Where Rental Income Goes in Your ITR
Rental income from any property you own (residential or commercial) is taxed under the head 'Income from House Property' in the Income Tax Act. It is declared in Schedule HP of ITR-1, ITR-2, or ITR-3 depending on your overall income profile. Most salaried owners with one to three rental properties file ITR-2. The head is treated separately from salary or business income, with its own deductions.
How Taxable Rental Income is Actually Computed
Step 1: determine Gross Annual Value (GAV) — your actual rent received or fair market rent, whichever is higher. Step 2: deduct municipal taxes (property tax) paid during the year. Step 3: that gives you Net Annual Value (NAV). Step 4: claim the 30 percent standard deduction under Section 24(a). Step 5: claim home loan interest under Section 24(b) — capped at ₹2,00,000 per year for self-occupied but uncapped for let-out property. The result is your taxable income from house property.
- →GAV: Actual rent received, or fair market rent, or municipal rateable value — whichever is highest
- →Less: Municipal taxes actually paid (keep receipts)
- →Equals: Net Annual Value (NAV)
- →Less: 30 percent of NAV under Section 24(a) — covers repairs, maintenance, insurance — NO receipts needed
- →Less: Home loan interest under Section 24(b) — unlimited for let-out; ₹2 lakh cap for self-occupied
- →Equals: Taxable 'Income from House Property'
The 30 Percent Standard Deduction is a Gift
Section 24(a) gives every owner a flat 30 percent deduction from NAV — no receipts, no questions, regardless of how much you actually spent on repairs. If your net rent is ₹3,00,000 annually, Section 24(a) takes off ₹90,000 automatically. Many owners think they need to collect repair bills and claim actuals — they do not. The 30 percent is fixed by law and always available. This alone drops the effective tax rate on rental income substantially.
Home Loan Interest: The Big One
If you bought the rental property with a home loan, you can deduct the interest you paid that year under Section 24(b). For let-out property there is no cap. Example: if you pay ₹4,50,000 of home loan interest in FY 2025-26 and your NAV after 30 percent deduction is ₹2,10,000, you report a loss of ₹2,40,000 from house property — which is adjustable against salary income up to ₹2,00,000 per year (cap from Budget 2017). The balance carries forward for 8 years against future HP income. For most loan-funded rental owners, this deduction makes the rental income effectively tax-free or tax-negative.
TDS on Rent: The Tenant's Responsibility
Tenants paying rent above ₹50,000 per month to an individual owner must deduct 5 percent TDS under Section 194-IB, deposit it to the government, and issue Form 16C annually. Companies renting for employee accommodation above ₹2,40,000 per year deduct 10 percent TDS under Section 194-I. As an owner you are the recipient — you will see this TDS credited in your Form 26AS (tax credit statement). When you file ITR, you claim this TDS credit against your final tax liability.
Tenant's HRA Claim: What You Need to Know
Your tenant may ask for your PAN to claim HRA (House Rent Allowance) from their employer. The rule: if annual rent paid exceeds ₹1,00,000, the tenant must quote owner's PAN. Share your PAN as asked — this does not increase your tax liability. But it means the rent is tracked by the tax department, so make sure you actually declare the full rent in your ITR. Mismatch between tenant's HRA claim and your declared rent is one of the easiest red flags for an income tax scrutiny notice.
What Happens If You Do Not Declare Rental Income
Non-disclosure of rental income is tax evasion. The Income Tax Department increasingly cross-checks tenant HRA claims, TDS filed by tenants, registered rental agreements, and society NOCs against owners' declared incomes. Once flagged, you face back-assessment up to 10 years, tax plus interest at 12 percent per annum plus penalty up to 300 percent of tax due. The arithmetic is brutal: ₹3,00,000 per year of undisclosed rent for 5 years becomes a ₹15 lakh problem, not a ₹15 lakh secret.