How Rental Income is Taxed in India
Rental income from house property is taxable under the head “Income from House Property” in the Indian Income Tax Act. Whether you own one property or multiple properties, understanding the tax implications of rental income is essential for property owners. The tax calculation involves concepts like Gross Annual Value, Municipal Taxes, Standard Deduction, and Home Loan Interest, each of which affects your final tax liability.
The taxation framework applies to all types of property — residential, commercial, and industrial. Even if you receive rental income from agricultural land buildings or let out a portion of your self-occupied property, specific tax rules apply. This guide covers everything you need to know about rental income taxation for the assessment year 2026-27.
Determining Gross Annual Value (GAV)
The first step in calculating tax on rental income is determining the Gross Annual Value (GAV) of the property. GAV is the higher of the actual rent received or the reasonable expected rent, but it cannot be lower than the Municipal Value (as determined by local authorities for property tax purposes). If the property was vacant for part of the year, the GAV is reduced proportionally.
Actual rent received includes all regular payments from the tenant — monthly rent, maintenance charges borne by the tenant, and any premium or advance received. If rent received is less than the expected rent due to vacancy, the actual rent received is taken as GAV. Unrealized rent (rent that was due but not received despite the owner’s best efforts) can be deducted from GAV under certain conditions.
Deductions Available on Rental Income
Two key deductions are available from the Gross Annual Value. First, municipal taxes actually paid by the owner during the financial year are deducted from GAV to arrive at Net Annual Value (NAV). Only taxes paid by the owner qualify — if the tenant bears the municipal taxes, no deduction is available. Taxes paid for previous years are deductible in the year of actual payment.
Second, a Standard Deduction of 30% of NAV is available under Section 24(a). This flat deduction covers all expenses related to maintenance, repairs, insurance, and collection charges. No actual proof of expenditure is needed — the 30% deduction is available automatically. No other expenses (painting, repairs, renovation, brokerage, etc.) can be claimed separately, as the standard deduction is meant to cover everything.
Home Loan Interest Deduction on Let-Out Property
Under Section 24(b), interest paid on a home loan taken for the let-out property is fully deductible from rental income with no upper limit. This is a significant advantage over self-occupied properties, where the deduction is capped at ₹2 lakh per year. For a heavily-mortgaged rental property, the interest deduction can sometimes result in a “loss from house property” that can be set off against other income.
The loss from house property that can be set off against other income (salary, business, etc.) is capped at ₹2 lakh per year. Any excess loss can be carried forward for 8 years and set off against future income from house property. Pre-construction interest is also deductible — interest paid during the period from loan disbursement to property possession is deductible in 5 equal installments starting from the year of possession.
Multiple Property Ownership and Deemed Rental Income
If you own more than two house properties, only two can be claimed as self-occupied (with zero rental value). The remaining properties are treated as “deemed let-out” — you must calculate and pay tax on the expected rental income even if the properties are actually vacant. The expected rent is based on municipal value, fair rent, or standard rent, whichever is applicable.
You get to choose which two properties to declare as self-occupied, so select the properties that would generate the highest deemed rental income as self-occupied to minimize tax. The tax calculation for deemed let-out properties follows the same framework: determine GAV based on expected rent, deduct municipal taxes, apply 30% standard deduction, and deduct home loan interest.
TDS on Rent Under Section 194-I and 194-IB
If your tenant is a business entity, they may be required to deduct TDS on rent under Section 194-I at 10% for land, building, or furniture (2% for plant and machinery). Individual tenants (not subject to tax audit) must deduct TDS at 5% under Section 194-IB if monthly rent exceeds ₹50,000. The TDS deducted can be claimed as tax credit while filing your return.
As a landlord, ensure your PAN is shared with the tenant for correct TDS deduction. Verify that TDS deducted appears in your Form 26AS. If TDS is deducted at a higher rate due to PAN mismatch or non-availability, you can claim the credit and receive a refund after filing your ITR. Maintain rent receipts, lease agreements, and bank statements as evidence of rental income received.
Co-Ownership and Joint Property Rental Income
When a property is jointly owned, each co-owner must report their share of rental income and claim proportionate deductions. The share is typically based on the ownership ratio as mentioned in the sale deed. Each co-owner files their ITR separately and reports their share under “Income from House Property.”
Joint ownership can be a tax planning tool — if a property is jointly owned by spouses with equal shares, the rental income is split equally, potentially keeping both owners in lower tax brackets. Each co-owner can independently claim the ₹2 lakh deduction for home loan interest on self-occupied property, effectively doubling the household’s deduction to ₹4 lakh.
Reporting Rental Income in ITR
Rental income should be reported in the appropriate ITR form. Salaried individuals with rental income from one property can use ITR-1. Those with multiple properties or rental income from business/commercial properties should use ITR-2 or ITR-3. In the ITR form, fill in details under the “Income from House Property” schedule, including property address, tenant name, annual rent received, municipal taxes paid, and home loan interest.
Ensure consistency between rental income reported and TDS credits available in Form 26AS. If you have a rental agreement registered with the sub-registrar, the income tax department may cross-verify the declared rent with the registered amount. Maintain copies of rent agreements, bank statements showing rental receipts, and municipal tax payment receipts for assessment proceedings.
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