The Income Tax Act, 1961, classifies income into five heads, one of which is “Income from House Property”. This head pertains to rental income or the notional income derived from owning a property. It applies even when the property is not actually rented out. The rules under this head are unique, as taxation is based not on actual receipt but on “Annual Value”, a notional concept.
Statutory Provision
The statutory provisions relating to Income from House Property are contained in Sections 22 to 27 of the Income Tax Act, 1961. According to Section 22, the annual value of property consisting of buildings or lands appurtenant thereto, of which the assessee is the owner (other than used for business or profession), is taxable under this head.
Basic Conditions for Taxability
The income is taxable under this head only if:
- The property consists of buildings or land appurtenant thereto.
- The taxpayer must be the owner of the property.
- The property should not be used by the owner for business or professional purposes.
How to Determine Annual Value of a Property (Section 23)
Annual Value is the value of a property used to calculate tax under ‘Income from House Property’.
The annual value is:
- The reasonable expected rent from year to year (notional rent), OR
- Actual rent received/receivable, if it is higher than the expected rent.
- If the property was vacant for some time, and actual rent is less than expected rent due to this vacancy, then actual rent will be considered.
Deduction for Property Taxes
- Municipal or local authority taxes paid by the owner are deducted when calculating annual value.
- Only taxes actually paid during the year are allowed (regardless of when they were due).
Unrealised Rent Not Counted
- If some part of the rent cannot be recovered, that amount is excluded from actual rent (subject to rules).
Annual Value of Self-Occupied House
- If the house is used by the owner for own residence, annual value is taken as Nil.
- This also applies if the owner cannot live there due to job/business elsewhere and is staying in a rented property.
When Nil Value is NOT Allowed
- If the house is let out anytime during the year.
- If the owner gets any benefit (like rent) from the house.
Multiple Self-Occupied Houses
Up to 2 Houses Allowed as Self-Occupied
- An owner can treat up to 2 houses as self-occupied (option to choose).
- Annual value will be Nil for those 2 houses.
- For other houses: Annual value will be calculated as if let out [i.e., using Section 23(1)].
Property Held as Stock-in-Trade (Builders/Developers)
Annual Value = Nil for Unsold Inventory
If the property is held as stock-in-trade (e.g., by builders) and is not let out, then:
- Annual value = Nil for up to 2 years from the end of the financial year in which the completion certificate is received.
Dedications Allowed (Section 24)
Only two deductions are permitted:
(a) Standard Deduction
30% of the Net Annual Value (NAV)
(b) Interest on Borrowed Capital
- Self-occupied property: Deduction up to ₹2,00,000 under Section 24(b)
- Let-out property: Full interest is deductible, subject to overall loss limit of ₹2,00,000 under head ‘Income from House Property’ (as per Section 71(3A) inserted by Finance Act 2017)
Tax on Arrears and Unrealised Rent (Section 25A)
If an assessee receives arrears of rent or previously unrealised rent in a later financial year, such amount is taxable as “Income from House Property” in the year it is received, even if the person is no longer the owner of the property in that year.
Deduction Allowed: 30% of such amount received can be claimed as a standard deduction.
Income from Property Owned by Co-owners (Section 26)
When a property is jointly owned by two or more persons with definite and ascertainable shares, each co-owner will be taxed individually on their respective share of income from the property, not as an Association of Persons (AOP).
Each co-owner is entitled to the same reliefs under Section 23(2) as if they owned the property independently.
Deemed Ownership [Section 27]
Ownership is not restricted to legal title. It includes:
- Transfers to spouse or minor child
- Holder of an impartible estate
- Member of a co-operative society or company allotted a flat
- Possession under part performance of a contract [Section 53A of Transfer of Property Act]
Landmark Case
Commissioner of Income-Tax, Bombay v. Podar Cement Pvt. Ltd. (1997)
In this landmark judgment, the Supreme Court of India clarified the interpretation of the term “owner” under Section 22 of the Income Tax Act, 1961, which deals with “Income from House Property.” The core issue was whether income from property can be taxed under Section 22 when the assessee is not the legal owner (i.e., no registered title deed), but has possession and enjoyment of the property due to payment of full consideration and possession under an agreement. The Court held that for taxation under Section 22, the term “owner” includes a person who has the property and receives income from it in their own right, even if no registered sale deed exists.
The ruling emphasised that ownership under the Income Tax Act must be interpreted in light of economic reality and beneficial ownership, not strictly legal title. The Court upheld the views of the High Courts of Patna, Punjab & Haryana, and Rajasthan, and overruled contrary views of the Delhi and Bombay High Courts. It further recognised the 1988 amendment to Section 27 as clarificatory, thus giving it retrospective effect.
This judgment significantly expanded the scope of “ownership” for tax liability on house property income, aligning it with the practical enjoyment and income rights of the property holder.
Key Changes in Budget 2025
Two Self-Occupied Homes Allowed: Taxpayers can now declare any two house properties as self-occupied, with no deemed rental income applied.
Simplified Tax Filing: No need to provide reasons for the second house being unoccupied; less compliance hassle.
Effective From: Applicable from April 1, 2025, i.e., Assessment Year 2025–26 onwards.
Conclusion
Income from house property remains a crucial and well-structured head under the Income Tax Act, 1961. It is unique in that it taxes not just actual rental income but also notional income, ensuring that property ownership does not become a vehicle for tax avoidance. The law is clear in its scope—only buildings or land appurtenant thereto are covered, and only owners are liable to pay tax under this head.
Despite its simplicity, taxpayers often overlook critical details, such as how to compute Annual Value, what deductions are allowed under Section 24, and the implications of deemed ownership. Proper tax planning—such as choosing co-ownership, utilising housing loans efficiently, and understanding the rules for self-occupied and let-out properties—can significantly reduce tax liability.
A clear understanding of the provisions under Sections 22 to 27 can help individuals and businesses alike manage their real estate investments in a compliant and tax-efficient manner. As the legal and financial landscape evolves, staying informed and aligned with the Income Tax Act ensures both savings and peace of mind.
References
[1] Income Tax Act, 1961
[2] CIT Bombay v. Podar Cement Pvt. Ltd. AIR 1997 SC 2523
[3] Budget 2025-2026, Available Here
[4] Handbook on FAQ’s on House Property under Income-tax Act 1961, Available Here
[5] Income tax rules for house property simplified in Budget 2025, Available Here