Income from house property

1. The charge: section 20 [section 22]

The annual value of property consisting of buildings or lands appurtenant to them, of which the assessee is the owner, is chargeable under the head “Income from house property” (section 20(1) of the Income-tax Act, 2025). Three conditions follow:

• the property is a building or land appurtenant to it (vacant land is not covered; its rent is income from other sources);
• the assessee is the owner (including a deemed owner under section 25); and
• the property is not occupied by the owner for his own business or profession the profits of which are taxed (section 20(2)). Such property is part of business; its annual value is not taxed separately.

Rent from a property let as part of a business of letting may still be house property income; the head depends on the nature of the income, not the label the assessee gives it.

2. Annual value: section 21 [section 23]

The annual value is deemed to be the higher of:

• (a) the sum for which the property might reasonably be expected to let from year to year (the expected rent); or
• (b) the actual rent received or receivable, where the property or any part of it is let (section 21(1)).

Expected rent is ordinarily fixed by reference to the municipal valuation and the fair rent of similar property, but it cannot exceed the standard rent where a rent control law applies. In Sheila Kaushish v. Commissioner of Income-tax, 1981 INSC 142, (1981) 131 ITR 435, the Court held that a landlord cannot reasonably expect to receive more than the standard rent fixed or fixable under the Delhi Rent Control Act, so the annual value could not be taken above it.

• Vacancy. If a let property is vacant for the whole or part of the year and because of the vacancy the actual rent is less than the expected rent, the actual rent received or receivable is the annual value (section 21(2)).
• Unrealised rent is excluded from actual rent, subject to the Rules (section 21(4)).
• Municipal taxes levied by a local authority and actually paid by the owner during the tax year are deducted from the annual value, whenever they fell due (section 21(3)). Taxes paid by the tenant are not deductible.
• Unsold stock of a builder. A house held as stock-in-trade and not let has nil annual value for two years from the end of the year in which the completion certificate is obtained (section 21(5)).

3. Self-occupied property: section 21(6) and (7)

The annual value of a house occupied by the owner for his own residence, or which he cannot occupy because of employment or business elsewhere, is nil. This benefit is available for up to two houses chosen by the assessee. It is lost if the house or any part of it is actually let during the year or if the owner derives any other benefit from it.

4. Deductions: section 22 [section 24]

• Standard deduction of 30% of the annual value (after municipal taxes), whatever the actual expenses on repairs (section 22(1)(a)). Nothing else, such as repairs, insurance or collection charges, is deductible.
• Interest on borrowed capital used to acquire, construct, repair, renew or reconstruct the property (section 22(1)(b)), on an accrual basis.
• Pre-construction interest (interest for the period before the year of completion or acquisition) is allowed in five equal instalments beginning with that year (section 22(1)(c)).
• Limit for self-occupied houses (section 22(2) and (5)): interest is capped at ₹2,00,000 in aggregate where the loan is for acquisition or construction completed within five years from the end of the tax year of borrowing and the lender certifies the interest; otherwise ₹30,000. For let-out property there is no cap on interest, but the resulting loss is restricted in set-off (section 8 below).
• Interest payable outside India without deduction of tax at source and without an agent in India is not deductible (section 22(6)).

5. Arrears and unrealised rent: section 23 [section 25A]

Arrears of rent, or unrealised rent later recovered, are taxed in the year of receipt, whether or not the assessee still owns the property, after a deduction of 30% of the amount.

6. Co-owners and deemed owners: sections 24 and 25 [sections 26 and 27]

Co-owners with definite and ascertainable shares are not assessed as an AOP; each is taxed on his share, and each may claim the self-occupation benefit and interest limit separately (section 24). Section 25 makes certain persons deemed owners: a person who transfers a house to his spouse (other than under an agreement to live apart) or to a minor child (other than a married daughter) without adequate consideration; the holder of an impartible estate; a member of a co-operative society or company to whom a building is allotted; a person in possession under part performance (section 53A of the Transfer of Property Act, 1882); and a lessee under a lease of twelve years or more.

The deemed-owner rules reflect the approach in Commissioner of Income-tax v. Podar Cement Pvt. Ltd., 1997 INSC 515, (1997) 226 ITR 625: the “owner” for this head is the person entitled to receive the income in his own right, even if a registered conveyance has not been executed.

7. Computation format

• Gross annual value (higher of expected rent and actual rent, subject to vacancy rule)
• less municipal taxes paid by the owner in the year
• = Net annual value
• less 30% of net annual value (section 22(1)(a))
• less interest on borrowed capital, including one-fifth of pre-construction interest (section 22(1)(b), (c))
• = Income (or loss) from house property

8. Loss from house property

A loss under this head (usually because of interest) may be set off against income under any other head only up to ₹2,00,000 in a tax year (section 109(1)(b) [section 71(3A)]). The balance is carried forward for eight tax years and set off only against house property income (section 110 [section 71B]).

9. Problem

R owns a house let at ₹30,000 a month. The municipal valuation is ₹3,00,000 and fair rent ₹3,40,000. The house was vacant for two months. Municipal tax of ₹20,000 was paid by R. Interest on a housing loan is ₹1,10,000. Compute the income from house property.

Law. Annual value under section 21: the higher of expected rent and actual rent; if actual rent is lower because of vacancy, actual rent is taken. Deductions under section 22.

Application. Expected rent = ₹3,40,000 (higher of municipal value and fair rent; no rent control limit given). Actual rent receivable for ten months = ₹3,00,000. Rent for the full year (₹3,60,000) would exceed expected rent, so but for the vacancy the actual rent would have been the annual value; the shortfall is due to vacancy, so section 21(2) makes the annual value ₹3,00,000. Less municipal tax ₹20,000 = ₹2,80,000. Less 30% = ₹84,000. Less interest ₹1,10,000.

Conclusion. Income from house property = ₹86,000.

How this is examined

January 2026 (80-mark paper) Q. 2(a): what is annual value, and the deductions allowed from annual value. Short notes on self-occupied property, deemed owner and the 30% deduction are also set. For the essay, give sections 1 to 6 in order; for problems, use the format in section 7 and show the vacancy step separately.