House Property Income: Let-Out and Self-Occupied

A family that owns one flat and lives in it pays no tax on it, however valuable it is. A family that owns three flats, lives in one, keeps one for visiting parents and lets the third, is taxed on two of them, including one that earns nothing. The difference lies in how the Act measures income from a building. It does not tax the rent as such. It taxes the “annual value”, a statutory figure that is sometimes the rent, sometimes a notional rent and sometimes nil. This guide explains how that figure is worked out, when a house counts as self-occupied, what can be deducted, and what happens to a loss, under both Acts.

Which Act governs which year

• Financial year 2025-26 (assessment year 2026-27) and earlier. The head is governed by sections 22 to 27 of the Income-tax Act, 1961. Returns for AY 2026-27 are filed under the 1961 Act.
• Tax year 2026-27 onwards. The Income-tax Act, 2025 applies from 1 April 2026. The same rules are in sections 20 to 25, in Part C of Chapter IV.
• Section 536(2) of the 2025 Act keeps the 1961 Act alive for earlier years. Clause (m) carries forward a house property loss brought forward from a year before 1 April 2026, to be set off “in the manner provided in” section 71B of the 1961 Act.

The counterparts, checked against the text of both Acts, are these:

Subject	1961 Act	2025 Act
Charge on the annual value	s.22	s.20
Annual value, vacancy, self-occupation	s.23	s.21
30 per cent and interest	s.24	s.22(1) to (5)
Interest payable outside India	s.25	s.22(6)
Arrears and unrealised rent received later	s.25A	s.23
Co-owners	s.26	s.24
Deemed owners	s.27	s.25
Loss against other heads	s.71(3A)	s.109(1)(b)
Carry forward of the loss	s.71B	s.110
New regime exclusions	s.115BAC(2)	s.202(2)
Unrealised rent conditions	rule 4 of the Income-tax Rules, 1962	rule 21 of the Income-tax Rules, 2026

What is taxed, and in whose hands

Section 22 charges “the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner”. Section 20(1) of the 2025 Act is in the same terms. Two limits follow from the words.

• Business use is excluded. The portion the owner occupies for his own business or profession, the profits of which are taxed, is outside the head (s.22; s.20(2)).
• Letting a residential house is not business. Explanation 3 to section 28, inserted by the Finance (No. 2) Act, 2024 from AY 2025-26, says income from letting a residential house “by the owner” is chargeable only as income from house property. Section 26(4) of the 2025 Act repeats it.

“Owner” is not confined to the person with a registered deed. In CIT v Podar Cement Pvt Ltd (Supreme Court, 27 May 1997), a company had bought four flats in “Silver Arch” on Nepeansea Road, Bombay, paid the full price and taken possession in August 1973, and let them out. Title had not been conveyed. The company argued the rent was income from other sources because it was not the legal owner. The Court held that, for section 22, the owner is the person entitled to receive the income in his own right, and decided against the company. Section 27 now deems several others to be owners as well: a person in possession under a contract of the kind in section 53A of the Transfer of Property Act, a member allotted a flat by a co-operative society, a lessee for twelve years or more, and an individual who has transferred a house to a spouse or minor child without adequate consideration. Section 25 of the 2025 Act lists the same persons. The full text of Podar Cement is on BharatTax case law.

The annual value of a let-out house

Section 23(1) gives three measures. The annual value is:

• (a) “the sum for which the property might reasonably be expected to let from year to year”;
• (b) the actual rent received or receivable, where that is more than (a); or
• (c) the actual rent, where the property was let and was vacant for the whole or part of the year and, owing to the vacancy, the rent is less than (a).

Section 21(1) of the 2025 Act puts (a) and (b) as “the higher of” the two. Section 21(2) is the vacancy rule.

The expected rent. The Act gives no formula. In CIT v Tip Top Typography (Bombay High Court, 8 August 2014, ITA No. 1213 of 2011), the assessee let commercial premises of about 8,118 square feet in Mumbai to a related company for Rs 3,60,000 and took an interest-free deposit of Rs 5.25 crore. The Assessing Officer used comparable rents and fixed the annual value at Rs 85,72,608. The Court, agreeing with a Full Bench of the Delhi High Court, held that the rent agreed between a willing landlord and tenant, uninfluenced by extraneous circumstances, is reliable evidence of the expected rent. The municipal rateable value is “a safe guide”, though not binding where the arrangement is suspect. Notional interest on a refundable deposit cannot simply be added to the rent. Where rent control law applies, the standard rent under that law sets the ceiling.

Municipal taxes. Taxes levied by a local authority are deducted from the annual value in the year the owner actually pays them, whatever year they relate to (proviso to s.23(1); s.21(3)).

Rent that cannot be collected. Rent the owner “cannot realise” is left out of the actual rent, subject to rules (Explanation to s.23(1); s.21(4)). Rule 4 of the 1962 Rules and rule 21 of the 2026 Rules set the same four conditions:

1. the tenancy is bona fide;
2. the defaulting tenant has vacated, or steps have been taken to make him vacate;
3. the defaulting tenant is not in occupation of any other property of the owner; and
4. the owner has taken all reasonable steps to sue for the rent, or satisfies the Assessing Officer that legal proceedings would be useless (rule 4) or futile (rule 21).

If the rent is recovered later, it is taxed in the year of receipt, less 30 per cent, whether or not the person still owns the property (s.25A; s.23 of the 2025 Act). Arrears of rent are treated the same way.

A house that stays empty. Clause (c) speaks of a property that “is let and was vacant during the whole or any part” of the year. The Revenue’s reading is that clause (c) needs an actual letting. In Sachin R. Tendulkar v DCIT (ITAT Mumbai, 10 August 2018, ITA No. 3755/Mum/2016, AY 2012-13), the assessee owned two flats in Pune. One was let for nine months. The other stayed empty all year, and he had written three letters to the builder asking it to find a tenant, as it had for the first flat. The Assessing Officer estimated rent at 6 per cent of the cost, and the Commissioner (Appeals) cut it to Rs 15,000 a month. The Tribunal followed its earlier decision in Premsudha Exports and deleted the addition. Its reasoning was that section 23(3) speaks of a house “actually let”, so “is let” in clause (c) must mean something wider: a property held for letting, with efforts made to let it, is covered for the year it stays vacant. The 2025 Act uses the same two expressions, “is let” in section 21(2) and “actually let” in section 21(7)(b), so the argument carries over. This is a Tribunal view; the Revenue disputes it, and the effort to let has to be proved year by year. The order is on BharatTax case law. The site’s article on unrealised rent and vacancy has more on the evidence.

The self-occupied house

Section 23(2), as substituted by the Finance Act, 2025 from 1 April 2025, says the annual value of a house “shall be taken as nil, if the owner occupies it for his own residence or cannot actually occupy it due to any reason”. The earlier text allowed the second limb only where employment, business or profession elsewhere forced the owner to live in a building not belonging to him. Section 21(6) of the 2025 Act uses the new, wider words.

Three limits apply:

• Two houses at most. Where the owner has more than two such houses, nil value applies to two “which the assessee may, at his option, specify” (s.23(4)(a); s.21(7)(a)). Any other house is valued “as if such house or houses had been let” (s.23(4)(b)). The 2025 Act does not repeat that phrase; it simply confines nil value to the two houses specified, which leaves the others to the ordinary rule in section 21(1).
• No letting at all. The nil value is lost if the house or part of it “is actually let during the whole or any part of the previous year” (s.23(3)(a); s.21(7)(b)).
• No other benefit. It is also lost if the owner derives any other benefit from it.

Because the annual value is nil, the 30 per cent deduction is also nil. The only deduction left for a self-occupied house is interest on a loan, capped at Rs 2,00,000 or Rs 30,000. See Home-Loan Interest: Section 24(b) and the Rs 2 Lakh Cap.

What can be deducted

Section 24 begins: “Income chargeable under the head ‘Income from house property’ shall be computed after making the following deductions, namely”. Only two follow:

• (a) “a sum equal to thirty per cent of the annual value”; and
• (b) interest on capital borrowed to acquire, construct, repair, renew or reconstruct the property.

Section 22(1) of the 2025 Act lists three: 30 per cent of the annual value, current interest, and interest for the period before acquisition or construction, which is spread over five years. The 30 per cent stands in for repairs, collection costs and everything else. No separate deduction is allowed for repairs, society charges, insurance or brokerage, whatever was actually spent.

A worked example for a let-out flat, AY 2026-27 (the figures work the same way for tax year 2026-27):

Item	Rs
Rent, Rs 30,000 a month	3,60,000
Less municipal tax paid in the year	12,000
Annual value	3,48,000
Less 30 per cent of annual value	1,04,400
Less interest on the home loan	4,00,000
Loss from house property	(1,56,400)

The rent is taken as the annual value because nothing suggests the expected rent is higher.

A loss, and how far it goes

• Within the head. A loss on one house is set off first against income from other houses for the same year.
• Against other heads, up to Rs 2,00,000. Section 71(3A), inserted by the Finance Act, 2017 from AY 2018-19, bars setting off a house property loss against other heads “to the extent the amount of the loss exceeds two lakh rupees”. Section 109(1)(b) of the 2025 Act allows the set-off “to the extent of” Rs 2,00,000.
• Carry forward for eight years. The rest is carried forward and set off only against house property income, for up to eight assessment years (s.71B) or tax years (s.110(2)).
• A late return does not forfeit it. Section 80 of the 1961 Act denies carry forward of a loss not determined in a return filed under section 139(3), but it names sections 72, 73, 73A, 74 and 74A, not section 71B. Section 121 of the 2025 Act is built the same way and does not name section 110.

In the example, the whole loss of Rs 1,56,400 can be set off against salary in the old regime. The site’s article on the Rs 2 lakh inter-head cap works through larger losses.

The new regime changes the arithmetic

Section 115BAC(2) of the 1961 Act computes total income in the new regime without:

• the interest deduction under section 24(b) “in respect of the property referred to in sub-section (2) of section 23”, the self-occupied house; and
• any set-off of a loss “under the head ‘Income from house property’ with any other head of income”.

Section 202(2)(a)(v) and (b)(ii) of the 2025 Act are the same. Interest on a let-out house remains deductible, and a loss on one let-out house can still absorb income from another. But the loss of Rs 1,56,400 in the example cannot reduce the salary.

Whether that loss can be carried forward in the new regime turns on section 115BAC(3) and section 202(3). They say the loss “referred to in” the set-off bar “shall be deemed to have been given full effect to and no further deduction for such loss … shall be allowed for any subsequent year”. Read literally, a house property loss that the new regime stops from being set off against salary is treated as used up, and nothing is carried forward. The site’s article on the Rs 2 lakh cap says this in one place and the opposite in another. For the choice between regimes, see Old or New Regime: The Choice for Employees.

What to have ready

• For each house: the purchase or allotment deed showing who owns it and in what share, and whether it was self-occupied, let or vacant in each month of the year.
• For a let-out house: the rent agreement, rent received month by month, the tenant’s TDS certificate if tax was deducted (see TDS on Rent), and evidence of any vacancy and the efforts to let.
• Municipal tax receipts, showing the date of payment.
• For unrealised rent: the notice to the tenant, the eviction or recovery proceedings, and evidence the tenant holds no other property of the owner.
• The lender’s interest certificate for each loan. See guide 2202.
• Brought-forward losses: the amount and year of origin of each house property loss, from earlier returns.

Reporting, due dates and corrections

• Reporting. Each house is reported separately in the return’s house property schedule, with its address, the owner’s share and the tenant’s details where it is let.
• Due dates. The return is due by the date in section 139(1) of the 1961 Act or section 263(1) of the 2025 Act. A person who wants the old regime must file by that date; see Belated and Revised Returns.
• Verification and corrections. The return is verified as in E-Verifying a Return. A wrong annual value is corrected by a revised return or, where it increases tax, an updated return.

In order

1. List every building owned or deemed owned, and decide which are let, which are self-occupied and which are neither.
2. For a let-out house, take the higher of the expected rent and the actual rent, less any unrealised rent that meets rule 4 (rule 21 from tax year 2026-27), less municipal taxes paid in the year.
3. For self-occupied houses, take nil for up to two houses chosen by the owner; value any other house as if let.
4. Deduct 30 per cent of the annual value and the interest allowed under section 24(b) (section 22(1)(b) and (c) of the 2025 Act).
5. Set off a loss against other houses, then against other heads up to Rs 2,00,000 in the old regime only, and carry the rest forward for eight years.
6. Report each house separately and file by the due date if the old regime is wanted.

The next guide, Home-Loan Interest: Section 24(b) and the Rs 2 Lakh Cap, deals with the interest deduction in detail.