Income is taxable under the head “Income from House Property” when it arises from any building or land appurtenant thereto. The law recognizes three categories of house property for taxation purposes, let‑out, self‑occupied, and deemed let‑out property, each subject to specific rules in computing annual value and determining income liable to tax.
Building and Land Appurtenant Thereto
Income under this head is chargeable only when it arises from a property that includes any building or land attached for its use and enjoyment by the occupiers. Pure vacant land, without any building, does not qualify under this category and is taxed under other heads, such as “Profits and Gains of Business or Profession” or “Income from Other Sources.” Gardens, garages, parking areas, and backyards that form an integral part of a building are considered land appurtenant and taxable under this head.
Ownership of Property
Only the owner of the property is liable to tax under this head. The person must hold legal title and exercise rights independently. In certain circumstances, even without legal title, a person may be treated as a deemed owner—such as when property is transferred under sec. 27 but life interest remains—to the extent income is chargeable in their hands. Rental income received by a non‑owner is taxed under other heads unless he is treated as a deemed owner by law.
Use of the Property
The annual value of a house property is not charged to tax under this head if (a) the owner uses the property for carrying on his business or profession, and (b) income from that business or profession is taxable. Nonetheless, where letting out is the owner’s business, the resulting rental income is usually treated as “Income from House Property.” Judicial decisions have held that where property letting forms part of the main business operations, or supports operations of the main business, the rent may be considered business income instead.
Self‑Occupied House Property
Where a property is used exclusively by the owner for residence, it is categorized as self‑occupied. The annual value of a self‑occupied house property is considered nil. This rule extends to cases where the owner cannot occupy the property due to employment, business, or profession elsewhere. However, this benefit is limited to two properties—if the owner holds more than two such self‑occupied properties at different locations, only two can be treated as self‑occupied; the others are presumed to be let‑out and taxed accordingly.
Computation of Annual Value of House Property
The annual value of a house property is the notional rent the property is expected to fetch if it were let out from year to year. It is a crucial figure in determining the taxable income under this head. The method of computation varies depending on whether the property is self-occupied, let out, or deemed let out.
For let-out property, the Gross Annual Value (GAV) is higher than:
- Expected Rent (based on municipal valuation or fair rent)
- Actual Rent received or receivable
From the GAV, municipal taxes paid by the owner are deducted to arrive at the Net Annual Value (NAV).
For self-occupied properties, the annual value is taken as nil, and for deemed let-out properties, the expected rent is considered the GAV.
Deductions under Section 24
After determining the NAV, two deductions are allowed under Section 24 of the Income Tax Act:
- Standard Deduction [Section 24(a)]
A flat 30% deduction is allowed from the Net Annual Value for repairs and maintenance, irrespective of the actual expenditure incurred by the assessee. - Interest on Borrowed Capital [Section 24(b)]
Interest on home loan borrowed for acquisition, construction, repair, renewal, or reconstruction of the property is deductible. The maximum deduction is:
- ₹2,00,000 per annum for self-occupied properties, if the loan is taken on or after 01.04.1999 for acquisition or construction (completed within 5 years).
- ₹30,000 in other cases.
- No limit for let-out or deemed let-out properties.
Treatment of Arrears and Unrealized Rent
Arrears of rent or unrealized rent received later are taxable in the year of receipt under Section 25A, even if the property is no longer owned. A 30% deduction is allowed from such amount.
Unrealized rent, if meeting prescribed conditions (genuine efforts for recovery, tenancy legally terminated, etc.), can be excluded from GAV.
Taxability in Special Scenarios
- Vacancy Allowance: If a property is let out but remains vacant for part of the year, the actual rent received (even if lower than expected rent) is treated as GAV, provided the vacancy is genuine.
- Composite Rent: If rent includes charges for services like electricity, water, furniture, etc., only the rent for property is taxable under this head; the rest may fall under “Income from Other Sources” or “Business Income.”
- Deemed Ownership: Certain situations—like transfer to spouse without adequate consideration, possession under part performance of contract (Section 53A of the Transfer of Property Act), or co-operative housing society allotment—may result in a person being treated as owner for tax purposes.
Exemptions and Reliefs
- One House Property Exemption (Section 23(2)): If the assessee owns only one house used fotheir r their residence, the annual value is nil and no tax is payable. Since FY 2019-20, this exemption has been extended to two self-occupied properties.
- Deduction for Pre-Construction Interest: Interest paid before the completion of construction/acquisition is deductible in 5 equal instalments starting from the year in which construction is completed.
- Deduction under Section 80EE and 80EEA:
- Section 80EE: Additional deduction up to ₹50,000 for interest paid on home loan sanctioned between 01.04.2016 and 31.03.2017.
- Section 80EEA: Additional deduction up to ₹1,50,000 for loans sanctioned from 01.04.2019 to 31.03.2022 for affordable housing.
- House Property Held as Stock-in-Trade: If a builder or developer holds property as stock-in-trade and the property remains unsold after construction is complete, no tax is levied for 2 years from the end of the financial year in which the completion certificate is obtained.
Income from Self-Occupied House Property – Example
Let us consider an individual who owns a self-occupied residential property for which a home loan was taken. The construction of the property was completed during the financial year, and the owner occupied the house immediately after its completion. The following information is provided: Municipal Value: Not relevant (as it is self-occupied), Actual Rent Received: Nil (since no rent is generated), and Interest on borrowed capital: ₹1,80,000.
Under the Income Tax Act, for a self-occupied property, the annual value is treated as Nil. However, deductions are allowed under Section 24(b) of the Act for interest paid on home loan borrowings. In this case, the individual paid ₹1,80,000 as interest during the year. Since the maximum deduction allowed for interest on a self-occupied house is ₹2,00,000 per financial year, the entire interest amount of ₹1,80,000 qualifies for deduction.
Therefore, the Income from House Property is calculated as: Annual Value (Nil) minus Interest on Loan (₹1,80,000) = –₹1,80,000. This results in a negative income under the head “Income from House Property.” This negative figure can be set off against income under other heads, such as salary, business income, or capital gains in the same assessment year, subject to a maximum loss adjustment limit of ₹2,00,000. Any unadjusted loss can be carried forward for up to 8 years to be set off against future income from house property.
Income from Let-Out House Property – Example
Now, let us consider a scenario where an individual owns a second house property, which is let out. The monthly rent received from this property is ₹25,000, amounting to ₹3,00,000 annually. Municipal taxes of ₹30,000 are paid by the owner during the year, and interest on a home loan taken for this property amounts to ₹2,50,000. Under the Income Tax Act, income from house property is computed by following a specific set of deductions and allowances.
First, we calculate the Gross Annual Value (GAV), which is the higher of actual rent received or expected rent (as per municipal valuation or fair rent). Since the property is let out for ₹25,000 per month and there are no indications of higher expected rent, the GAV is ₹3,00,000.
Next, municipal taxes actually paid during the year are deducted to arrive at the Net Annual Value (NAV). In this case, ₹30,000 paid by the owner is deductible. Thus, NAV = ₹3,00,000 – ₹30,000 = ₹2,70,000.
From the NAV, a standard deduction of 30% is allowed under Section 24(a) to cover repairs, maintenance, etc. That amounts to ₹81,000 (i.e., 30% of ₹2,70,000). Additionally, interest on borrowed capital used to acquire or construct the property is deductible under Section 24(b). The interest in this case is ₹2,50,000.
Therefore, the total deductions are ₹81,000 (standard deduction) + ₹2,50,000 (interest) = ₹3,31,000. Deducting this from the NAV, we get:
Income from House Property = ₹2,70,000 – ₹3,31,000 = –₹61,000.
Set-Off and Carry Forward of Loss
Loss under the head “Income from House Property” is a unique category in income tax law that allows for favorable set-off provisions. When the deductions—such as interest on home loan—exceed the net annual value of a property, it results in a negative income or loss from house property. As per the current income tax rules, such a loss can be set off against income from any other head, including salary, business income, capital gains, or income from other sources, but only up to a limit of ₹2,00,000 in a financial year.
For instance, if a taxpayer has a total house property loss of ₹3,00,000 in a given financial year and also has a salary income of ₹10,00,000, only ₹2,00,000 of the house property loss can be set off against the salary income for that year. The remaining ₹1,00,000 (unabsorbed loss) cannot be adjusted in the same year.
Co-Ownership and Tax Implications
When a house property is jointly owned by two or more individuals, and each co-owner’s share in the property is clear, definite, and ascertainable, the income from such property is not taxed in the hands of a single person or entity. Instead, it is apportioned and taxed individually in the hands of each co-owner according to their respective ownership share. This ensures equitable tax treatment and allows each co-owner to claim deductions independently under the Income Tax Act.
For instance, if two brothers co-own a rental property in equal proportion (50:50), and the annual rent received is ₹4,00,000, each brother will be considered to earn ₹2,00,000. Similarly, deductions available under Section 24—such as the standard deduction of 30% and interest on borrowed capital—will also be split in the same ratio. Each brother can claim up to ₹2,00,000 of interest on home loan in respect of their share if the property is self-occupied.
However, if the ownership shares are not clearly defined or documented, and there is no evidence to determine the proportion of ownership, the income from such property is assessed as that of an Association of Persons (AOP). In such cases, the AOP is treated as a separate taxable entity, and the income is taxed in its hands according to applicable slab rates.
Deemed to be Let-Out – Example
Under the Income Tax Act, an individual is permitted to treat up to two house properties as self-occupied, provided they are not actually let out during the financial year. These self-occupied properties are assigned an annual value of Nil, and the taxpayer can claim deductions such as interest on home loan (up to ₹2,00,000 per property, in aggregate) under Section 24(b). This provision was introduced to offer relief to homeowners who maintain multiple properties for personal use, such as one in their hometown and another near their workplace.
However, if an assessee owns more than two house properties and uses all of them for personal residence or leaves them vacant, only two can be treated as self-occupied. The remaining properties, irrespective of their actual usage, are considered “deemed to be let out.” In such cases, notional rent or expected rental income—based on fair rent, municipal valuation, or standard rent—is used to compute the Gross Annual Value (GAV) for these properties.
Common Errors in Practice
Many taxpayers inadvertently make errors while computing income from house property, which can lead to incorrect tax filings and potential scrutiny from the tax authorities. One common mistake is failing to claim a deduction for municipal taxes, even when they have been paid by the owner. Municipal taxes are deductible from the Gross Annual Value only if they are actually paid during the year, and not just accrued.
Another frequent error is claiming interest deduction under Section 24(b) before taking possession of the property. Interest on home loan is deductible only from the year in which construction is completed and possession is taken. Pre-construction interest, however, can be claimed in five equal installments starting from the year of possession.
Taxpayers also tend to compute rental income without accounting for periods when the property was vacant. In such cases, only the actual rent received during the occupancy period should be considered, not the full year’s rent. Confusion between self-occupied and deemed let-out properties is also common, particularly when multiple houses are involved.
Additionally, some claim more than ₹2,00,000 deduction for interest on self-occupied properties, exceeding the permissible limit. Others claim principal repayment under Section 80C without verifying that they are both the owner and the one making the payment. These oversights can lead to tax notices and possible reassessments.
Joint Ownership with Loan
In cases of joint ownership of a house property where both co-owners have jointly taken a home loan and are individually contributing towards its repayment, each co-owner is eligible to claim income tax benefits, provided certain conditions are met. Under Section 24(b) of the Income Tax Act, each co-owner can claim a deduction of up to ₹2,00,000 on interest paid on the home loan if the property is self-occupied. For a let-out property, there is no upper limit on interest deduction, although the total loss from house property that can be set off against other income is capped at ₹2,00,000 in a financial year.
Similarly, under Section 80C, each co-owner can claim a deduction for principal repayment of up to ₹1,50,000, subject to the overall limit under Section 80C. These benefits are available only if both the ownership and repayment are in the same proportion. For example, if the property is co-owned equally (50:50), and both parties contribute equally to the loan repayment, each can claim 50% of the eligible deductions.
Tax Planning Opportunities
Owning multiple house properties presents an opportunity for strategic tax planning under the Income Tax Act. Taxpayers can legally minimize their tax liability by carefully selecting which properties to declare as self-occupied and which to treat as let-out. This choice becomes particularly important when two or more houses are used for personal purposes, as the law allows only two properties to be treated as self-occupied with a Nil annual value. Any additional properties are deemed to be let-out, and notional rental income is considered taxable, even if they remain vacant.
For instance, if one of the properties has a high potential rent but a relatively low interest outflow, and another has a high loan interest burden but lower notional rent, it may be more beneficial to declare the former as let-out and the latter as self-occupied. This approach helps maximize deductions, particularly the interest deduction under Section 24(b), which is capped at ₹2,00,000 for self-occupied properties but is unrestricted for let-out or deemed let-out properties (subject to the overall loss set-off limit of ₹2,00,000 per year).
Case Study 1 – Self-Occupied vs Deemed Let-Out
Ravi owns three houses – House A, B, and C. He occupies all three with his family. As per the current income tax law, he can treat any two houses as self-occupied with nil annual value. The third will be deemed to be let out. He selects House A and B as self-occupied and treats House C as deemed let-out. Expected annual rent for House C is ₹3,60,000, municipal taxes paid ₹30,000, and interest on loan is ₹2,50,000. The computation will be: Gross Annual Value: ₹3,60,000; Less: Municipal taxes: ₹30,000; Net Annual Value: ₹3,30,000; Less: Standard deduction @30%: ₹99,000; Less: Interest: ₹2,50,000; Income from House Property: -₹19,000.
Case Study 2 – Let-Out Property and Vacancy Period
Neha let out her property at ₹20,000 per month from April to December, but it remained vacant from January to March. Annual rent received: ₹1,80,000. Expected rent (market rent): ₹2,40,000. Municipal taxes paid: ₹20,000. Interest on loan: ₹1,80,000. Gross Annual Value is the actual rent received or expected rent, whichever is higher – but if the property was vacant for part of the year, the actual rent received is taken as GAV. So, GAV: ₹1,80,000; Less: Municipal taxes: ₹20,000; Net Annual Value: ₹1,60,000; Less: Standard deduction @30%: ₹48,000; Less: Interest: ₹1,80,000; Income from House Property: -₹68,000.
Case Study 3 – Co-Ownership and Loan Benefits
Husband and wife jointly own a house with 50:50 ownership and have taken a joint loan. They repay ₹4,00,000 interest and ₹2,00,000 principal in a year. Since both are co-owners and co-borrowers, and each repays 50%, they can each claim ₹2,00,000 interest deduction under Section 24(b) and ₹1,00,000 principal deduction under Section 80C, subject to limits.
Judicial Precedents and Key Rulings
CIT v. J.K. Investors (Bombay HC): Even if actual rent is lower than notional rent, income is based on notional rent if the property is let out to a related party at undervalued rent. Bajaj Tempo Ltd. v. CIT (SC): Tax planning is legal, and a taxpayer can arrange affairs to reduce tax legally. Choosing which house to declare as self-occupied is allowed. CIT v. Raj Dadarkar (SC): If the assessee does not own the property or has only tenancy rights, rental income is taxable under Income from Other Sources. Sushil Ansal v. CIT (ITAT Delhi): Property lying vacant during the year and not let out is not eligible for vacancy allowance unless genuine efforts were made to let it out.
Conclusion
Income from house property is a vital and often underestimated head of income under the Income Tax Act. Proper planning can help reduce tax liability using available deductions for interest, municipal taxes, and joint ownership benefits. However, common mistakes and non-disclosure can lead to penalties or tax demands. Understanding the basics of annual value computation, exemptions for self-occupied property, and treatment of deemed let-out property is essential for compliance and efficient tax management. Taxpayers should maintain records of interest certificates, municipal tax payments, and ownership proof for availing benefits accurately.