Income tax on rental income: how rent from a flat, house or shop is taxed

The short answer

Rent you earn from a building or land attached to it — a flat, a house, a shop, an office — is taxed under the head 'income from house property', whether you live in India or abroad, and whether you let it to a family or a company. This is sections 20 to 25 of the Income-tax Act, 2025 (sections 22 to 27 of the 1961 Act).

The calculation: take the annual value (normally the rent receivable for the year), subtract municipal taxes you actually paid in the year, subtract a standard deduction of 30% of what is left, and subtract interest on a loan taken to buy, build or repair the property. The result is added to your other income and taxed at your slab rates.

You cannot deduct actual repairs, painting, society maintenance, insurance or property management fees separately: the 30% standard deduction is meant to cover them, whatever you actually spent.

If interest makes the result negative, the loss can be set off against salary and other income only up to ₹2 lakh a year under the old regime; the rest is carried forward for up to eight years against future house property income. Under the new regime (now the default), a house property loss cannot be set off against other income at all.

A note on section numbers: the Income-tax Act, 2025 has applied from 1 April 2026 (the start of tax year 2026-27). Anything that happened before that date — a sale, a rent payment, a deduction — is governed by the Income-tax Act, 1961 and its section numbers. This guide gives both numbers where the new one has been confirmed.

Step 1: the annual value

For a let-out property, the annual value is the higher of the rent you actually receive or are entitled to receive for the year and the 'expected rent' — what the property might reasonably fetch, judged by municipal valuation, comparable rents and, where it applies, the standard rent under rent control law. In practice, for a property let at a market rent to an unrelated tenant, the actual rent is used. This is section 21 of the 2025 Act (section 23 of the 1961 Act).

Where the property was let but was vacant for part of the year, and the actual rent is lower than the expected rent because of that vacancy, the actual rent is taken. You are not taxed on rent you could not earn because the flat was empty between tenants.

Rent that you could not collect (unrealised rent) is left out of the annual value if the conditions in the rules are met — broadly, the tenancy was genuine, the defaulting tenant has left or you have taken steps to recover it. If you recover it later, it is taxed in the year you receive it, with a 30% deduction (see arrears below).

A refundable security deposit is not rent and is not taxed when received. An amount you keep from the deposit for unpaid rent becomes rent at that point.

Step 2: municipal taxes

Deduct the property tax and other local taxes you actually paid during the year to the municipal body, whatever year they relate to. Taxes that are due but unpaid are not deductible. If the tenant pays the property tax under the lease, you cannot deduct it.

The result after municipal taxes is the 'net annual value'. The separate guide on municipal property tax explains how the tax is calculated and paid.

Step 3: the 30% standard deduction

From the net annual value, deduct 30% as a standard deduction, regardless of what you actually spent on repairs. This is section 22 of the 2025 Act (section 24(a) of the 1961 Act). The deduction is available under both tax regimes.

Because the deduction is fixed, keeping repair bills does not increase it. If you spend heavily on a renovation that adds to the property, that cost may count as a cost of improvement when you eventually sell; keep the bills for that purpose.

Step 4: interest on a home loan

Interest on money borrowed to buy, construct, repair, renew or reconstruct the property is deductible (section 22 of the 2025 Act, section 24(b) of the 1961 Act).

Let-out property: all the interest for the year is deductible from the rent, with no upper limit under the head. The limit bites only when you try to set the resulting loss against other income (step 5).

Self-occupied property (old regime only): interest is capped at ₹2 lakh a year (₹30,000 where the loan was taken before 1 April 1999 or for repairs). Under the new regime, interest on a self-occupied home is not deductible at all.

Interest for the period before the year construction was completed is deducted in five equal instalments starting with the year of completion. Principal repayment is never deducted from rental income; under the old regime it counts towards the ₹1.5 lakh limit of section 123 of the 2025 Act (section 80C of the 1961 Act). See the home loan tax benefits guide.

Interest on a loan taken for some other purpose — a personal loan, a business loan — is not deductible against rent, even if you mortgaged the property to get it.

Step 5: losses and the ₹2 lakh cap

If interest exceeds the rent after the 30% deduction, you have a loss under 'income from house property'.

Old regime: the loss can first be set against income from another house property, then against salary, business or other income, but only up to ₹2,00,000 in a year. This cap is section 109(1)(b) of the 2025 Act (section 71(3A) of the 1961 Act). Any loss above ₹2 lakh is carried forward for up to eight tax years and can be set off only against future income from house property (section 110 of the 2025 Act, section 71B of the 1961 Act). To carry forward, file your return by the due date.

New regime: a loss under house property cannot be set off against any other head of income. The interest still reduces the rental income from that property, potentially to nil, but the excess does not reduce your salary or other income. The common reading of the new regime rules, reflected in the return forms, is that such a loss also cannot be carried forward; confirm with your chartered accountant before relying on it.

If you have a large home loan on a let-out flat, this is often the single biggest factor in choosing the old regime. Compute both every year.

Worked example 1: a let-out flat with a home loan

Illustrative numbers only. A salaried resident lets a flat for ₹30,000 a month all year. He pays property tax of ₹12,000 in the year, and home loan interest of ₹4,50,000.

Annual value: ₹3,60,000. Less property tax paid: ₹12,000. Net annual value: ₹3,48,000. Less 30% standard deduction: ₹1,04,400. Less interest: ₹4,50,000. Income from house property: ₹3,48,000 − ₹1,04,400 − ₹4,50,000 = ₹(−)2,06,400.

Old regime: ₹2,00,000 of the loss is set against his salary; ₹6,400 is carried forward to set against future house property income.

New regime: the rental income is nil after interest, but none of the ₹2,06,400 loss reduces his salary.

Separately, if his rent exceeded ₹50,000 a month and the tenant was an individual, the tenant would deduct 2% TDS once a year; see the TDS on rent guide.

Worked example 2: a shop with no loan

Illustrative numbers only. A resident lets a shop to a company for ₹80,000 a month and pays property tax of ₹20,000. Annual value: ₹9,60,000. Net annual value: ₹9,40,000. 30% deduction: ₹2,82,000. Income from house property: ₹6,58,000, added to her other income.

The tenant company deducts 10% TDS each month (₹8,000) because the rent exceeds ₹50,000 a month; ₹96,000 for the year is credited against her tax. If her aggregate turnover from taxable supplies exceeds the GST threshold, she must also register and charge 18% GST on the commercial rent; see the guide on GST and TDS on commercial rent.

Self-occupied, deemed let-out and vacant homes

You can treat up to two houses as self-occupied, each with an annual value of nil, if you live in them or cannot live in them because your work takes you elsewhere. Under the old regime, the ₹2 lakh interest cap is a combined limit for both.

If you own three or more houses that are not let out, you choose which two are self-occupied. The others are 'deemed let-out': taxed on the rent they could reasonably fetch, even though you receive nothing, with the 30% deduction and interest allowed against it.

A house that is empty for the whole year and is one of your two self-occupied houses has a nil annual value. A house you were trying to let, which stayed vacant, is treated as let-out with the actual rent (nil) as its annual value, if the conditions for vacancy are met.

Builders holding unsold flats as stock-in-trade have a separate rule allowing a nil annual value for a period after the completion certificate; it does not apply to individual owners.

Arrears and unrealised rent

If you receive arrears of rent (for example, after a rent revision is applied backwards), or recover rent you previously could not collect, the amount is taxed in the year you receive it, under house property, after a deduction of 30%, even if you no longer own the property. This is section 23 of the 2025 Act (section 25A of the 1961 Act).

Illustrative example: you recover ₹1,20,000 of unpaid rent from a former tenant. Taxable: ₹1,20,000 − 30% = ₹84,000, in the year of recovery.

Co-owners

Where a property is owned by co-owners with definite and ascertainable shares, each co-owner is taxed on their share of the income, computed as if they owned that share alone (section 24 of the 2025 Act, section 26 of the 1961 Act). Each claims their share of municipal tax, the 30% deduction and their own interest on a loan they are liable for. Each has their own ₹2 lakh set-off limit under the old regime.

The split follows ownership, not who receives the rent into their bank account. If a husband paid the whole price and the wife is a co-owner without having contributed, the income from her share can be clubbed with his. The guide on joint property and co-owners works through this.

PG, furnished lets, short stays and business use

Rent for the building alone is house property income. Where you provide substantial services along with the space — meals, housekeeping, laundry, reception — as with a paying guest house or serviced apartments run as an activity, the income can be business income instead, computed on actual expenses with depreciation rather than the flat 30%.

Rent for furniture and fittings let together with a flat, where the two cannot be let separately, is usually taxed together with the building; where the furniture is let under a separate agreement, the furniture rent may be 'income from other sources' with its own deductions. The line is factual; take advice if a large part of the rent is for furnishing or services.

Short-stay letting through online platforms can look like a business if it is organised and continuous. The classification affects how you compute income and, for GST, whether you must register.

A property used for your own business or profession is not taxed as house property at all; no notional rent is charged.

Commercial property

Rent from shops, offices and warehouses is also house property income, computed the same way: annual value, municipal taxes, 30%, interest. The differences are on the indirect tax and TDS side — GST at 18% on commercial rent, and 10% TDS by business tenants on rent above ₹50,000 a month. Rent from letting plant and machinery, or from a business centre with services, is generally not house property income.

Non-resident landlords

Rent from property in India is taxable in India for a non-resident, computed the same way. The tenant must deduct tax at the rates in force for non-residents under section 393(2) of the 2025 Act (section 195 of the 1961 Act), with no threshold. The landlord can apply for a lower deduction certificate (Form 128) and claim any excess TDS in the Indian return.

Common mistakes

Deducting actual repair, maintenance and painting bills on top of the 30% standard deduction.

Deducting property tax that was due but not paid, or that the tenant paid.

Setting a house property loss above ₹2 lakh against salary, or any loss at all under the new regime.

Leaving a third empty house out of the return; it is deemed let-out.

Splitting rent between spouses according to whose account receives it, rather than by ownership.

Treating a PG run with meals and services as house property income without considering whether it is a business.

Not reporting rent because the tenant deducted TDS. TDS is a credit; the income must still be declared.

This is general information, not tax or legal advice. Tax law, rates and forms change with each Finance Act; confirm how the rules apply to your own facts with a chartered accountant before you sign, pay or file.

Common questions

Sources

• Income-tax Act, 2025: sections 20 (charge), 21 (annual value), 22 (deductions: 30% and interest), 23 (arrears and unrealised rent), 24 (co-owners), 109(1)(b) (₹2 lakh set-off cap), 110 (carry-forward), 123 (earlier 80C), 202 (new regime); incometaxindia.gov.in; checked 2 October 2026
• Income-tax Act, 1961: sections 22 to 27, 71(3A), 71B, 80C and 115BAC; indiacode.nic.in; checked 2 October 2026
• Income Tax Department e-filing portal (incometax.gov.in) — ITR forms and the house property schedule; checked 2 October 2026

Last checked 2026-10-02.