Introduction: Income from House Property – Income Tax Act, 1961
The Indian Income Tax Act, 1961 classifies income under five heads, one of which is “Income from House Property”, governed primarily by Sections 22 to 27. This head is unique because it taxes not the actual activity of earning income, but the ownership of a property, whether it is let out or even kept vacant in some cases.
The underlying principle is simple: if you own a building (with or without land appurtenant) and it has the potential to earn income, then that potential income, or its actual rent, becomes taxable—even if no business activity is conducted.
For example, imagine a person owns a flat in Delhi but lives in Mumbai. Even if the Delhi flat is lying vacant and not rented out, the tax law may still deem it as let out if it’s not one of the two self-occupied properties allowed under the law. Thus, taxation here is based more on ownership and usage than on direct monetary transactions.
This head plays a crucial role in curbing the unproductive hoarding of real estate and ensuring equitable taxation based on asset holding. At the same time, it provides generous deductions, especially on interest paid on housing loans, to encourage home ownership.
In the upcoming sections, we will explore its computation, exceptions, legal interpretations, and how it aligns with broader economic and social goals.
Basic Principle:
Basic Principle of Taxation – Income from House Property
The basic principle underlying the taxation of income from house property is that the ownership of a property capable of generating rental income constitutes a taxable asset, regardless of whether actual income is received or not.
In other words:
“It is not the income earned from the property that is necessarily taxed, but the income that is reasonably expected to be earned from it.”
Key Features of the Basic Principle:
Ownership is the basis of charge
Only the owner or deemed owner of the property is liable to pay tax under this head. The income is not taxed in the hands of the tenant or occupier. Taxability is linked to potential income
Even if the property is not rented (i.e., vacant), deemed income (called annual value) is taxable for certain types of properties (e.g., third house if more than two are self-occupied).
No relation to actual business or profession
If a building is used for own business or profession, its income is not taxed under this head but rather under Profits and Gains from Business or Profession.
Land appurtenant to the building is included The tax applies to buildings and land attached or connected with it (e.g., garden, parking), but not on open land alone. Only one building used for residence is fully exempt (earlier one, now two from FY 2019-20 onwards):
Up to two self-occupied properties can have their annual value taken as nil. More than two → excess properties are deemed to be let out.
Why this principle?
To ensure that:
Property ownership does not go untaxed, Speculative or unutilized property also contributes to revenue, And homeowners benefit from genuine self-occupation through deductions.
Definition: “House Property” and “Ownership”
✅ House Property:
As per the Income Tax Act, house property includes:
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Any building (residential/commercial/industrial),
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And land appurtenant thereto (e.g., garden, garage).
It does not include open land or property used for own business/profession.
✅ Ownership:
Under Section 22, only the owner or deemed owner of house property is chargeable to tax under this head.
Ownership can be:
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Legal: Registered owner with title
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Deemed: As per Section 27 (e.g., transfer to spouse/minor child, lease for 12+ years)
Key Sections – Income from House Property (Sec. 22 to 27)
| Section | Provision | Description |
|---|---|---|
| Section 22 | Basis of Charge | Income from house property is taxable if the assessee is the owner of buildings/land appurtenant thereto and the property is not used for own business/profession. |
| Section 23 | Annual Value | Determines the Gross Annual Value (GAV) – the basis for computing income from property. Covers actual rent, expected rent, and deemed rent. |
| Section 24 | Deductions | Allows: (a) Standard deduction @ 30% of NAV and (b) Interest on borrowed capital (up to ₹2,00,000 for self-occupied; unlimited for let-out). |
| Section 25 | Amounts not deductible | Specifies expenditures that are not allowed as deductions – e.g., personal expenses, capital outlay, etc. |
| Section 25A / 25AA / 25B | Arrears of rent & unrealized rent recovered | Provides rules for taxing arrears or previously unrealized rent received in subsequent years. |
| Section 26 | Co-ownership | When property is owned by multiple persons, income is divided according to their respective shares, and each co-owner is assessed separately. |
| Section 27 | Deemed Ownership | Enumerates cases where a person is treated as an owner, even if not legal owner – e.g., property transferred to spouse/minor child, holders of impartible estate, lessee under long lease. |
Computation of Income from Let-out Property
Step 1: Gross Annual Value (GAV)
GAV = Higher of:
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Expected Rent (based on Municipal Value, Fair Rent, and Standard Rent under Rent Control Act)
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Actual Rent received or receivable
If property is vacant for part of the year and rent is lower, then actual rent is considered GAV only if vacancy is genuine.
Step 2: Municipal Taxes
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Deduct only if:
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Paid by the owner, and
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Paid during the previous year
(Due but unpaid taxes are not deductible)
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Step 3: Deductions under Section 24
24(a) – Standard Deduction
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30% of Net Annual Value
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Given irrespective of actual expenses
24(b) – Interest on Borrowed Capital
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No upper limit for let-out property
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Loan may be taken for purchase, construction, repair, or renovation
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Pre-construction interest is also allowed (in 5 equal installments starting from year of completion)
| Step | Computation |
|---|---|
| 1 | Gross Annual Value (GAV) = Higher of Expected Rent or Actual Rent (subject to Rent Control Act) |
| 2 | Less: Municipal Taxes paid by owner |
| 3 | = Net Annual Value (NAV) |
| 4 | Less Deductions under Sec 24 |
| 5 | = Income from House Property |
Illustration Example:
Suppose:
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Fair Rent = ₹2,40,000
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Municipal Value = ₹2,20,000
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Standard Rent = ₹2,00,000 (under Rent Control Act)
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Actual Rent = ₹2,30,000
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Municipal Taxes paid by owner = ₹20,000
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Interest on loan = ₹80,000
Computation:
| Particulars | Amount (₹) |
|---|---|
| Gross Annual Value (lower of Fair/Actual, not exceeding Standard Rent) = ₹2,00,000 | |
| Less: Municipal Taxes | ₹20,000 |
| Net Annual Value | ₹1,80,000 |
| Less: 30% Standard Deduction (24a) | ₹54,000 |
| Less: Interest on loan (24b) | ₹80,000 |
| Income from House Property | ₹46,000 |
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If loss arises (due to high interest deduction), it can be:
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Set off against income under other heads (up to ₹2,00,000 per year)
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Carried forward for 8 assessment years (only against house property income)
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Section 23: Determination of Annual Value
For Let-out Property:
GAV is higher of:
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Expected Rent (based on fair rent or municipal value), or
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Actual Rent received
For Self-occupied Property:
Annual Value = NIL
Section 24: Deductions Allowed
| Clause | Deduction |
|---|---|
| 24(a) | Standard Deduction – 30% of NAV |
| 24(b) | Interest on Borrowed Capital – |
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For self-occupied: Up to ₹2,00,000
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For let-out: Actual interest, no limit (if loan taken for purchase/construction)
Loan must be taken on or after 1st April 1999 for acquisition/construction to claim ₹2 lakh
Section 25: Disallowed Deductions
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Interest on loan not taken for the property
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Capital expenditure
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Personal expenses
Section 26: Co-ownership
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If the property is owned by two or more persons and not used for business, income is divided as per their share in ownership.
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Each co-owner can claim separate deduction.
Section 27: Deemed Ownership
Even if the assesses is not legal owner, he is deemed to be owner in following cases:
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Holder of impartible estate
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Property transferred to spouse or minor child without adequate consideration
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Lessee in long-term lease (≥12 years)
Loss under the Head “Income from House Property”
Sometimes, due to high interest on housing loans, the deductions (under Sec 24) may exceed the income from house property – leading to a loss under this head.
🔻 How does loss arise?
Primarily due to:
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High interest on borrowed capital (especially for self-occupied property)
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Standard deduction of 30%, even on low rental income
Set-off and Carry Forward Rules
1. Set-off within the same Assessment Year (Section 70 & 71)
| Scenario | Treatment |
|---|---|
| House Property Income > 0 | Normal taxation |
| House Property Income < 0 (Loss) | Set-off up to ₹2,00,000 against income under any other head like salary, business, etc. |
🔸 If loss > ₹2,00,000 → balance cannot be set off in the same year.
2. Carry Forward to Future Years (Section 71B)
| Condition | Rule |
|---|---|
| If loss is not fully set off | Carry forward for up to 8 Assessment Years |
| Set-off in future years | Only against Income from House Property (not other heads) |
| Carry forward allowed if return filed on time? | Yes, loss must be declared in the original return filed within due date (u/s 139(1)) |
Example:
A salaried person has:
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Salary income: ₹10,00,000
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Interest on home loan: ₹3,50,000
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Self-occupied property: GAV = NIL
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Rational Objective: The limit of ₹2 lakh was introduced (Finance Act, 2017) to curb tax avoidance through high-interest loans on multiple self-occupied homes.
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Self-occupied homes have a maximum deduction of ₹2 lakh u/s 24(b), so loss usually capped.
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Let-out homes can have higher losses (due to unlimited interest deduction), but still the ₹2 lakh inter-head set-off cap applies.
Landmark Judicial Interpretations
1. East India Housing and Land Development Trust Ltd. v. CIT (1961) 42 ITR 49 (SC)
Principle:
Rental income from property is taxable under “Income from House Property” even if the property is part of the assessee’s business assets.
Facts:
Company owned a market complex and earned rental income.
Held:
Rental income should be taxed under the head “House Property”, not “Business Income” – ownership and nature of use matter, not the business purpose of holding the asset.
2. Sultan Brothers Pvt. Ltd. v. CIT (1964) 51 ITR 353 (SC)
Principle:
Whether income is “House Property” or “Business” depends on composite letting (i.e., letting of building along with services/equipment).
Facts:
Assesses let out a fully furnished building with furniture and amenities.
Held:
If letting of building is inseparable from letting of services/facilities, the income may be taxed as Business Income, not House Property.
But if letting is separable, the building’s rent will be under House Property.
3. Shambhu Investment Pvt. Ltd. v. CIT (2003) 263 ITR 143 (SC)
Principle:
Letting out property with basic amenities does not transform it into business income.
Facts:
Company let out office premises with furniture and ACs; claimed it as business income.
Held:
Since the main intention was to let out property, not to exploit it commercially through business activity, income taxable as House Property, not Business.
4. Chelmsford Club v. CIT (2000) 243 ITR 89 (SC)
Principle:
If a property is used for the owner’s own purpose, and no rent is earned, there is no income chargeable under this head.
Facts:
Club building used for its own purposes—not let out.
Held:
No taxable income arises, as property must be yielding or deemed to yield income for taxation under this head.
5. Keyaram Hotels Pvt. Ltd. v. DCIT (2021) (ITAT Chennai)
Principle:
Hotel rooms let on a daily basis is not house property; it’s a business.
Held:
Short-term room letting in hotels/motels is not covered under House Property but is taxable under Business Income.
6. Raj Dadarkar & Associates v. ACIT (2017) 394 ITR 592 (SC)
Principle:
If the assesses does not own the property, rental income cannot be taxed under House Property.
Facts:
Firm sublet stalls in a municipal market, but did not own the premises.
Held:
Income was not “House Property” as there was no ownership. Assessed under Other Sources or Business.
| Case | Key Principle |
|---|---|
| East India Housing (SC, 1961) | Rental income taxable as House Property, even if business asset |
| Shambhu Investments (SC, 2003) | Letting out office space with amenities is still House Property |
| Sultan Bros. (SC, 1964) | Composite letting rules – separable vs inseparable income |
| Raj Dadarkar & Assoc. (SC, 2017) | Subletting not taxable under House Property without ownership |
| Chelmsford Club (SC, 2000) | If no income generated, no tax under this head |
Article 265 of the Constitution of India
“No tax shall be levied or collected except by authority of law.”
— Article 265, Constitution of India
The Income Tax Act, 1961, enacted by Parliament, provides the legal authority to tax income from house property. Judicial interpretations ensure that taxation is aligned with legislative intent and does not exceed the powers under Article 265.
Rationale: Taxing Notional Income (Deemed Let-out)
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If an assesses owns more than two self-occupied properties, excess properties are deemed to be let out.
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Tax is levied on their notional rental income, even if the property is lying vacant.
Justification:
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Prevents hoarding of property for tax-free use.
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Ensures equitable contribution to tax revenue.
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Encourages productive use of real estate.
Conclusion
The provisions relating to Income from House Property under the Income Tax Act, 1961, reflect the legislature’s intent to tax income not merely based on actual receipt, but also on ownership and potential earning capacity. With clearly defined computation rules, standardized deductions under Section 24, and the concepts of deemed ownership and co-ownership, the law ensures equitable and simplified taxation.
Judicial pronouncements by the Supreme Court and High Courts have played a vital role in clarifying issues such as business use vs letting, ownership vs possession, and the taxability of composite lettings—thereby strengthening the interpretation and application of the law.
Furthermore, the principle of “deemed let-out” embodies a broader fiscal policy to prevent underutilization of property and to bring idle assets within the tax net, supporting a fairer economic order.
Crucially, all of this is underpinned by Article 265 of the Constitution, ensuring that no tax is imposed without the backing of statutory law, thus upholding the rule of law and taxpayer rights.
In essence, the taxation of house property stands as a balanced framework—legally robust, judicially refined, and constitutionally sound—ensuring that real estate ownership contributes meaningfully to the national exchequer while offering clarity and certainty to taxpayers.