Income from House Property: Computation, Deductions & Practical Issues (Sections 22–27)

A complete guide to how rental and self-occupied property income is taxed under the Income Tax Act, 1961.

Chargeability — Section 22

Section 22 is the basic charging provision for this head of income. In simple terms, the annual value of a property consisting of buildings or land appurtenant to them — where the assessee is the owner — is chargeable to tax under the head “Income from House Property.”

Three essential conditions must be met:

The property must consist of buildings or land appurtenant thereto. Vacant plots without any building are not taxed under this head — they fall under capital assets or other sources instead.
The assessee must be the owner of the property. This includes deemed ownership cases under Section 27, so legal title isn’t always required.
The property must not be used for the assessee’s own business or profession. If it is, the income is assessed under “Profits & Gains of Business or Profession” instead.

Deemed Ownership — Section 27

Section 27 covers cases where a person is treated as the “owner” even though legal title rests elsewhere:

Transfer to spouse or minor child — property transferred without adequate consideration (except to a spouse under an agreement to live apart, or to a married daughter)
Holder of an impartible estate — treated as the individual owner of all properties in the estate
Member of a co-operative society or company — allotted a building or part of one under a house-building scheme; the member, not the society, is the deemed owner
Person in possession under Section 53A of the Transfer of Property Act — where possession is taken through part-performance of a contract, even if the sale deed isn’t registered
Lessee holding a lease of 12 years or more — this excludes month-to-month leases or those renewable monthly

Determining Gross Annual Value — Section 23(1)

The Gross Annual Value (GAV) is the higher of Expected Rent and Actual Rent Received or Receivable.

Step 1: Expected Rent (ER) ER is the higher of Municipal Valuation (MV) and Fair Rent (FR) — the rent a similar property would fetch — but capped by the Standard Rent (SR), if one has been fixed under rent control legislation.

ER = Lower of [Higher of MV, FR] and SR

Step 2: Actual Rent Received/Receivable (AR) This is the rent for the period the property was actually let out during the year, adjusted for unrealised rent where the conditions of Rule 4 are satisfied. Notional loss from vacancy is excluded when comparing against GAV.

Putting it together: GAV is the higher of ER and AR — except where vacancy reduces AR below ER, in which case GAV equals AR (Section 23(1)(c)).

Computation Flow — From GAV to Income

Here’s how you get from Gross Annual Value to the final taxable Income from House Property:

Gross Annual Value (GAV) — as determined under Section 23(1)
Less: Municipal Taxes paid by the owner — only if actually borne and paid during the year
= Net Annual Value (NAV)
Less: Standard Deduction @ 30% of NAV — under Section 24(a), a flat deduction regardless of actual expenditure
Less: Interest on Borrowed Capital — under Section 24(b), for acquisition, construction, repair, renewal, or reconstruction
= Income from House Property — chargeable under this head

Section 24(a) — Standard Deduction

A flat 30% of Net Annual Value (NAV) is allowed as a deduction, regardless of the actual expenditure incurred on repairs, insurance, or collection charges.

A few important nuances:

It’s computed on NAV — that is, after deducting municipal taxes from GAV — not on GAV itself.
It’s not available if NAV is Nil, such as for a self-occupied property with an Annual Value of Nil.
No separate deduction is allowed for actual repair or maintenance costs — the 30% is a deemed, flat allowance.
The deduction only applies when NAV is positive.

Section 24(b) — Interest on Borrowed Capital

For Let-out or Deemed Let-out Property: The entire interest amount is deductible with no monetary ceiling, covering loans for acquisition, construction, repair, renewal, or reconstruction. If NAV less deductions results in a loss, it becomes a “loss from house property.” Set-off against other heads of income is restricted to ₹2,00,000 in a year (Section 71(3A)), with any balance carried forward for 8 years (Section 71B).

For Self-Occupied Property (SOP):

₹2,00,000 per annum — where the loan is for acquisition or construction, and construction is completed within 5 years from the end of the financial year in which the loan was borrowed
₹30,000 per annum — if that condition isn’t satisfied, or if the loan is for repair, renewal, or reconstruction
The deduction is capped overall and cannot exceed NAV (which is Nil for SOP), creating a “loss from SOP” subject to the Section 71(3A) set-off limit

Pre-Construction Period Interest

Under the proviso to Section 24(b), interest paid or payable on borrowed capital for the period before the year of acquisition or completion of construction is treated specially. This pre-construction interest accumulates from the time the loan is taken until construction is completed or the property is acquired.

It’s deductible in 5 equal annual instalments, starting from the year of completion or acquisition. This is in addition to the interest for that year, though the total remains subject to the same SOP ceilings (₹2,00,000 / ₹30,000) where applicable.

Categories of House Property

The treatment of Annual Value differs depending on the category:

Self-Occupied Property (SOP) Annual Value is Nil under Section 23(2) — there’s no GAV computation. Only the interest deduction under Section 24(b) is available, subject to the applicable ceiling. Up to 2 properties can be claimed as SOP following the relevant amendment.

Let-out Property (LOP) GAV is computed under Section 23(1) as the higher of Expected Rent and Actual Rent. Full deductions apply — municipal tax, the 30% standard deduction, and uncapped interest. There’s no restriction on the number of let-out properties.

Deemed Let-out Property (DLOP) Where an assessee owns more than 2 properties used for their own residence, the additional property or properties are treated as let-out, with a notional GAV computed as if they were actually let. This has applied from Assessment Year 2020-21 onwards (the earlier limit was just 1 property).

Co-Ownership — Section 26

Where a house property is owned by two or more people with definite and ascertainable shares, each co-owner is assessed separately on their share of income — the property is not taxed as an Association of Persons (AOP).

Practical implications:

Each co-owner separately computes GAV, NAV, and deductions under Section 24, in proportion to their share
Each co-owner who independently satisfies the SOP test can claim their share’s Annual Value as Nil
For the interest deduction under Section 24(b), each co-owner can independently claim up to the applicable ceiling (₹2,00,000 / ₹30,000) on the interest relating to their share of the loan

Arrears of Rent & Unrealised Rent — Section 25A

Arrears of Rent Received:

Taxable in the year of receipt, regardless of the previous year to which it relates
Taxable even if the assessee no longer owns the property in the year of receipt
A 30% standard deduction is allowed on the arrears (no separate expense deduction)
Taxed under “Income from House Property,” not “Income from Other Sources”

Unrealised Rent — Recovered Later: If unrealised rent (previously excluded from Actual Rent under Rule 4) is later recovered, it’s taxable in the year of recovery — even if the assessee no longer owns the property. A 30% standard deduction applies here too.

Common Practical Issues & Pitfalls

Composite rent (rent + amenities/services): If separable, split it into Income from House Property (building rent) and Income from Other Sources (for services like lift, security, or furniture). If not separable, the entire rent may be taxed as business income or other sources, depending on the facts.

Municipal taxes deduction basis: Deductible only on a payment basis — actually paid during the year — not on accrual, even if the assessee otherwise follows the mercantile system.

New tax regime (Section 115BAC): Interest on SOP under Section 24(b) is generally not deductible under the default new regime, but the treatment of loss from let-out property and its set-off rules needs careful review each year as provisions evolve.

Property held as stock-in-trade by builders: The annual value of unsold flats held as stock-in-trade becomes taxable under Income from House Property after a specified period from completion (Section 23(5)) — a point frequently missed by real estate clients.

Key Takeaways

Chargeability hinges on ownership (including deemed ownership) of a building or land appurtenant to it, provided it isn’t used in the assessee’s own business.
GAV is the higher of Expected Rent (capped by Standard Rent) and Actual Rent, with a special vacancy rule under Section 23(1)(c).
A standard deduction of 30% on NAV (Section 24(a)), plus interest on borrowed capital (Section 24(b)), applies — subject to SOP ceilings and new regime restrictions.
Up to 2 properties can be claimed as self-occupied; additional properties are taxed as deemed let-out (DLOP).
Co-owners are taxed individually on their share, and pre-construction interest is spread over 5 years.