Rental Income Tax in India: How to Calculate and Report in ITR for AY 2026-27

If you own property in India and earn rent from it, that income is taxable under the head "Income from House Property." Whether you have a single flat rented out or multiple properties, understanding how rental income is computed and reported can save you significant tax — and keep you compliant.

This guide covers everything you need to know about rental income taxation for AY 2026-27 (FY 2025-26), including the Net Annual Value calculation, deductions available, the concept of deemed let-out property, and how to report it correctly in your ITR.

How Rental Income Is Classified Under Income Tax

Rental income does not fall under "Income from Other Sources." The Income Tax Act specifically classifies it under "Income from House Property" (Sections 22 to 27). This distinction matters because the computation method and allowed deductions are different from other income heads.

Three key points to note:

• The owner of the property is the one taxed, not the person receiving the rent
• "Owner" means the legal owner — if the property is in your spouse's name, it's taxed in their hands
• Rental income from subletting (where you're a tenant, not owner) is taxed under "Income from Other Sources," not this head

Step-by-Step Calculation of Taxable Rental Income

The taxable amount from house property is called Net Annual Value (NAV). Here's how it's computed:

Step 1: Determine Gross Annual Value (GAV)

The GAV is the higher of:

• Actual rent received (or receivable) during the year
• Fair rental value — what a similar property in the same locality would reasonably fetch

However, if the property is covered under the Rent Control Act, the standard rent under that act becomes the ceiling.

Example: You own a 2BHK in Bangalore and rent it out for ₹25,000/month. The actual rent received is ₹3,00,000 for the year. The municipal valuation suggests a fair rental value of ₹2,80,000. The GAV is ₹3,00,000 (the higher of the two).

Step 2: Deduct Municipal Taxes Paid

Subtract any municipal taxes actually paid by the owner during the financial year. Only taxes paid during the year count — not taxes due but unpaid.

Example: You paid ₹12,000 in property tax to BBMP during FY 2025-26.

GAV minus municipal taxes = ₹3,00,000 − ₹12,000 = ₹2,88,000 (this is the Net Annual Value)

Step 3: Claim Standard Deduction (30%)

A flat 30% standard deduction on the Net Annual Value is allowed under Section 24(a). This covers all maintenance and repair expenses — you cannot claim actual repair costs separately.

Standard deduction = 30% of ₹2,88,000 = ₹86,400

Step 4: Deduct Home Loan Interest Under Section 24(b)

If you took a loan to purchase or construct the rented property, the entire interest paid during the year is deductible. Unlike self-occupied property (which has a ₹2,00,000 cap), there is no upper limit on interest deduction for let-out property.

Example: You pay ₹1,80,000 in home loan interest during FY 2025-26.

Final Computation

From ₹3 lakh of rent received, only ₹21,600 is taxable. That's the power of understanding the deductions available.

What If Your Property Is Vacant? The Deemed Let-Out Rule

Here's where many property owners get tripped up. If you own more than two house properties, you can designate up to two as self-occupied (with zero GAV). Every additional property is treated as deemed to be let out — even if it's sitting vacant.

For deemed let-out property:

• The GAV is the fair rental value (what it could reasonably fetch if rented)
• You still get the 30% standard deduction and Section 24(b) interest deduction
• You're taxed on this notional income even though you received no rent

Example: Rahul owns three flats. He lives in Flat A, keeps Flat B for his parents (no rent), and Flat C is also vacant. He can treat Flats A and B as self-occupied. Flat C is deemed let-out. If the fair rental value of Flat C is ₹20,000/month, Rahul has a GAV of ₹2,40,000 from Flat C — taxable under house property, even with zero actual rent.

Loss from House Property: Can It Reduce Your Tax?

Yes. If your home loan interest exceeds your Net Annual Value after the standard deduction, you end up with a loss from house property. This loss can be set off against other income (like salary) up to ₹2,00,000 per year.

Any loss exceeding ₹2 lakh can be carried forward for up to 8 assessment years and set off against future income from house property.

Example: Priya has a let-out property with NAV of ₹1,50,000. After the 30% standard deduction (₹45,000), the balance is ₹1,05,000. Her home loan interest is ₹3,50,000. The loss from house property is ₹1,05,000 − ₹3,50,000 = (₹2,45,000). She can set off ₹2,00,000 against her salary income this year and carry forward ₹45,000 to future years.

This is a legitimate and powerful tax-saving strategy for salaried individuals with home loans on rented property.

Rental Income Under Old Regime vs New Regime

Both the old and new tax regimes allow the standard deduction of 30% and the Section 24(b) interest deduction. However, the key difference lies in how the loss from house property is treated:

If rental income and house property loss are your primary tax-planning tools, both regimes work similarly. The regime choice depends more on your other deductions. For a detailed comparison, see our guide on old vs new tax regime.

Co-Owned Property: How Rental Income Is Split

If a property is jointly owned, each co-owner is taxed on their share of the rental income in proportion to their ownership. Each co-owner independently computes their GAV, claims the 30% standard deduction, and deducts their share of home loan interest.

Example: A husband and wife jointly own a flat (50:50) that earns ₹40,000/month in rent. Each reports ₹2,40,000 as their GAV and claims deductions separately. This effectively splits the tax burden and can result in lower overall tax if one spouse is in a lower tax bracket.

TDS on Rent: Section 194-I and Section 194-IB

If your tenant is a business entity, they must deduct TDS on rent:

• Section 194-I: When a business or professional pays rent exceeding ₹2,40,000 per year, TDS at 10% is deducted (for land/building/furniture). This TDS will appear in your Form 26AS and AIS.
• Section 194-IB: Individual or HUF tenants (not covered under tax audit) must deduct TDS at 5% if monthly rent exceeds ₹50,000. They deduct TDS only once, in the last month of the tenancy or the last month of the financial year, whichever is earlier.

Make sure the TDS deducted matches your Form 26AS before filing. Mismatches are one of the most common reasons for income tax notices.

Unrealised Rent: What If the Tenant Doesn't Pay?

If your tenant defaulted and you couldn't collect rent despite reasonable efforts, you may be able to exclude "unrealised rent" from your GAV. The conditions under Rule 4 are:

1. The tenancy was genuine (bona fide)
2. The default wasn't by a person occupying another property of yours
3. You've taken reasonable steps to recover the amount (legal proceedings, etc.)
4. The defaulting tenant has vacated the property or steps have been taken to evict them

If these conditions are met, the unrealised rent is excluded from your GAV, reducing your taxable income from house property.

Which ITR Form to Use for Rental Income

If you have rental income, you must file at least ITR-1 or ITR-2 depending on your situation:

• ITR-1 (Sahaj): If your total income is under ₹50 lakh, you have salary income, one house property, and other sources — you can use ITR-1. However, if you have a loss from house property to carry forward, ITR-1 won't work.
• ITR-2: Required if you have more than one house property, capital gains, or need to carry forward a house property loss.

Many taxpayers with rental income find that ITR-2 is the safer choice. 49Tax's AI-powered platform can automatically determine which form you need based on your income sources and guide you through reporting house property income correctly.

Common Mistakes to Avoid

1. Not reporting rental income at all. The tax department cross-references property registrations, TDS on rent, and bank deposits. Omitting rental income is risky.
2. Claiming actual repair costs instead of the 30% standard deduction. You cannot claim both — the standard deduction is a flat 30% regardless of actual expenses.
3. Ignoring deemed let-out rules. If you own three or more properties, at least one will be deemed let-out. Not reporting this notional income is a common oversight.
4. Forgetting pre-construction interest. If you paid interest during the construction period of a property, you can claim it in 5 equal instalments starting from the year the construction is completed. Many people forget this deduction entirely.
5. Mismatched rent amounts. If your rental agreement says ₹30,000/month but you report ₹20,000/month, the discrepancy can trigger a notice — especially if the tenant is claiming HRA exemption based on the full amount.

Key Takeaway

Rental income taxation follows a structured formula — GAV minus municipal taxes, minus 30% standard deduction, minus home loan interest. The rules are actually favourable to property owners: the unlimited interest deduction on let-out property and the ability to set off losses up to ₹2 lakh against salary income make real estate one of the more tax-efficient asset classes. The most important thing is to report it correctly and claim every deduction you're entitled to. If you own multiple properties or have complex loan structures, take the time to compute each property separately — or let 49Tax handle the calculations for you.