Income from House Property
Direct Taxation • Income from House Property
Income from House Property: Annual Value, Rental Values & Deductions u/s 24
A theory-first guide to the House Property head of income — the different notions of "rental value," how annual value is determined, and the deductions available under Section 24 before it becomes taxable income.
A property's tax liability starts with a single question: what value should be attached to it for the year?
I. Meaning and Basis of Charge [Section 22]
Section 22 charges to tax the annual value of property (consisting of any building, or land appurtenant to a building) of which the assessee is the owner, under the head "Income from House Property" — provided the property is not used by the owner for purposes of a business or profession carried on by them, the profits of which are chargeable to tax.
Three conditions must be satisfied for income to be taxed under this head:
- The property must consist of buildings or land appurtenant to buildings (vacant land alone does not fall under this head; income from letting out vacant land is taxed as "Income from Other Sources").
- The assessee must be the owner of the property — including, in certain cases, a "deemed owner" under Section 27 (for example, a person who has transferred a property to their spouse or minor child other than for adequate consideration, or a person in possession of a property under a long-term lease or under Section 53A of the Transfer of Property Act).
- The property must not be used by the owner for their own business or profession.
Notably, tax is charged on the property's annual value, not on the actual rent received — so income can arise under this head even where the owner receives no rent at all (for instance, a self-occupied or vacant property).
II. Types of Rental Value
Before annual value can be determined, four distinct notions of "rent" need to be understood, since the annual value is built up by comparing them:
| Term | Meaning |
|---|---|
| Municipal Value (MV) | The value assigned to the property by the local municipal authority for levying municipal (property) taxes. |
| Fair Rent (FR) | The rent a similar property in the same locality, with similar amenities, would reasonably be expected to fetch. |
| Standard Rent (SR) | The maximum rent a landlord is legally entitled to recover from a tenant under a Rent Control Act, where such an Act applies to the property. |
| Actual Rent Received/Receivable (AR) | The rent actually received or receivable by the owner for the previous year, from letting out the property. |
These four values are combined to compute what the Act calls the "Expected Rent" (Reasonable Expected Rent), which then feeds into the Gross Annual Value.
III. Determination of Annual Value
Step 1 — Expected Rent
Expected Rent is the higher of Municipal Value and Fair Rent, but this figure is then capped at the Standard Rent, wherever the Rent Control Act applies to the property. Where no Rent Control Act applies, Expected Rent is simply the higher of Municipal Value and Fair Rent.
Step 2 — Gross Annual Value (GAV)
For a let-out property, the Gross Annual Value is the higher of the Expected Rent and the Actual Rent received or receivable for the year. Where the actual rent is lower than the Expected Rent solely because of a vacancy during the year, the actual rent (lower figure) is taken as the GAV instead.
For a property that is self-occupied for the owner's own residence throughout the year (or which remains vacant because the owner could not occupy it due to their employment, business, or profession being carried on at another place), the Gross Annual Value is taken as Nil, provided the owner derives no other benefit from the property. A taxpayer may treat only up to two properties as self-occupied with Nil annual value; any additional such property is treated as "deemed to be let out," and its Expected Rent is brought to tax even though no rent is actually received.
Step 3 — Net Annual Value (NAV)
Net Annual Value is arrived at by deducting municipal taxes actually paid by the owner during the previous year (regardless of the year to which those taxes relate) from the Gross Annual Value. Municipal taxes paid by the tenant are not deductible. No deduction for municipal taxes is available for a self-occupied property, since its GAV is already Nil.
- Expected Rent = Higher of (Municipal Value, Fair Rent), subject to a ceiling of Standard Rent
- Gross Annual Value = Higher of (Expected Rent, Actual Rent) — Nil for a self-occupied property
- Net Annual Value = Gross Annual Value − Municipal Taxes Paid by Owner
IV. Deductions under Section 24
Two, and only two, deductions are permitted from Net Annual Value in arriving at taxable income from house property:
(a) Standard Deduction [Section 24(a)]
A flat deduction equal to 30% of the Net Annual Value is allowed, irrespective of the actual expenditure incurred by the owner on repairs, insurance, or collection of rent. This deduction is not available for a self-occupied property, since its annual value is already Nil (there is nothing to deduct 30% from).
(b) Interest on Borrowed Capital [Section 24(b)]
Interest on capital borrowed for the purpose of purchase, construction, repair, renewal, or reconstruction of the property is deductible on an accrual basis (i.e., interest payable for the year, whether actually paid or not).
| Category | Limit on Interest Deduction |
|---|---|
| Let-out property (or deemed let out) | No ceiling — the entire interest payable for the year is deductible. |
| Self-occupied property | Capped at ₹2,00,000 per year, and only where the loan was taken for acquisition or construction completed within 5 years from the end of the financial year in which the loan was taken; the cap is ₹30,000 where these conditions are not met (e.g., loan for repairs, or construction not completed in time). |
| Pre-construction interest | Interest for the period before the year of completion of construction/acquisition is aggregated and allowed in 5 equal annual instalments, starting from the year in which construction is completed or the property is acquired. |
V. Special Situations
- More than two self-occupied houses: Only two properties, at the owner's choice, may be treated as self-occupied with Nil annual value; every additional property is treated as "deemed let out," with its Expected Rent brought to tax as if it had actually been rented.
- Property let out for part of the year: If a property is let out for part of the year and used by the owner personally for the remaining part, it is generally treated as a let-out property for the whole year; the owner-occupied months do not get proportionate self-occupied treatment.
- Unrealised rent: Rent that the owner is genuinely unable to recover from a tenant, subject to prescribed conditions, can be excluded while computing actual rent, reducing the Gross Annual Value accordingly.
- Co-owned property: Where a property is owned by two or more persons with definite and ascertainable shares, each co-owner is separately assessed on their respective share of income from the property, and each is separately entitled to the Section 24 deductions (including the self-occupied interest cap) in respect of their share.
- Property held as stock-in-trade: Where a property (or part of it) is held as stock-in-trade by a real estate business and is not let out during the year, its annual value is taken as Nil for a specified period (up to two years from the end of the financial year in which the completion certificate is obtained).
This post is intended for educational purposes as theory notes and reflects provisions applicable for Assessment Year 2026-27 under the Income-tax Act, 1961. Please refer to incometax.gov.in and the relevant Finance Act for authoritative and updated provisions before relying on this content for compliance or filing purposes.
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