Income from House Property: Rental Income Tax Rules & Calculation

House property income includes rental income from residential or commercial buildings owned by the taxpayer, as well as the surrounding land. Deductions such as the standard deduction, interest on housing loans, and property tax are allowed under sections 22 to 27 of the Income Tax Act.

Earning passive income from rental property is one of the most reliable ways to build long-term wealth. However, this additional income also comes with certain tax responsibilities that every property owner should understand. So, let’s take a closer look at how rental income is taxed in India and its calculation process.

Generally, income earned from renting a residential property is classified as ‘income from house property.’ Under Section 22 of the Income Tax Act, 1961, rental income is determined based on the gross annual value of the property, or the total rent received. Tax on rental income is determined after deducting municipal taxes, standard deductions, and interest paid on existing home loans. Read on to understand everything about income from house property.

What is Income from House Property?

House property income refers to rental income from renting out a building or its appurtenant land (such as parking space, garden, or courtyard). This includes residential houses, offices, shops, factories, or commercial complexes.

Simply put, any rental income a taxpayer earns from his property, whether residential or commercial, will be taxed under the head “Income from House Property” unless it is used for his own business or is considered a business activity.

As per section 22 of the Income Tax Act, 1961, such income is taxable under the head “Income from house property” if the following conditions are satisfied:

• The property must consist of a building or part of a building, as well as the land appurtenant to it.
• The taxpayer must be the legal owner of the property (or deemed to be the owner under Section 27)
• The owner must not use the property for his or her business or profession. If it is used for business purposes, the income will be taxed under the head profits and gains of business or profession.

Key Points to Note

• Rental Income Only – The income must be in the form of rent or lease, whether received periodically or in one lump sum.
• Building and Appurtenant Land – Rent received for land attached to a building (e.g., parking lot, garden) is also considered house property income. However, if the payment is primarily for the land, it is taxed under the head ‘Income from Other Sources’.
• Not a Business Activity – If the taxpayer carries on the sole business of renting out properties, the income is taxed as business income, not house property income.
  • Example: Renting out an apartment = House Property Income.
  • Running a multi-room hostel = Business Income.
• Residential or Commercial Property – Both residential and commercial rents are considered income from house property.
• Ownership is required – The taxpayer must own the property. If a person sublets a rental property, the income is not taxed as house property income but is taxed under ‘other sources’.
• Deemed owners are also covered – Even if the legal title is not in the taxpayer’s name, the income is taxable in the hands of the person deemed to be the owner under Section 27.

What’s not included under ‘Income from House Property’?

Now, these are the sources which cannot be taxed under the head ‘Income from House Property‘.

• Rental income from subletting a property: Subletting is a situation in which a tenant (who is not the owner) rents out the property or a portion of it to another person. Rental income from subletting a property to a tenant cannot be taxed under the head ‘Income from house property’.
• Rental income if assets are part of the property: If the renting of the building and the renting of other assets cannot be separated from each other, such as renting out an equipped theatre, the entire rent will be taxed under the head ‘Income from other sources’.

Concept of Deemed Ownership (Section 27)

• The concept of deemed ownership was introduced to prevent tax evasion.
• Property owners transferred property to others (such as family members) and still retained control of the property, while the tax burden fell on the transferee.
• Therefore, the person who maintains control over the house property is considered the owner, whether the title is in his or her name or not. Income from the house property is taxable in the hands of the deemed owner.
• The following cases are provided in the Act related to deemed ownership under section 27:
  • If a person transfers their property to their spouse or minor child, the transferor is deemed the owner.
  • If a property cannot be divided among heirs, the holder of the property is deemed the owner.
  • If a person is allotted a house under a cooperative housing scheme, the allottee is deemed the owner.
  • If a person is given possession under Section 53A of the Transfer of Property Act, the person holding the possession is deemed the owner.
  • If a person is on lease for a period of more than 12 years, the lessee is deemed the owner.

How is income tax on rental income calculated? 

Here’s how to calculate tax on rental income in India:

• First, calculate the gross annual value (GAV) of the rental property. This is considered the annual rent received from the tenant.
• Then, subtract the amount of property tax paid from the GAV to obtain the net annual value (NAV). Property tax, or house tax, is a municipal tax paid annually to the relevant municipal authority.
• Subtract 30 per cent from the NAV, which is a standard deduction under Section 24(a) of the Income Tax Act.
• If the owner has taken a housing loan for their rental property, the entire interest paid on the housing loan during the financial year can be deducted from the rental income after the standard deduction. This rebate is available under Section 24(b) of the Income Tax Act.
• The remaining amount is the individual’s taxable rental income, on which income tax will be payable according to their respective tax slab. 

Rental tax calculation: Example

Let’s consider an example to further understand the calculation process. In this case, the monthly rent for an apartment is ₹25,000, the property tax due is ₹20,000, and the interest paid on the home loan is ₹80,000. The table below provides a step-by-step rental income calculation.

Parameters	Calculation
Monthly Rent	Rs 25,000 per month
Gross Annual Value (GAV)	12 (months) x Rs 25,000 = Rs 3,00,000 annually
Property Tax	Rs 20,000 per year
Net Annual Value (NAV)	Rs 3,00,000- Rs 20,000 = Rs 2,80,000 annually
Standard Deduction	30% of Rs 2,80,000 = Rs 84,000
Interest Paid on Home Loan	Rs 80,000
Total Taxable Income	Rs 2,80,000- Rs 84,000- Rs 80,000 = Rs 1,16,000

Under the new tax system, if your total taxable income is up to ₹12 lakh, you won’t have to pay any income tax due to the rebate under Section 87A. For salaried individuals, after claiming a standard deduction of ₹75,000, the effective zero-tax limit can go up to approximately ₹12.75 lakh of gross salary.

Effective Ways to Save Tax on Rental Income

1. Separate Maintenance Charges from Rent

If your rental agreement includes maintenance charges, make sure they are billed separately. According to the Income Tax Act, if the agreement clearly mentions maintenance charges, they can be excluded from taxable rental income.

2. Avail the 30% Standard Deduction

Section 24(a) of the Income Tax Act allows a flat deduction of 30% from net rental income for maintenance, regardless of the actual expenses. You can claim this fixed deduction even if the maintenance expenses are lower.

3. Deduct Municipal Taxes

Municipal taxes, including property tax, sewage charges, and service tax, can be deducted from the gross annual value before the 30% standard deduction is applied. However, these must be paid by the owner, not the tenant.

4. Claim Full Interest Deduction on Home Loan

Under Section 24(b), homeowners can claim an unlimited deduction on home loan interest for rental properties. Unlike self-occupied properties, where the deduction is limited to ₹2 lakh per year, rental properties offer the full interest deduction, significantly reducing their tax liability.

5. Opt for Joint Ownership

If you co-own a property with your spouse or family member, rental income can be divided between the co-owners, reducing personal tax liability. Both co-owners can claim separate deductions, further improving tax savings.

6. Structure Rent Wisely for Furnished Properties

If you rent a semi-furnished or fully furnished property, charge separately for the rent and additional amenities like furniture, internet, and appliances. Only the rent portion is taxable, reducing the overall tax burden.

7. Leverage HUF (Hindu Undivided Family) Benefits

If your HUF is registered, you can purchase property in the name of the HUF. This helps distribute rental income among multiple family members, reducing tax liability as each member is eligible for separate tax exemptions.

8. Invest in Tax-Saving Instruments

Investing rental income in tax-saving instruments like National Pension Scheme (NPS), ELSS, or PPF can help reduce the total taxable income under Section 80C.

9. Consider Rental Agreement Optimisation

• Avoid renting out property to a business, as this could lead to a tax audit.
• Choose long-term rental agreements (12+ months) to avoid recurring tax charges.

10. Benefit from Senior Citizen Tax Exemptions

If you’re a senior citizen (60+ years), rental income up to ₹3 lakh is tax-free. Planning property ownership in the name of senior family members can help optimise tax savings.

GST’s Role in Tax on Rental Income

Rental income may attract GST under the following conditions:

• Residential properties rented for home use are exempt from GST.
• If a commercial property is rented out and the annual rental income exceeds ₹20 lakh, 18% GST will be applicable.
• Residential properties rented out for commercial use may also be subject to GST if the landlord is registered under GST.
• Security deposits are exempt from GST, but advance rent may be subject to GST.

To avoid unnecessary tax burden, landlords should clearly disclose their rental transaction pattern and check their GST registration status.

Is rental income earned by NRIs taxable in India?

Rental income earned by NRIs is taxable under Section 24 of the Income Tax Act. However, in the case of NRI-owned properties, the tenant pays tax on behalf of the owner under Section 195. The process is as follows:

After deducting TDS (Tax Deducted at Source), the tenant makes the payment to the NRI’s account. They then submit the TDS form to the relevant authority and file Form 15CA with the Income Tax Department.

NRIs are required to pay double tax—one tax in India and another in the country where they reside—for the same property under Section 24. However, NRIs can avoid this double taxation by checking whether there is a Double Taxation Avoidance Agreement (DTAA) between India and the country where they reside.

To maximise the benefits of their rental income, it’s important to know how to save tax through the right deductions. You can adjust for vacant months or unpaid rent when calculating income, claim a 30% standard deduction for maintenance, and deduct home loan interest, if applicable. You can also treat two homes as self-occupied, meaning their notional rent won’t be taxed. In short, understanding these rules helps you legally reduce your taxes, increase your savings, and make your rental property a strong long-term investment. 

Frequently asked questions