Quick Answer
15 min read|Updated: Apr 1, 2026|Income-tax
Quick Answer
Under the Income Tax Act 2025, income from house property is taxed on the annual value concept. Up to 2 self-occupied properties (SOPs) have nil annual value.
- The expected rent (based on municipal value, fair rent, and standard rent) is treated as the GAV, even though no actual rent is received
- The full 30% standard deduction is available on this notional NAV
- Interest on borrowed capital is fully deductible with no upper limit (same as actual let-out property under the old regime)
The taxpayer should strategically designate the 2 properties with the highest expected rent as SOP to minimise tax liability, and treat properties with lower expected rent as deemed let-out where the interest deduction may create a loss.
5. Municipal Taxes Deduction
Municipal taxes (property tax, house tax, water tax, sewerage tax) paid by the owner to the local authority are deducted from GAV to arrive at NAV. Conditions:
- Taxes must be borne by the owner — if the tenant pays municipal tax, the owner cannot claim it
- Taxes must be actually paid during the financial year — mere liability is insufficient; the deduction is on payment basis
- Both current-year and arrear municipal taxes are deductible in the year of actual payment
- For SOP, since GAV is nil, municipal taxes paid have no impact (they cannot create a negative value)
6. Standard Deduction — 30% of NAV
A flat 30% of Net Annual Value is allowed as a standard deduction for let-out and deemed let-out properties. This deduction is meant to cover all maintenance and repair expenses, insurance premium, vacancy allowance, collection charges, and any other incidental expenditure. Key features:
- The 30% is mandatory — it cannot be higher or lower based on actual expenses
- No proof of actual expenditure is required
- Even if the actual expenses exceed 30%, only 30% is allowed
- For self-occupied property, NAV is nil, so 30% of nil = nil deduction
- Available under both the new and old tax regimes
7. Interest on Borrowed Capital — Limits and Rules
Interest on money borrowed for the purpose of purchase, construction, repair, renovation, or reconstruction of the house property is deductible. This is the second and final deduction allowed under this head.
| Property Type | Old Regime | New Regime |
|---|---|---|
| Self-Occupied Property (SOP) — loan for purchase/construction | Up to ₹2,00,000 per annum (construction must be completed within 5 years from the end of FY in which loan was taken) | Up to ₹2,00,000 per annum |
| SOP — loan for repair/renovation/reconstruction | Up to ₹30,000 per annum | Up to ₹30,000 per annum |
| SOP — if construction not completed within 5 years | Limited to ₹30,000 per annum | Limited to ₹30,000 per annum |
| Let-Out Property (LOP) | No upper limit — entire interest deductible | No upper limit — entire interest deductible |
| Deemed Let-Out Property | No upper limit — entire interest deductible | No upper limit — entire interest deductible |
Important conditions: (i) The loan must be taken for the purpose of purchase, construction, repair, renovation, or reconstruction — a loan taken for personal purposes but secured against property does not qualify. (ii) A certificate from the lender showing the interest breakup is required. (iii) Interest on loan taken for repayment of an earlier loan (top-up loan for the same property) also qualifies. (iv) Interest includes processing fees and prepayment charges to the extent allowable. (v) If one property is jointly owned by spouses and both are co-borrowers, each can claim up to ₹2 lakh interest deduction on their respective share.
8. Pre-Construction Interest — 5-Year Spread
Interest paid during the period from the date of borrowing to 31 March of the financial year immediately preceding the year in which construction is completed (or the property is acquired) is called pre-construction interest. This interest is:
- Aggregated for the entire pre-construction period
- Deducted in 5 equal annual instalments starting from the year of completion/acquisition
- Each instalment is in addition to the regular current-year interest deduction
- For SOP, the total of pre-construction instalment plus current-year interest is subject to the ₹2,00,000 ceiling
- For LOP/deemed LOP, there is no ceiling on total interest including pre-construction instalments
Pre-Construction Interest Example
Mr. Suresh took a home loan of ₹50 lakh in April 2022 for an under-construction flat. Construction completed in March 2026. Total interest paid from April 2022 to March 2025 (pre-construction period) = ₹8,40,000. Annual instalment = ₹8,40,000 / 5 = ₹1,68,000. For FY 2025-26 (first year after completion), he can claim ₹1,68,000 as pre-construction instalment plus the current year’s interest — total subject to ₹2 lakh cap if SOP, or fully deductible if LOP.
9. Loss from House Property — ₹2 Lakh Set-Off Limit
Loss from house property typically arises when the home loan interest exceeds the rental income (or when the property is self-occupied with nil income but interest is claimed). The set-off and carry-forward rules are:
- Inter-head set-off: Loss from house property can be set off against income from any other head (salary, business, capital gains, other sources) but only up to ₹2,00,000 in a financial year
- Carry-forward: Loss exceeding ₹2 lakh that cannot be set off in the current year is carried forward to the next 8 assessment years
- Carry-forward set-off restriction: The carried-forward loss can be set off only against house property income in future years — not against salary or business income
- Both regimes: The ₹2 lakh set-off limit applies under both the old and new tax regimes
- ITR filing: To carry forward the loss, the ITR must be filed within the due date specified under the Act
Expert View — CA V. Viswanathan
The ₹2 lakh set-off cap on house property loss is one of the most significant constraints for property investors with multiple home loans. If you own 2 self-occupied properties and 1 let-out property, all financed by loans, the combined interest could easily exceed ₹6–8 lakh annually. With only ₹2 lakh set-off permitted against salary, the remaining loss gets parked for 8 years with a very limited future recovery prospect (only against future house property income). I recommend structuring property investments and loan amounts with this cap in mind. For queries on penalties and interest on late filing, ensure your ITR is filed on time to preserve carry-forward rights.
10. Co-Ownership Provisions
When a property is co-owned by two or more persons, the income from that property is assessed in the hands of each co-owner in proportion to their definite and ascertainable share. Key rules:
- Each co-owner is assessed individually on their share of the income — not as an AOP (Association of Persons)
- Each co-owner can independently claim the SOP benefit for their share (effectively, a couple owning a single property jointly can each treat their share as SOP)
- Each co-owner gets the full ₹2,00,000 interest deduction limit on their share, provided they are co-borrowers on the home loan
- The 30% standard deduction applies on each co-owner’s share of NAV
- If shares are not definite and ascertainable, the income is assessed as income of an AOP
Example: A couple co-owns a property 50:50 and has a joint home loan. Each can claim: SOP benefit on their 50% share, interest deduction up to ₹2 lakh each (total ₹4 lakh household deduction), and the loss from house property up to ₹2 lakh set-off each against their respective salary. This effectively doubles the tax benefit compared to single ownership.
11. Unrealised Rent and Arrears of Rent
11.1 Unrealised Rent
Rent that the owner could not realise from the tenant is excluded from actual rent while computing GAV, subject to these conditions:
- The tenancy is bona fide
- The defaulting tenant has vacated, or steps have been taken to compel vacation
- The defaulting tenant is not occupying any other property of the owner
- The owner has taken all reasonable steps to institute legal proceedings for recovery or has satisfied the Assessing Officer that legal proceedings would be useless
11.2 Arrears of Rent
Arrears of rent received in a subsequent year — even if the property is no longer owned — are taxable under house property income in the year of receipt. A deduction of 30% is allowed from such arrears (as standard deduction), and the balance is taxable. No other deduction (such as interest on capital) is available against arrears.
11.3 Recovery of Unrealised Rent
If unrealised rent that was previously excluded from GAV is subsequently recovered, it is taxable under house property income in the year of recovery, with a 30% standard deduction. This applies regardless of whether the owner still owns the property.
12. SOP vs LOP vs Deemed LOP Comparison
| Parameter | Self-Occupied (SOP) | Let-Out (LOP) | Deemed Let-Out |
|---|---|---|---|
| Maximum number allowed | 2 properties | Unlimited | 3rd and subsequent vacant properties |
| Gross Annual Value | Nil (by statute) | Higher of expected rent or actual rent | Expected rent (notional) |
| Municipal tax deduction | No (since GAV is nil) | Yes — taxes actually paid by owner | Yes — taxes actually paid by owner |
| 30% standard deduction | Nil (30% of nil = nil) | 30% of NAV | 30% of NAV |
| Interest deduction (old regime) | Up to ₹2,00,000 | No limit | No limit |
| Interest deduction (new regime) | Up to ₹2,00,000 | No limit | No limit |
| Typical outcome | Loss (interest creates negative income) | Income or loss depending on rent vs interest | Income or loss depending on expected rent vs interest |
13. Interest Deduction Limits Across Regimes
| Scenario | Old Regime Limit | New Regime Limit | Remarks |
|---|---|---|---|
| SOP — purchase/construction loan (completed within 5 years) | ₹2,00,000 | ₹2,00,000 | Includes pre-construction interest instalment |
| SOP — purchase/construction loan (NOT completed within 5 years) | ₹30,000 | ₹30,000 | Penalty for delayed construction |
| SOP — repair/renovation loan | ₹30,000 | ₹30,000 | Lower limit for non-acquisition loans |
| LOP — any housing loan | No limit | No limit | Full interest deductible from rental income |
| Deemed LOP — any housing loan | No limit | No limit | Full interest deductible from notional income |
| Loss set-off against other heads | ₹2,00,000 | ₹2,00,000 | Excess carried forward for 8 years (HP income only) |
14. Numerical Example — SOP + LOP Computation
Mr. Vikram owns two properties in FY 2025-26:
- Property A (SOP): Self-occupied flat in Chennai. Home loan outstanding ₹45 lakh; annual interest = ₹3,60,000. Municipal tax paid = ₹12,000.
- Property B (LOP): Rented apartment in Pune. Actual rent = ₹25,000/month (₹3,00,000/year). Fair rent = ₹2,80,000; Municipal value = ₹2,60,000; Standard rent = ₹3,20,000. Home loan outstanding ₹30 lakh; annual interest = ₹2,40,000. Municipal tax paid = ₹18,000.
| Particulars | Property A — SOP (₹) | Property B — LOP (₹) |
|---|---|---|
| Expected Rent [higher of municipal value and fair rent, but capped at standard rent] | N/A | 2,80,000 (higher of 2,60,000 and 2,80,000 = 2,80,000; capped at standard rent 3,20,000 = 2,80,000) |
| Gross Annual Value [higher of expected rent and actual rent] | Nil | 3,00,000 (higher of 2,80,000 and 3,00,000) |
| Less: Municipal taxes paid by owner | — | (18,000) |
| Net Annual Value (NAV) | Nil | 2,82,000 |
| Less: Standard deduction at 30% of NAV | Nil | (84,600) |
| Less: Interest on borrowed capital | (2,00,000) [capped] | (2,40,000) [no limit for LOP] |
| Income/Loss from each property | (2,00,000) | (42,600) |
| Total income/loss from house property | (2,42,600) | |
Set-off: The total loss is ₹2,42,600. Only ₹2,00,000 can be set off against salary or other income in the current year. The balance ₹42,600 is carried forward to the next assessment year for set-off against future house property income. The actual interest disallowed on Property A (₹3,60,000 – ₹2,00,000 = ₹1,60,000) is permanently lost and cannot be carried forward.
15. Changes from the 1961 Act
- 2 SOPs retained: The provision allowing 2 self-occupied properties (introduced in 2019 Budget) is carried forward into the 2025 Act
- Interest limit unchanged: The ₹2,00,000 interest ceiling for SOP remains the same under both regimes — there was expectation of an increase but it did not materialise
- Loss set-off cap retained: The ₹2 lakh inter-head set-off restriction (introduced by Finance Act 2017) continues unchanged in the 2025 Act
- New regime parity: Under the 2025 Act’s new regime, the interest deduction for SOP and the ₹2 lakh loss set-off are both available, providing parity with the old regime for this head
- Simplified drafting: The annual value computation rules, previously scattered across sections 22–27 of the 1961 Act, are consolidated into a more coherent framework
- Deemed ownership rules updated: The concept of deemed ownership is expanded and clarified, particularly for beneficial ownership in cases of transfer through irrevocable trusts and for flats allotted by cooperative housing societies
- Section 80EEA discontinued: The additional ₹1.5 lakh interest deduction for affordable housing loans (section 80EEA of the 1961 Act) has been discontinued as it had already expired for loans taken after March 2022
- Up to 2 self-occupied properties can have nil annual value — designate the highest-value properties as SOP to minimise tax
- Interest on SOP home loan is capped at ₹2 lakh; for LOP there is no cap on interest deduction under either regime
- The 30% standard deduction from NAV is flat and mandatory — no separate claims for repair, insurance, or maintenance
- Loss from house property set-off against other income is limited to ₹2 lakh per year; excess is carried forward for 8 years
- Co-owners each get separate SOP benefit and ₹2 lakh interest limit — joint ownership doubles the household deduction
- File ITR before the due date to preserve carry-forward of house property loss
- Pre-construction interest is allowed in 5 equal instalments from the year of completion — plan your advance tax payments accordingly
Frequently Asked Questions
How many self-occupied properties are allowed under the Income Tax Act 2025?
A taxpayer can declare up to 2 properties as self-occupied with nil annual value. The third and subsequent unlet properties are treated as deemed let-out, and their notional rental income is taxable even if no rent is actually received. The taxpayer has discretion to choose which 2 properties to designate as SOP.
What is the home loan interest deduction limit for self-occupied property?
For a self-occupied property purchased or constructed with a home loan (construction completed within 5 years), interest up to ₹2,00,000 per year is deductible under both the old and new regimes. If the loan is for repair or renovation, or if construction is not completed within 5 years, the limit is reduced to ₹30,000.
What is the standard deduction for house property income?
A flat 30% of Net Annual Value is allowed as standard deduction for let-out and deemed let-out properties. This covers all expenses including repairs, maintenance, insurance, and collection charges. No separate deduction for actual expenses is permitted. For self-occupied property, since NAV is nil, this deduction is effectively nil.
How is annual value calculated for let-out property?
The Gross Annual Value of a let-out property is the higher of expected rent and actual rent received. Expected rent itself is the higher of municipal rateable value and fair rent, capped at standard rent if the Rent Control Act applies. Municipal taxes actually paid by the owner are deducted from GAV to arrive at Net Annual Value.
Can loss from house property be set off against salary income?
Yes, loss from house property can be set off against salary or any other head of income, but only up to ₹2,00,000 per financial year under both the old and new regimes. Any excess loss beyond ₹2 lakh is carried forward for up to 8 assessment years and can be set off only against future house property income.
How is pre-construction interest treated under the 2025 Act?
Interest paid from the date of borrowing to 31 March of the year preceding the year of completion is aggregated and allowed as a deduction in 5 equal annual instalments starting from the year of completion. Each instalment is claimed in addition to the current year’s interest. For SOP, the combined total remains subject to the ₹2 lakh cap.
What is deemed let-out property under the Income Tax Act 2025?
When a taxpayer owns more than 2 house properties that are not actually let out, the 3rd and subsequent properties are treated as deemed let-out. Their expected rental value (based on municipal value and fair rent) is taxable even though no rent is received. The 30% standard deduction and full interest deduction (no cap) are available on deemed let-out properties.
Is house property income taxable under the new tax regime?
Yes, house property income is fully taxable under the new regime. The 30% standard deduction from NAV, interest deduction (₹2 lakh for SOP, unlimited for LOP), and the ₹2 lakh loss set-off against other income are all available under the new regime. The computation methodology is identical to the old regime for this head.
How is unrealised rent treated for tax purposes?
Rent that could not be realised from a defaulting tenant is excluded from actual rent while computing GAV, provided the tenancy is bona fide, the tenant has vacated or steps have been taken, and the owner pursued recovery. If unrealised rent is subsequently recovered in a later year, it is taxable in that year with a 30% standard deduction.
What are the co-ownership rules for house property income?
Each co-owner is assessed separately on their proportionate share of income. Each co-owner can independently claim SOP benefit for their share and the full ₹2 lakh interest deduction limit on their share. Shares must be definite and ascertainable; otherwise, income is assessed as an AOP. Joint ownership by spouses effectively doubles the household tax benefit on a single property.
Disclaimer: This article is for educational purposes and does not constitute professional tax advice. Tax laws are subject to amendments and judicial interpretation. Consult a qualified Chartered Accountant for advice specific to your situation. For professional assistance, contact Virtual Auditor.
