Rental Income Tax: Standard Deduction, Interest and Set-off Rules
- Rental income is taxed under 'Income from House Property' after a flat 30% standard deduction and actual home loan interest — not under business income.
- Loss from a self-occupied property (up to ₹2 lakh interest) can be set off against salary in the same year; loss from a let-out property follows different rules.
- If you own more than two properties, every additional one beyond two is deemed let out — you pay tax on notional rent even if it sits empty.
If you earn rent from a flat, shop or plot, the tax on rental income is calculated under the head Income from House Property — not as business income or other income. After two deductions (a flat 30% standard deduction and your actual home loan interest), the balance is added to your total income and taxed at your slab rate. Get these deductions right and you can legitimately reduce your taxable rent by more than half. Get them wrong — or miss the set-off rules — and you overpay tax or attract a scrutiny notice. Here is everything you need to know for FY 2026-27.
How Rental Income Is Computed: The Step-by-Step Framework
The Income Tax Act taxes you not simply on rent received but on the Annual Value of the property. For a let-out property, Annual Value is broadly the higher of actual rent received and the fair market rent (what a similar property would fetch). Municipal taxes you actually pay in the year are deducted first to arrive at the Net Annual Value (NAV).
- Gross Annual Value (GAV): Higher of actual rent and fair market / municipal rent.
- Less: Municipal taxes paid by the owner during the year.
- = Net Annual Value (NAV)
- Less: Standard deduction (30% of NAV) — flat, no bills needed.
- Less: Home loan interest — actual interest paid on a loan taken to buy, build, repair or reconstruct the property.
- = Income from House Property — added to your total income and taxed at slab.
The 30% Standard Deduction Explained
Section 24(a) gives every landlord a flat 30% deduction on NAV. This is meant to cover repairs, maintenance, insurance and all other property expenses. You cannot claim actual repair bills in addition to this — it is one or the other, and the law has already made the choice for you: 30% flat. No receipts, no justification required. This makes it simple but it also means you cannot claim more even if your actual costs are higher.
Home Loan Interest Deduction Under Section 24(b)
Over and above the 30% standard deduction, you can claim the actual interest paid on a home loan for a let-out property with no upper limit. If you paid ₹8 lakh in interest, you deduct ₹8 lakh. This is the rule that most landlords miss or underuse.
For a self-occupied property (where you live yourself or which you treat as self-occupied because it is vacant), the Annual Value is taken as nil. The 30% standard deduction therefore becomes nil too. But you can still claim home loan interest — subject to a cap of ₹2,00,000 per year (provided the loan was taken after 1 April 1999 and construction was completed within five years of taking the loan; otherwise the cap is ₹30,000).
Pre-construction interest: Interest paid during the construction period cannot be claimed in the construction year. It is accumulated and then claimed in five equal instalments starting from the year in which construction is completed.
Worked Example: Salaried Person with One Rented-Out Flat
Anika is a salaried employee in Bengaluru. For FY 2026-27 she also earns rent from a 2BHK she owns. Here is her house property calculation:
| Particulars | Amount (₹) |
|---|---|
| Monthly rent received | 25,000 |
| Annual rent (GAV) | 3,00,000 |
| Less: Municipal taxes paid by Anika | (12,000) |
| Net Annual Value (NAV) | 2,88,000 |
| Less: Standard deduction @ 30% of NAV | (86,400) |
| Less: Home loan interest paid | (1,80,000) |
| Income from House Property | 21,600 |
| Salary income (after standard deduction) | 12,00,000 |
| Total taxable income | 12,21,600 |
Without claiming the 30% standard deduction and home loan interest, Anika would have added the full ₹2,88,000 NAV to her salary, pushing her taxable income to ₹14,88,000. By using both deductions correctly, she adds only ₹21,600 — a difference that, at the 30% slab, saves her roughly ₹80,000 in tax. Use KyaTax's Income Tax Calculator to run your own numbers under both the old and new tax regimes.
Set-Off and Carry-Forward of House Property Loss
This is where most people — and even many accountants — get it wrong.
Loss from a Self-Occupied Property
Since the Annual Value of a self-occupied house is nil, the only deduction is home loan interest (up to ₹2 lakh). This creates a loss. That loss can be set off against salary or any other income head in the same year — up to ₹2 lakh. Any portion beyond ₹2 lakh cannot be set off and is simply lost; it cannot be carried forward.
Loss from a Let-Out Property
If your let-out property also produces a loss (because interest is very high relative to rent), the situation is different. You can set off that loss against other income in the same year — but only up to ₹2 lakh in total across all house properties. The remaining unabsorbed loss can be carried forward for up to eight assessment years and set off only against future house property income.
The Two-Property Rule
From FY 2019-20 onwards, you can treat up to two self-occupied properties as self-occupied (Annual Value = nil). If you own three or more properties and none are let out, the third and subsequent properties are deemed to be let out at their notional market rent, and you pay tax on that notional rent. Many second-home owners are unaware of this and receive demand notices.
New Tax Regime: Key Difference
If you opt for the new tax regime (which is the default from FY 2023-24 onwards), the picture changes significantly:
- The 30% standard deduction under Section 24(a) is still available for let-out properties.
- Home loan interest deduction on a let-out property is still available under the new regime.
- However, home loan interest on a self-occupied property is not deductible under the new regime.
- House property loss cannot be set off against salary or other income under the new regime.
This makes the old regime more attractive for those with a self-occupied home loan and moderate rental income.
Common Mistakes to Avoid
- Claiming actual repair expenses instead of (or on top of) the 30% standard deduction. The law allows only the flat 30% — actual costs are irrelevant. Claiming both will lead to disallowance in scrutiny.
- Not reporting vacant properties beyond two. If you own three flats and live in one, the other two are either let-out or deemed let-out. Many taxpayers show only actual rent and ignore the notional rent on the third property.
- Forgetting pre-construction interest. Interest paid during construction must be split into five instalments and claimed only after possession. Claiming it all in one year — or not claiming it at all — both cause errors.
- Assuming unlimited set-off of house property loss under the new regime. Under the new regime, a loss from house property cannot be set off against salary. Switching regimes without understanding this costs people significantly.
- Not deducting municipal taxes before applying the 30% standard deduction. Municipal taxes are deducted first to get NAV. The 30% standard deduction is applied on NAV, not on gross rent. Applying 30% on gross rent overstates the deduction and can trigger a demand.
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Open Income Tax Calculator →Frequently asked questions
Is rental income added to my salary and taxed at the same rate?
Yes. Income from house property is added to your total income — which includes salary, business income and other sources — and the combined amount is taxed at your applicable slab rate. There is no separate flat rate for rental income.
Can I claim both the 30% standard deduction and home loan interest on a rented property?
Yes, absolutely. For a let-out property, you first deduct 30% of the Net Annual Value as a standard deduction under Section 24(a), and then separately deduct the actual home loan interest paid under Section 24(b) with no upper limit. Both deductions apply together.
What if my rental property runs at a loss after deductions — can I reduce my salary tax?
Under the old tax regime, yes — a house property loss can be set off against salary income in the same year, but only up to ₹2 lakh in total across all properties. Any remaining loss is carried forward for up to eight years and set off against future house property income only. Under the new tax regime, this set-off against salary is not permitted.
I have two flats — one I live in, one is rented out. Do I report both?
Yes. The flat you live in is self-occupied: its Annual Value is nil, so no rental income arises, but you can claim home loan interest (up to ₹2 lakh under the old regime). The rented flat is let-out: you compute its Annual Value, apply the 30% standard deduction and any home loan interest, and report the net figure as taxable income. Owning two properties does not trigger deemed let-out; that rule applies only from the third property onward.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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