Key Takeaways
- Gross Annual Value of a let-out property is the higher of expected rent (municipal or fair rent, capped by standard rent) and the actual rent received. Subtract municipal taxes paid by the owner to reach Net Annual Value.
- Section 24(a) gives a flat 30% standard deduction on NAV, regardless of what you actually spent on repairs.
- Section 24(b) interest has no cap for a let-out property under the old regime, unlike the Rs 2,00,000 limit on a self-occupied house.
- Loss from house property sets off against other income only up to Rs 2,00,000 per year; the balance carries forward 8 years against future house property income.
- Finance Act 2025 allows two self-occupied houses; from the third property it is deemed let-out and notional rent is taxed.
- Under the new regime, let-out interest cannot create a loss against other income for AY 2026-27; the deduction is effectively capped at the rental income.
- Rental income beyond one house, or a carry-forward loss, forces ITR-2 instead of ITR-1.
How is a let-out house property taxed for AY 2026-27? Compute Gross Annual Value as the higher of expected rent and actual rent, deduct municipal taxes you paid to get Net Annual Value, then subtract a flat 30% standard deduction and full home loan interest. Under the old regime interest is uncapped, but any resulting loss sets off against other income only up to Rs 2,00,000 a year.
If you rent out a flat, a shop, or an office, the rent is taxed under the head "income from house property," not as business income and not simply netted against your loan EMI. The computation is a fixed statutory sequence: Annual Value first, then two deductions under Section 24. Get the sequence right and a let-out property with a large home loan can legitimately produce a loss that lowers your total tax. Get it wrong and you either overpay or trigger an Annual Information Statement (AIS) mismatch on the rent your tenant has already reported.
This guide is the dedicated let-out deep-dive. For the broader picture across self-occupied, let-out and deemed let-out property, and how Schedule HP sits inside the return, read our companion piece on computing income from house property for AY 2026-27. Here the focus is the Net Annual Value math and the two limbs of Section 24 that decide your final number.
Looking for expert help with how to calculate tax on rental income from a let-out property AY 2026-27? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
The Computation Sequence at a Glance
Every let-out property runs through the same five lines. Skipping or reordering a line is the single most common filing error we correct.
| Step | Line item | Governing rule |
|---|---|---|
| 1 | Gross Annual Value (GAV) | Section 23(1): higher of expected rent or actual rent |
| 2 | Less: Municipal taxes paid by owner | Section 23(1), proviso (paid basis only) |
| 3 | Net Annual Value (NAV) | GAV minus municipal taxes |
| 4 | Less: Standard deduction at 30% of NAV | Section 24(a) |
| 5 | Less: Interest on borrowed capital | Section 24(b) |
| Income / (Loss) from house property | Result of 3 minus 4 minus 5 |
The reference to Sections 23 and 24 is to the Income Tax Act, 1961. The corresponding provisions have been renumbered in the Income Tax Act, 2025 (Sections 20 to 22), but the substance of the Annual Value and deduction mechanism is carried forward unchanged, so the arithmetic below holds for AY 2026-27 filings.
Step 1: Gross Annual Value (GAV)
GAV is not simply the rent you collected. It is the higher of two figures:
- Expected rent, being the amount the property might reasonably fetch. This is the higher of the municipal value and the fair rent of a comparable property, but subject to a ceiling: it cannot exceed the standard rent fixed under any Rent Control Act that applies. In short, expected rent = higher of (municipal value, fair rent), but not more than standard rent.
- Actual rent received or receivable for the year.
GAV is the greater of expected rent and actual rent. The logic is anti-avoidance: the law does not let an owner declare an artificially low rent to a related party and pay tax only on that. If the property could fetch more, the higher expected rent is taxed.
There is one relief. Where actual rent is lower than expected rent only because the property was genuinely vacant for part of the year, the actual (lower) rent is taken as GAV. Vacancy allowance protects a landlord who could not find a tenant, but it does not rescue a below-market rent charged to family.
Unrealised rent
Rent that a tenant has defaulted on, and which you have taken reasonable steps to recover, can be excluded from actual rent in computing GAV, provided the conditions of Rule 4 are met (tenancy was bona fide, the defaulting tenant has vacated or steps taken to vacate, and the tenant is not in occupation of another property of yours). Do not simply drop unpaid rent without meeting these tests.
Step 2: Municipal Taxes (Deductible Only if Paid)
From GAV you deduct municipal taxes, meaning property tax, water tax, sewerage tax and similar levies charged by the local authority. Two conditions are strict:
- The taxes must be borne and actually paid by the owner during the previous year. Accrual or a raised bill is not enough; deduction is on a paid basis.
- If the tenant pays the municipal taxes, the owner gets no deduction.
Because deduction follows payment, arrears of earlier years paid this year are deductible this year. Keep the municipal corporation receipt: it is the evidence that supports the deduction if the return is scrutinised.
Step 3: Net Annual Value (NAV)
NAV = GAV minus municipal taxes paid by the owner. This is the base on which both Section 24 deductions are computed. Nothing else is subtracted before NAV.
Step 4: Standard Deduction at 30% (Section 24(a))
Section 24(a) grants a flat 30% of NAV as a standard deduction. It is meant to cover repairs, maintenance, insurance, collection charges and the general cost of holding a let-out property.
The key practitioner point: the 30% is notional and automatic. You get it whether or not you spent a rupee on repairs, and you cannot claim more even if you spent far in excess of 30%. There are no bills to attach and no separate deduction for actual repairs, painting, brokerage or society maintenance charges. Anyone trying to claim actual society maintenance on top of the 30% is duplicating a deduction the law has already bundled in.
Step 5: Interest on Borrowed Capital (Section 24(b))
This is where a let-out property differs sharply from a self-occupied one.
| Feature | Self-occupied property | Let-out / deemed let-out property |
|---|---|---|
| Interest cap (old regime) | Rs 2,00,000 per year | No cap: full interest deductible |
| Pre-construction interest | 1/5th per year for 5 years, within the Rs 2 lakh cap | 1/5th per year for 5 years, no cap |
| Result | Usually a capped loss | Loss can be large, subject to set-off limit |
For a let-out property under the old regime, the entire interest you pay on the housing loan is deductible under Section 24(b) with no ceiling. A property let for Rs 3,00,000 a year but carrying Rs 6,00,000 of loan interest genuinely produces a loss under this head. That is by design: the law taxes real income, and a leveraged rental can run at a book loss.
Pre-construction interest
Interest paid during the period before the year of completion (the "pre-construction period," running from the date of borrowing to the 31 March preceding the year the construction is completed) is not lost. It is aggregated and allowed in five equal annual instalments starting from the year construction is completed, over and above the current year's interest. For a let-out property this pre-construction interest is also uncapped. For a fuller treatment of the timing rules, see our note on pre-construction period interest under Section 24(b).
Worked Example: Let-Out Flat with a Home Loan
Facts (AY 2026-27, old regime). Mr Rao owns a flat in Hyderabad, let out for the full year.
- Actual rent received: Rs 30,000 per month = Rs 3,60,000
- Municipal value: Rs 3,20,000; Fair rent: Rs 3,50,000; Standard rent: not applicable
- Municipal (property) taxes paid by Mr Rao during the year: Rs 24,000
- Home loan interest paid during the year: Rs 4,80,000
- Pre-construction interest (accumulated before completion): Rs 2,50,000, now in its 2nd of 5 instalments, so Rs 50,000 this year
Step 1: Gross Annual Value.
- Expected rent = higher of municipal value (Rs 3,20,000) and fair rent (Rs 3,50,000) = Rs 3,50,000
- Actual rent = Rs 3,60,000
- GAV = higher of expected rent and actual rent = Rs 3,60,000
Step 2: Less municipal taxes paid by owner = Rs 24,000
Step 3: Net Annual Value = Rs 3,60,000 minus Rs 24,000 = Rs 3,36,000
Step 4: Less 30% standard deduction under Section 24(a) = 30% of Rs 3,36,000 = Rs 1,00,800
Step 5: Less interest under Section 24(b) = current year Rs 4,80,000 plus pre-construction instalment Rs 50,000 = Rs 5,30,000
Income from house property:
- Rs 3,36,000 minus Rs 1,00,800 minus Rs 5,30,000 = (Rs 2,94,800), a loss.
Mr Rao has a house property loss of Rs 2,94,800. Under the old regime, he can set off Rs 2,00,000 against his salary or other income this year. The remaining Rs 94,800 is carried forward for up to 8 years and can be set off only against future house property income.
Loss from House Property: The Rs 2,00,000 Wall
The interest deduction is uncapped, but the set-off of the resulting loss is not. Two limits work together:
- Intra-year set-off cap: A net loss under "income from house property" can be set off against income under other heads (salary, business, capital gains, other sources) only up to Rs 2,00,000 in a financial year.
- Carry-forward: Any loss beyond Rs 2,00,000, or that cannot be absorbed this year, is carried forward for 8 assessment years. Crucially, a carried-forward house property loss can be set off only against income from house property in those later years, not against salary or other heads.
To carry a loss forward you must file the return on or before the due date under Section 139(1). A belated return protects the current-year set-off but can jeopardise the carry-forward, so meet the deadline.
TDS on Rent: Who Deducts, and How Much
The tenant, not the landlord, is responsible for deducting TDS. Which section applies depends on who the tenant is.
| Provision | Who deducts | Threshold | Rate | Mechanics |
|---|---|---|---|---|
| Section 194-IB | Individual / HUF not under tax audit | Rent exceeds Rs 50,000 per month | 5% | Deduct once a year (or on vacating), Form 26QC, no TAN required |
| Section 194-I | Business, company, or any person under tax audit | Rent above Rs 2,40,000 per year | 10% (land/building) | Deduct monthly, TAN required, quarterly TDS returns |
For a salaried tenant paying Rs 30,000 a month, no TDS applies. Once monthly rent crosses Rs 50,000, an individual tenant must deduct 5% under Section 194-IB and issue Form 16C. As the landlord, reconcile this credit in your Form 26AS and AIS so the rent reported by your tenant matches what you declare. A mismatch here is a frequent trigger for a system-generated notice.
The New Regime Restriction You Must Not Miss
This is the trap that catches leveraged landlords who moved to the default new regime. Under the new tax regime for AY 2026-27:
- Interest under Section 24(b) on a let-out property remains deductible, but only up to the taxable income of that property. It cannot create a loss from house property.
- That loss, if it would have arisen, cannot be set off against salary or other income, and cannot be carried forward.
In plain terms, under the new regime the let-out interest deduction is effectively limited to the rental income (NAV less 30% standard deduction). In Mr Rao's example, the same numbers under the new regime would allow interest only up to Rs 2,35,200 (NAV Rs 3,36,000 minus standard deduction Rs 1,00,800), bringing house property income to nil. The remaining Rs 2,94,800 of interest and the entire loss simply disappear, with no set-off and no carry-forward.
So a landlord with heavy interest is often materially better off in the old regime, where the loss set-off of Rs 2,00,000 and the 8-year carry-forward survive. Run both regimes before locking your choice. Our ITR filing guide for AY 2026-27 walks through the form-level differences.
Deemed Let-Out After Finance Act 2025
Finance Act 2025 retained the benefit of treating up to two house properties as self-occupied, each with nil Annual Value. From the third property onward, the house is deemed let-out even if it lies vacant, and you must offer notional rent (the expected rent) to tax.
Once deemed let-out, the property follows the exact five-step computation above: expected rent becomes GAV, municipal taxes paid are deducted, then the 30% standard deduction and uncapped Section 24(b) interest apply. The uncapped interest is the silver lining: an owner of a third, loan-funded property gets full interest as a deduction against the notional rent, unlike the Rs 2,00,000 ceiling on a self-occupied house.
ITR-1 or ITR-2: Choosing the Right Form
The form is not a free choice; the facts decide it.
- ITR-1 (Sahaj) is permitted only if you have income from one house property and no brought-forward or carry-forward loss under this head.
- ITR-2 is required if you own more than one house property, earn rent from multiple houses, have a deemed let-out property, or carry a house property loss forward.
Most let-out owners with interest-driven losses will file ITR-2, because the carry-forward of the unabsorbed loss cannot be reported in ITR-1. Filing ITR-1 in that situation risks a defective return notice under Section 139(9).
Filing Checklist for a Let-Out Property
- Confirm annual rent received or receivable, tenant by tenant.
- Establish expected rent: municipal value, fair rent, and any standard rent ceiling.
- Take GAV as the higher of expected rent and actual rent (apply vacancy relief only for genuine vacancy).
- Collect the municipal tax paid receipt for the year; deduct only if you paid it.
- Compute NAV, then the automatic 30% standard deduction.
- Gather the bank's interest certificate; add the current instalment of any pre-construction interest.
- Compute income or loss; apply the Rs 2,00,000 set-off cap and note any carry-forward.
- Reconcile TDS (Form 16C / 26AS / AIS) against the rent you are declaring.
- Compare old versus new regime, especially if interest creates a loss.
- File ITR-2 if there is any carry-forward loss or more than one property, on or before the Section 139(1) due date.
Getting the Annual Value and Section 24 sequence right is what separates a correctly taxed rental from an AIS mismatch or a lost loss set-off. If you own more than one property, split ownership with a co-owner, or carry interest large enough to run a loss, the choice of regime alone can change your tax by tens of thousands of rupees. Tax Garden handles the full Schedule HP computation, the regime comparison, and the ITR-2 filing on a fixed monthly plan, so you claim every rupee you are entitled to and stay compliant.
Sources: Income Tax Act, 1961, Sections 22, 23, 24 and 71 (set-off) and Rule 4; Income Tax Act, 2025, Sections 20 to 22; Sections 194-I and 194-IB (TDS on rent); Finance Act, 2025 (two self-occupied properties); CBDT ITR-1 and ITR-2 instructions for AY 2026-27; Income Tax Department e-filing portal (incometax.gov.in).
