Income from House Property: Annual Value, 30% Deduction and Interest (Income Tax Act 2025)

Under the Income Tax Act 2025, the owner of a building (or land attached to it) pays tax on its annual value under the head "Income from house property" (section 20(1)). From that annual value you deduct 30% and the interest on borrowed capital (section 22(1)). For a house you live in, the annual value is nil, and the interest deduction is capped at Rs 2,00,000 if the loan conditions are met, or Rs 30,000 otherwise (section 22(2)).

This guide takes you through the three sections that matter: section 20 (what is taxed), section 21 (how annual value is fixed) and section 22 (what you can deduct), with the rule on unrealised rent (rule 21) and worked examples for tax year 2026-27. The law is as amended by the Finance Act, 2026. This is information, not tax advice.

What is taxed under "Income from house property"?

Section 20(1) charges the annual value of "any buildings or lands appurtenant thereto" (land attached to the building) owned by the assessee. The test is ownership. The tax is on the annual value, not on the rent bill alone.

Section 20(2) carves out one portion: any part of the property that the owner occupies for his own business or profession, where the profits are taxed as business income. If Ravi, a doctor, runs his clinic from the ground floor of his own house, that floor is not taxed under this head.

How is annual value determined under section 21?

Section 21 has a separate rule for let-out property, for property let part of the year, for self-occupied homes and for property held as stock-in-trade. The diagram shows how the rules sit together.

Let-out property: the higher of two figures

Under section 21(1), the annual value is the higher of:

• (a) the sum for which the property might reasonably be expected to let from year to year; or
• (b) the actual rent received or receivable by the owner, if the property or any part of it is let.

Vacant for part of the year

If the property was let but vacant for the whole or part of the tax year, and because of that vacancy the actual rent received or receivable is less than the figure in (a), the annual value is the amount actually received or receivable (section 21(2)).

Local taxes are subtracted

The annual value is reduced by taxes (including service taxes) levied by a local authority on the property, actually paid during the tax year by the owner, whenever they became payable (section 21(3)). Property tax paid to the municipality is the usual case.

What is unrealised rent?

Rent that the owner cannot realise is left out of the actual rent (section 21(4)). Rule 21 says rent receivable but not paid by a tenant counts as unrealised only if it is proved to be lost and irrecoverable and all four conditions hold:

1. the tenancy is bona fide (genuine);
2. the defaulting tenant has vacated, or steps have been taken to make him vacate;
3. the defaulting tenant is not occupying any other property of the owner; and
4. the owner has taken all reasonable steps to start legal proceedings to recover the rent, or satisfies the Assessing Officer that legal proceedings would be futile.

Property held as stock-in-trade

If a builder holds a property as stock-in-trade and it is not let, wholly or partly, at any time in the tax year, the annual value is nil up to two years from the end of the financial year in which the competent authority issues the completion certificate (section 21(5)). The Finance Act, 2026 changed the wording from "nil for" to "nil up to" two years, with effect from 1 April 2026.

Self-occupied house: annual value nil

The annual value of a house is nil if the owner lives in it, or cannot actually occupy it for any reason (section 21(6)). Two limits apply (section 21(7)):

• This holds for only two houses, as specified by the assessee.
• It does not apply if the house, or any part of it, is actually let at any time in the tax year, or if the owner derives any other benefit from it.

What deductions are allowed from house property income?

Section 22(1) lets you deduct the following from the annual value determined under section 21:

Deduction	Amount	Section
Flat deduction	30% of the annual value	22(1)(a)
Interest on borrowed capital	Interest payable, where the property was acquired, constructed, repaired, renewed or reconstructed with borrowed capital	22(1)(b)
Pre-construction interest	Interest for the period before the tax year of acquisition or construction, in five equal instalments: that tax year and the four following tax years	22(1)(c)

The 30% is a flat deduction. You do not need receipts for repairs or collection costs to claim it.

How much interest can I claim on a self-occupied house?

For a house whose annual value is nil under section 21(6), the interest deduction under section 22(1)(b) and (c) together is capped (section 22(2)):

Case	Maximum interest deduction
(a) Property acquired or constructed with borrowed capital, completed within five years from the end of the tax year in which the capital was borrowed, and you furnish a certificate from the lender	Rs 2,00,000
(b) Any other case	Rs 30,000

Section 22(5) adds that the total deduction under section 22(2) across all such self-occupied properties cannot exceed Rs 2,00,000. The Finance Act, 2026 amended section 22(2) with effect from 1 April 2026 so that it now refers to sub-section (1)(b) and (c) together.

The lender's certificate must state the interest payable on the capital borrowed, and the interest payable on any new loan taken to repay all or part of the original loan (section 22(4)).

Two other rules on interest

• Pre-construction interest under section 22(1)(c) is computed after removing any amount already allowed as a deduction under another provision of the Act (section 22(3)).
• Interest payable outside India is not deductible if tax was neither paid nor deducted on it under Chapter XIX-B and there is no agent in India under section 306 (section 22(6)).

How do I compute income from house property?

Worked example 1: a let-out flat (tax year 2026-27)

Assumptions: Meena owns a flat let for the whole tax year at Rs 30,000 a month. A similar flat in the area would reasonably let for Rs 3,00,000 a year. She paid Rs 20,000 of property tax to the local authority in the year and Rs 1,50,000 of interest on a home loan taken to buy the flat.

Step	Working	Rs
Expected rent, s 21(1)(a)	given	3,00,000
Actual rent, s 21(1)(b)	30,000 x 12	3,60,000
Higher of the two	3,60,000 vs 3,00,000	3,60,000
Less: local taxes paid, s 21(3)	3,60,000 - 20,000	3,40,000
Less: 30%, s 22(1)(a)	30% x 3,40,000	1,02,000
Less: interest, s 22(1)(b)	no cap for a let-out flat in s 22(2)	1,50,000
Income from house property	3,40,000 - 1,02,000 - 1,50,000	88,000

Worked example 2: a flat left vacant for three months

Assumptions: Kabir's flat could reasonably be let for Rs 3,60,000 a year. He let it at Rs 30,000 a month for 9 months, and it stood vacant for 3 months. Because of the vacancy, the rent receivable is less than the expected rent. He paid Rs 12,000 of local tax and has no loan.

Step	Working	Rs
Expected rent, s 21(1)(a)	given	3,60,000
Actual rent receivable	30,000 x 9	2,70,000
Annual value under s 21(2) (vacancy lowers rent below expected)	the actual rent	2,70,000
Less: local taxes, s 21(3)	2,70,000 - 12,000	2,58,000
Less: 30%, s 22(1)(a)	30% x 2,58,000	77,400
Income from house property	2,58,000 - 77,400	1,80,600

Worked example 3: a self-occupied home with a loan

Assumptions: Anita lives in her only house, bought with a home loan. Construction was completed within five years from the end of the tax year in which she borrowed, and she holds her lender's certificate. Interest for 2026-27 is Rs 2,40,000.

1. Annual value is nil because she occupies it (section 21(6)).
2. 30% of nil is nil.
3. Interest payable is Rs 2,40,000, but the cap under section 22(2)(a) is Rs 2,00,000. Deduction allowed: Rs 2,00,000.
4. Income from house property: nil - 2,00,000 = loss of Rs 2,00,000.

Had she not met the completion or certificate conditions, the cap would have been Rs 30,000 under section 22(2)(b), and the loss would be Rs 30,000.

Worked example 4: interest paid before the house was ready

Assumptions: Suresh borrowed to build a house. Interest of Rs 1,50,000 accrued for the period before the tax year in which construction was completed. That amount is claimed in five equal instalments (section 22(1)(c)): Rs 1,50,000 / 5 = Rs 30,000 for the tax year of completion and for each of the next four tax years. If construction is completed in 2026-27, the instalments fall in 2026-27, 2027-28, 2028-29, 2029-30 and 2030-31. For a self-occupied house, this Rs 30,000 sits inside the section 22(2) cap together with the current year's interest.

Real-life scenarios

Ravi owns three flats and lives in one. He can name two of them as his houses under section 21(7)(a); each has a nil annual value. The third flat has no nil treatment, so its annual value is worked out under section 21(1), even if it stays empty. Ravi should decide which two to specify based on his own numbers.

Meena lets her second flat for two months, then moves in. Section 21(7)(b) says the nil rule does not apply if the house is actually let at any time of the tax year. That year, her flat's annual value is not nil, and she works it out under section 21(1) and (2).

Anil stops paying rent. His landlord can leave the unpaid rent out of income under section 21(4) only if rule 21's four conditions are met: bona fide tenancy, tenant vacated or steps taken to evict, no other property of the landlord occupied by him, and reasonable steps to sue (or proof that suing is futile), plus proof that the rent is lost and irrecoverable. Not collecting rent on its own is not enough.

What if I own more than two houses or my house property shows a loss?

Popular guides call a third, unoccupied house "deemed let-out". The Act does not use that label. Section 21(7)(a) limits the nil annual value to the two houses you specify, so every other house falls back on section 21(1): its annual value is the higher of expected rent and actual rent, even if it is empty or used by a relative.

A loss under this head arises when interest exceeds the income left after the 30% deduction, which is common for a self-occupied house. Under section 109(1)(b), the loss can be set off against income under any other head only to the extent of Rs 2,00,000. Any balance is carried forward and set off only against house property income of later years, for up to eight tax years after the year the loss was first computed (section 110(1) and (2)). Our guide on house property loss set-off and carry-forward has the details. In Anita's case above, the Rs 2,00,000 loss can be set off against other income within that limit.

Quick reference

Item	Rule	Where
Annual value, let property	Higher of expected and actual rent	s 21(1)
Part-year vacancy	Actual rent if lower than expected because of vacancy	s 21(2)
Local taxes	Reduce annual value if actually paid in the tax year	s 21(3)
Unrealised rent	Excluded if all four conditions are met	s 21(4), rule 21
Stock-in-trade	Nil up to two years from end of the financial year of the completion certificate	s 21(5)
Self-occupied	Nil, up to two houses	s 21(6), (7)
Flat deduction	30% of annual value	s 22(1)(a)
Interest cap, self-occupied	Rs 2,00,000 (conditions met) or Rs 30,000; total across such houses Rs 2,00,000	s 22(2), (5)

Common mistakes

1. Taking the actual rent when expected rent is higher. Section 21(1) uses the higher figure, so a below-market rent to a relative can still be taxed on the expected rent.
2. Claiming the nil annual value on a house that was let for a few weeks. Section 21(7)(b) takes it away for the whole tax year.
3. Calculating 30% before subtracting local taxes. The 30% is on the annual value as determined under section 21, which is already net of local taxes (section 21(3)).
4. Assuming the Rs 2,00,000 cap applies to every loan. It applies only with the five-year completion condition and the lender's certificate (section 22(2)(a)); otherwise the cap is Rs 30,000.
5. Writing off unpaid rent without meeting rule 21. All four conditions must hold.
6. Forgetting the pre-construction interest instalments. Section 22(1)(c) spreads it over five tax years, so a claim missed in year one is easy to miss in later years too.

Where this is in the Act

• Section 20: charge to tax under "Income from house property"; business-occupied portion excluded.
• Section 21: determination of annual value (sub-sections 1 to 7).
• Section 22: deductions, including the interest caps in sub-sections 2 and 5 and the foreign interest rule in sub-section 6.
• Sections 109(1)(b) and 110: set-off and carry-forward of house property loss.
• Rule 21 of the Income-tax Rules, 2026: unrealised rent.

If you receive rent from a tenant who is a company or other deductor, tax may be deducted at source; see our guide to TDS on rent under the Income Tax Act 2025.

For a CA firm, the hard part is collecting the right inputs from each client: rent agreements, municipal tax receipts, lender certificates and the list of which two houses were specified. Finexo's practice management software keeps those document requests and due dates tracked across your client book. It does not compute the tax for you.