinely connected with the property.
Incorrect treatment of municipal taxes paid or reimbursed.

Clear documentation and honest disclosure significantly reduce the risk of adjustments.

11. FAQs on Income from House Property

Practical questions, straightforward answers

1. Is all rental income taxed under “Income from house property”?

Generally yes, if you are the owner (or co-owner) and the building with its attached land is not used for your own business or profession. If the activity resembles a full-fledged business (like a hotel or serviced apartment with extensive services), part or all of the income may be treated as business income depending on facts. Simple renting of a flat or office is usually taxed under house property.

2. How is income from a self-occupied house computed?

For a self-occupied house used as your residence, the annual value is taken as nil. Municipal taxes and the 30% standard deduction do not apply. Only interest on eligible home loans is allowed, subject to the statutory cap. The result is usually a loss from house property up to the permitted limit.

3. Can I treat more than one house as self-occupied?

Only up to a specified number of houses (currently two) can be treated as self-occupied with nil annual value. If you own more than that, at least one additional house must be treated as deemed let-out and taxed on notional rent. You may choose which houses to classify as self-occupied each year within the limit.

4. What if my house is vacant for part of the year?

If a house is let out for part of the year and genuinely vacant for the rest despite efforts to find tenants, vacancy can be factored into GAV. In such cases, actual rent received/receivable (after vacancy) may be accepted if it is lower than expected rent. A house that is completely vacant the whole year but not treated as self-occupied may instead fall under deemed let-out rules.

5. Are municipal taxes always deductible?

Municipal taxes are deductible only when they are levied by a local authority, actually paid during the year, and borne by the owner. If the tenant pays and bears these taxes, you cannot claim them. If the owner pays but is reimbursed by the tenant, only the net cost borne by the owner is deductible.

6. Can I claim interest on a home loan if construction is delayed?

You can claim interest on a construction loan, but delays affect how much you can claim each year. Interest for the period before completion becomes pre-construction interest, which is allowed in equal instalments over several years after completion. For self-occupied property, the total interest (current plus pre-construction instalment) is still restricted by the annual cap, and that cap may be lower if construction is not finished within the prescribed period.

7. Can I claim both HRA and home loan interest together?

Yes, if the arrangement is genuine. For example, your own house (on loan) may be in one city while you work and stay in rented accommodation in another city. In such cases, you can claim HRA exemption for the rent you pay and also claim allowable interest deduction on your home loan, subject to other conditions.

8. How is income treated if I own only land without a building?

Income from bare land without a building is not taxed under “Income from house property”. It may be treated as income from other sources or as business income (for land traders/developers), depending on the nature of activity. House property requires a building plus land appurtenant.

9. Are security deposits or advance rent from tenants taxable?

Refundable security deposits are generally not taxed when received, as they are a liability to be returned. Non-refundable deposits or large advances that effectively represent rent may be taxable, often spread over the lease period depending on the agreement. Substance and documentation are key.

10. Can I claim brokerage, repairs, society charges or insurance separately?

No. Under the house property head, you get a flat 30% standard deduction on NAV to cover repairs and maintenance. Brokerage for finding tenants, routine repairs, society charges and property insurance are not allowed as separate deductions over and above this 30%.

11. How are arrears of rent and unrealised rent treated?

Arrears of rent or unrealised rent recovered later are typically taxed in the year of receipt, even if they relate to earlier years. There are specific conditions to classify past unpaid rent as unrealised in earlier years; once those conditions are met and the rent is later recovered, that amount is brought to tax in the year of recovery.

12. What exactly is “deemed let-out” in simple words?

“Deemed let-out” means the tax law pretends your property is rented out, even though it is actually not. This usually happens when you own more houses than you are allowed to show as self-occupied. The extra houses are assigned a reasonable notional rent, and that income is taxed after normal deductions.

13. In case of co-ownership, can each person claim the full interest and 30% deduction?

No. In genuine co-ownership, each co-owner reports their share of annual value or rent. The 30% standard deduction and interest deduction apply proportionately to each person’s share. The total of all co-owners’ deductions together cannot exceed the NAV and total interest actually paid.

14. What happens if my interest on housing loan is more than the rent I receive?

If interest and 30% standard deduction together exceed NAV, you have a loss from house property. You can set off only up to the permitted limit against other heads of income in the same year. The balance loss is carried forward for several years and can then be set off only against future house property income.

15. Under the new tax regime, is taking a home loan still beneficial from a tax angle?

Under the new regime, deductions for self-occupied interest and some additional benefits may be limited or unavailable. That reduces the pure tax advantage of a home loan. Under the old regime, interest deductions can still significantly reduce tax, especially for large loans. Whether a home loan remains “worth it” from a tax perspective depends on your regime choice, your loan size, property usage and other deductions. The asset value and non-tax factors should also be considered.

12. Conclusion

Income from house property appears straightforward – taxing rent or notional rent from buildings – but in practice involves several layers: classification into self-occupied, let-out or deemed let-out; the annual value concept; municipal tax treatment; 30% standard deduction; home loan interest caps; joint ownership; and the choice between old and new regimes.

To manage this head effectively, a taxpayer should: classify each property correctly, compute GAV and NAV sensibly, respect interest caps and loss set-off rules, maintain strong documentation, and compare both tax regimes before filing. When handled properly, the house property head can provide legitimate relief for genuine homeowners while keeping you fully compliant and ready for scrutiny.