Tax on Rental Income in India: The Deductions You're Missing

Owning a property and renting it out is one of the most common ways Indians build wealth — and one of the most commonly mistaxed. Many landlords either declare the full rent without claiming what they are entitled to, or fail to realise that a home loan can turn a rented flat into a tax saver rather than a tax cost.

The rules under "Income from House Property" are actually generous, but only if you use them. This guide walks through how rental income is taxed for FY 2025-26 (AY 2026-27), the deductions most people miss, and a worked example showing how a leveraged property can reduce your overall tax bill.

How Rental Income Is Taxed: The Four-Step Computation

Rental income falls under the head Income from House Property. The computation follows a fixed sequence:

Step 1 — Gross Annual Value (GAV). This is, broadly, the rent you received or were entitled to receive for the year. For a let-out property, it is normally the actual annual rent.

Step 2 — Less municipal taxes paid. Property tax (municipal tax) that you actually paid during the year is deducted from the GAV. This gives the Net Annual Value (NAV). The key word is paid — taxes due but unpaid do not count.

Step 3 — Less 30% standard deduction (Section 24(a)). A flat 30% of the NAV is deducted to cover repairs, maintenance, and collection costs. No bills required.

Step 4 — Less home loan interest (Section 24(b)). Interest on a loan taken to buy, build, or repair the property is deducted.

What remains is your taxable income from house property, which is added to your salary and other income and taxed at your slab rate.

The 30% Standard Deduction: Free and Automatic

The flat 30% deduction under Section 24(a) is the most under-appreciated feature of rental taxation. It is:

• Automatic — you do not need to spend the money or keep receipts.
• Fixed — exactly 30% of NAV, no more even if your real maintenance cost was higher, no less even if you spent nothing.
• Notional — meant to approximate upkeep, society charges, painting, and minor repairs.

So if your net annual value is ₹3,00,000, you deduct ₹90,000 straight away, regardless of what you actually spent. This is genuinely "free" tax relief that many landlords forget to claim.

Home Loan Interest: The Big Lever

For landlords with a loan, Section 24(b) is where the real saving lives — and the rules are more generous than for your own home.

Property type	Interest deduction limit
Self-occupied home	Capped at ₹2,00,000 a year
Let-out (rented) property	No upper limit — full interest deductible

For a let-out property, you can deduct the entire interest paid on the home loan, with no ceiling. In the early years of a loan, when interest is high, this often exceeds the net rental income, producing a loss from house property.

That loss is valuable. You can set off up to ₹2,00,000 of house-property loss against your other income (salary, business, etc.) in a year, directly reducing your overall tax. Any loss beyond ₹2 lakh is carried forward for up to 8 years to set off against future house-property income. For the full picture of loan-related reliefs, see our home loan tax benefits guide.

A Worked Example: Meera's Rented Flat

Meera owns a flat in Noida that she rents out for ₹35,000 a month. She has a home loan on it with ₹3,20,000 of interest payable this year, and she paid ₹18,000 in municipal tax. Her other income (salary) puts her in the 30% slab, and she is on the old tax regime.

Step 1 — Gross Annual Value: ₹35,000 × 12 = ₹4,20,000.

Step 2 — Less municipal taxes paid: ₹4,20,000 − ₹18,000 = ₹4,02,000 (Net Annual Value).

Step 3 — Less 30% standard deduction: 30% × ₹4,02,000 = ₹1,20,600. So ₹4,02,000 − ₹1,20,600 = ₹2,81,400.

Step 4 — Less home loan interest: ₹2,81,400 − ₹3,20,000 = −₹38,600 — a loss from house property of ₹38,600.

The result: Meera does not pay any tax on this rent. Instead, she has a ₹38,600 loss that she sets off against her salary income. At her 30% slab, that loss saves her ₹38,600 × 30% = ₹11,580, plus 4% cess — about ₹12,043 of tax saved, on top of paying zero tax on ₹4.2 lakh of rent received.

This is the counter-intuitive truth: a recently bought, rented-out property with a loan often reduces your total tax, because the interest deduction outweighs the rent.

Joint Ownership: Splitting the Income

If a property is jointly owned — commonly between spouses — the rental income and the deductions are split in the ratio of ownership (and of the loan repaid). If a couple owns 50:50 and both are co-borrowers, each declares half the rent and claims half the interest. This can be a useful way to spread income across two slabs, particularly if one spouse is in a lower bracket. The split must reflect genuine ownership and contribution, not just a tax preference.

The "Deemed Let-Out" Rule for Multiple Properties

Earlier, owning more than one self-occupied house meant the extra ones were treated as "deemed let out" and notional rent was taxed. The rules now allow you to treat up to two houses as self-occupied with nil annual value. Beyond two, additional houses are deemed let out and notional market rent becomes taxable. If you own three or more homes, this matters — and the same 30% standard deduction and interest rules apply to the deemed-let-out ones.

Pre-Construction Interest: The Five-Year Spread

A detail many first-time landlords miss entirely. If you took a home loan to buy or build a property and paid interest during the construction period — before the property was ready and let out — that interest is not lost. It is accumulated and claimed in five equal annual instalments, starting from the financial year in which the construction is completed.

So if you paid ₹5,00,000 of interest across the two years a flat was under construction, you can deduct ₹1,00,000 each year for five years once it is completed and let out, in addition to the regular interest you pay during those years. For a let-out property where interest is uncapped, this pre-construction interest stacks fully. For a self-occupied home it counts toward the ₹2 lakh cap. Keep your lender's interest certificates from the construction years — without them, this deduction is hard to substantiate.

Vacancy and Unrealised Rent

What if the property sits empty for part of the year, or the tenant defaults? The law has specific relief.

Vacancy allowance: If a let-out property was vacant for part of the year and, because of that vacancy, the actual rent received fell below the expected rent, the gross annual value is reduced to reflect the actual rent received. You are not taxed on rent you never received because the flat was genuinely vacant and available to let.

Unrealised rent: If a tenant defaults and you cannot recover the rent — and you have taken reasonable steps to recover it (including not letting the property to the same defaulting tenant) — that unrealised rent can be excluded from your gross annual value. If you later recover arrears that were earlier excluded, the recovered amount is taxed in the year of recovery, but you still get the 30% standard deduction on it. This prevents you from paying tax on income that exists only on paper.

TDS on Rent: What Tenants Deduct

Rent does not always reach you in full — tenants are sometimes required to deduct TDS before paying. Two regimes apply:

• Individuals/HUFs paying rent above ₹50,000 a month must deduct TDS at the prescribed rate and deposit it. This commonly applies to salaried tenants in metros renting premium flats.
• Businesses and others deducting under Section 194-I apply TDS on annual rent above the threshold.

For you as the landlord, this TDS is not an extra cost — it is a prepayment of your own tax. It appears in your Form 26AS and AIS and is adjusted against your final liability when you file, with any excess refunded. Use the TDS calculator to check the amount, and reconcile it carefully — a mismatch between the rent you declare and the TDS reported against you is a frequent trigger for scrutiny. The flip side: undeclared rent where a tenant did deduct TDS is almost impossible to hide, because the transaction is already on record with the department.

Does the Tax Regime Affect This?

Yes, partly. The 30% standard deduction and the interest deduction on a let-out property are available in both the old and new regimes for computing house-property income. However, the ability to set off a house-property loss against other income is restricted under the new regime. This is one more factor to weigh when choosing between regimes — run the numbers using our old vs new tax regime guide and the income tax calculator before deciding, especially if you rely on a large interest deduction.

Common Mistakes

Not claiming the 30% standard deduction. It is automatic and needs no proof. Failing to claim it means paying tax on 30% more income than necessary.

Deducting society maintenance separately. Society charges, repairs, and painting are already covered by the flat 30%. You cannot deduct them again on top.

Deducting municipal tax that was not paid. Only municipal tax actually paid during the year is deductible, not what was merely due.

Forgetting the ₹2 lakh loss set-off cap. While interest on a let-out property is uncapped, the loss you can set off against other income in a year is limited to ₹2 lakh; the rest carries forward.

Not declaring rent at all. Tenants often deduct TDS on rent above thresholds, and high-value transactions surface in your AIS. Undeclared rent is an easy mismatch to catch — reconcile with your Form 26AS and AIS.

Splitting jointly owned income arbitrarily. The split must follow genuine ownership and loan contribution, not a convenient ratio.

What to Do Next

• Total the rent received for the property across the full financial year.
• Subtract municipal/property tax actually paid to get the net annual value.
• Claim the flat 30% standard deduction under Section 24(a) — no proof needed.
• Claim the full home loan interest under Section 24(b) for a let-out property.
• If the result is a loss, set off up to ₹2 lakh against other income and carry the rest forward.
• For jointly owned property, split income and interest by genuine ownership ratio.
• Check whether you have more than two houses triggering deemed-let-out treatment.
• Reconcile rent and any TDS against your Form 26AS and AIS.
• Decide your tax regime carefully if a large interest deduction is involved — see the regime guide.
• Keep the loan interest certificate and municipal tax receipts with your tax document checklist.

A note on the new regime trade-off. Because the house-property loss set-off against other income is restricted under the new regime, a landlord with a large home loan interest deduction often finds the old regime materially better — the ability to knock up to ₹2 lakh of loss off their salary income each year can outweigh the new regime's lower slab rates. If, on the other hand, your rented property is fully paid off and simply generates net rental income, the new regime's lower rates may win, since you have little interest to deduct anyway. The point is to run your numbers: the right regime for a leveraged landlord and a debt-free one can be opposite. Use the income tax calculator with your actual rent, interest, and salary figures before you decide.

Rental income is taxable, but between the automatic 30% deduction and uncapped interest relief, a well-financed rented property is often far lighter on tax than landlords assume — and sometimes it cuts your total bill. The deductions are there for the taking; the only mistake is not claiming them.

Disclaimer: This article is for educational purposes only and is not tax advice. Tax rules change frequently — verify current provisions on the official income tax portal or with a qualified CA before filing.