Rental income looks like the simplest money a person earns. It arrives on a fixed date, in a fixed amount, from a tenant who signed a document. Owners therefore tend to treat it casually at tax time — declare the rent, deduct the loan interest, move on.
The law does not work that way. Rental income is not taxed on what the owner received. It is taxed on what the property is considered capable of earning, reduced by a fixed percentage the owner does not have to spend and by interest the owner may not have paid out of rent at all. The result can be higher than the rent collected, or lower than the money actually spent. Neither outcome is an error.
This article sets out how rental income is taxed, where the computation departs from common sense, and the points at which owners most often lose money or invite a notice.
What falls under this head — and what does not
Income from letting a building, or land attached to a building, that the owner owns is taxed under the head “income from house property”. Ownership is the trigger, not occupation and not profit. The nature of the building is irrelevant: a flat, a shop, a warehouse, an office floor and a godown are treated alike.
Three situations fall outside the head, and the distinction carries real consequences.
Property used by the owner for their own business or profession is not taxed under this head at all; there is no notional income, and the running costs sit inside the business accounts. Letting of vacant land with no building on it produces income from other sources, not house property. And where the owner provides substantial services alongside the space — staffed offices, hotel-style facilities, managed warehousing, equipment and manpower — the arrangement may be characterised as a business rather than a letting, which changes the deductions, the rate structure and the compliance entirely.
The line between renting space and running a business is not decided by what the agreement is called. It is decided by what the owner actually does.
The starting point is annual value, not rent received
The computation begins with annual value, which is the higher of two figures: the rent the property could reasonably be expected to fetch, and the rent actually received or receivable. An owner who lets a commercial unit to a relative at a concessional figure is taxed on the market expectation, not the concession.
Local authority taxes are then deducted, but only where the owner has actually paid them during the year. An amount merely levied, disputed or left outstanding gives no deduction. Owners who pay two years of municipal tax in a single year get the benefit in the year of payment.
Where a property was let and remained vacant for part of the year, and the rent actually received fell below the expected figure because of that vacancy, the actual rent may be taken instead. The relief follows a genuine letting that was interrupted, not a property that was never offered for rent.
The two deductions that follow
After local authority taxes, the law allows a standard deduction of thirty per cent of the annual value. It is not a reimbursement of expenditure. An owner who spent nothing on the property gets it in full; an owner who repainted, rewired and replaced the plumbing gets the same thirty per cent and nothing more. Repairs, insurance, brokerage, society maintenance and collection costs are all subsumed within it.
The second deduction is interest on capital borrowed to acquire, construct, repair or reconstruct the property. For a let-out property the interest is deductible without a ceiling. Interest for the period before the year of acquisition or completion is not lost — it is allowed in five equal annual instalments beginning with the year the property is acquired or completed.
Principal repayment is not deductible here. It belongs to a different part of the Act, sits under a separate ceiling, and is unavailable to those taxed under the default regime.
Houses the owner occupies, and houses that sit empty
An owner may treat up to two houses as self-occupied, with annual value taken as nil. The choice is the owner’s and can be revisited each year, which matters when the properties carry different loans. Any house beyond the second is taxed on its expected rent even if it stands locked and empty for the entire year. Interest on a self-occupied house is deductible up to two lakh, against an annual value of nil — which is how a house that earns nothing produces a loss.
Property held as stock-in-trade by a developer is given nil annual value for a limited period after the completion certificate is obtained. Once that window closes, unsold inventory begins to attract tax on notional rent.
Rent that arrives late, or never
Rent that the owner could not realise is excluded from the computation, subject to the prescribed conditions being satisfied — broadly, that the tenancy was genuine, the tenant has vacated or steps have been taken to recover, and the amount is truly irrecoverable.
If that rent is later recovered, or if arrears are received after a rent revision, the amount is taxed in the year of receipt. Two points are routinely missed. The thirty per cent deduction is available against it. And it remains taxable in the owner’s hands even if the property has since been sold.
Co-ownership and the owner who is not on the title
Where a property is owned by more than one person and their shares are definite and ascertainable, each is taxed on their own share. The share follows the title deed and the funding, not a convenient split arrived at while filing.
The Act also treats certain persons as owners although the title sits elsewhere: someone who transfers property to a spouse otherwise than for adequate consideration or under a separation arrangement, someone who transfers to a minor child other than a married daughter, a member of a housing society allotted a unit, a buyer in possession under an unregistered arrangement, and a holder of a long-term lease. Transferring a property within the family does not, by itself, transfer the tax.
The regime choice decides whether a loss is worth anything
Under the default regime, a loss under this head cannot be set against salary, business income or any other head. It can only be adjusted against income from another property, with the unabsorbed balance carried forward for eight years to be used against house property income alone.
Under the optional regime, the loss can be set against other heads, but only up to two lakh in a year, with the balance carried forward on the same restricted basis.
For an owner with a large housing loan, that single difference is often worth more than every other point of comparison between the two regimes combined. It deserves to be computed, not assumed.
The tenant’s obligation is the landlord’s exposure
Tenants who are businesses must deduct tax at source on rent for buildings once the monthly threshold is crossed, at ten per cent, and at two per cent on plant, machinery and equipment. Individuals and undivided families not subject to tax audit deduct at two per cent where monthly rent crosses the threshold.
Where the owner is non-resident, the position changes sharply. The tenant must deduct at the rate applicable to non-residents, plus surcharge and cess, with no threshold at all, and must hold a deduction account number to do it. Non-resident owners who let property while abroad are frequently unaware that their tenant carries this duty, and discover it when credits do not appear in the annual tax statement.
A note on section numbers
The provisions governing this head have been renumbered. The substantive rules — the thirty per cent deduction, the two-property limit for self-occupation, the interest ceiling, the treatment of arrears — carry across substantially unchanged. Returns for income of earlier years continue to follow the previous numbering. Anyone relying on older working papers should confirm which version applies to the year in question before quoting a section.
Frequently asked questions
Is rental income taxed even if the tenant has not paid? Yes, in principle. The head is charged on rent received or receivable, so rent that has fallen due is taxable even if unpaid. Relief for unrealised rent is available, but only where the prescribed conditions are met and documented.
My flat is vacant. Do I still pay tax on it? If it is one of your two self-occupied houses, the annual value is nil and nothing is taxed. Beyond two houses, a vacant property is taxed on the rent it could reasonably fetch. Vacancy relief applies to a property that was let and fell empty, not to one that was never let.
Can I deduct the society maintenance, repairs and property manager’s fee? No. These are covered by the thirty per cent standard deduction, whether your actual spending was higher or lower. Local authority taxes paid by you are deducted separately.
I receive rent for a fully furnished office along with staff and services. Is that house property income? Possibly not. Where services and facilities dominate the arrangement, the income may be assessed as business income. The characterisation should be settled at the outset, because it changes the deductions available and the compliance that follows.
Can both the standard deduction and the full loan interest be claimed on the same property? Yes, for a let-out property. The thirty per cent is computed on the annual value after local authority taxes, and interest is deducted separately and without a ceiling.
Does the rent go in my return or my spouse’s if the property is joint? It follows the ownership share, and that share follows the title and the funding. If the property was transferred to a spouse without adequate consideration, the transferor may continue to be taxed on it.
I live abroad and let out property back home. What should I watch? Three things: your tenant’s obligation to deduct tax at the non-resident rate with no threshold, the mismatch that arises when they fail to do so, and the availability of treaty relief and a refund where the deduction exceeds your actual liability.
Should I choose the regime that allows the loss set-off? Only after computing both. The loss benefit is capped, and the alternative regime carries lower rates. The right answer depends on the size of the loan, the rent and the rest of the income, and it can change from year to year.
How SRC Chartered Accountants can help
Rental income rarely creates difficulty on its own. It creates difficulty in combination — several properties held in different names, a loan that spans two of them, arrears received after a sale, a tenant who deducted at the wrong rate, an owner who moved abroad and did not tell anyone.
SRC Chartered Accountants works with property owners on exactly those combinations. We compute income under this head across a portfolio rather than property by property, establish the correct annual value where letting is between related parties or below market, and decide which two houses should be treated as self-occupied so that the interest deductions land where they are worth most.
We advise on whether a particular arrangement is a letting or a business before the first invoice is raised, handle unrealised rent and arrears with the documentation those claims require, and run the regime comparison as a calculation rather than a conversation. Where owners are non-resident, we manage the deduction, lower-deduction and refund position with the tenant, so that credits reconcile and returns are not held up.
We also work on the position before it becomes a filing problem: how a property should be held, whose name it should sit in, and what the tax outcome looks like on an eventual sale.
If you own property that earns rent — or property that should be earning it — talk to SRC Chartered Accountants.