Income From House Property under Income Tax Act 2025

INCOME FROM HOUSE PROPERTY

EXECUTIVE SUMMARY

Income from house property is a unique head of income under the Income Tax Act where taxability is primarily driven by the “Annual Value” of the asset rather than actual receipts alone. The fundamental chargeability rests on ownership and the existence of a building or land appurtenant thereto. This article explores the core legal provisions, the statutory framework for deductions, providing a level playing field for taxpayers and practitioners.

CHARGEABILITY [ SECTION 20 (ERSTWHILE SECTION 22 OF INCOME TAX ACT 1961)]

CHARGEABILITY OF PROPERTY INCOME

As per Section 20(1) of the Income tax Act 2025 prescribed that the annual value of property consisting of any buildings or lands appurtenant thereto, owned by the assessee, is chargeable to income-tax under the head “Income from House Property.”

This means that even if the property is not let out, its notional rental value (annual value) is considered taxable income. Ownership itself creates liability, regardless of whether the property is actively generating rent. The Annual value is the amount for which the property might reasonably be expected to Let out from year to year.

2. Exception for Business or Professional Use

As Section 20(2) of the act provides that  an important relief. If the assessee occupies any portion of the property for their own business or profession, the annual value of that portion is not chargeable to tax under “Income from House Property.” Instead, such use is treated as part of the business or professional activity, and profits arising therefrom are taxed under the head “Profits and Gains of Business or Profession.”

3. Essential conditions for taxing income under head income from house Property.

• There must be a property which consist of building and land appurtenant there to.
• Assessee must be the owner of such Property
• Taxable value is Annual Value
• If a property is used for own Business (or) Profession then Such property is excluded from charging section

Important Terms uses in Section 20(1) & 20(2) of the income tax Act 2025.

Meaning of property

Here Property means Building or Land Appurtenant there to. Thus, if building along with land has been let out then income shall be taxable under this head. But if only land has been let out then Income shall be taxable under the head other sources.

Meaning of Land Appurtenant

Land Appurtenant refers to the land that is naturally and necessarily connected to a building for its convenient and functional enjoyment. It includes areas like courtyards, parking spaces, gardens, and driveways that form an integral part of the property structure for example A homeowner rents out a bungalow along with its attached private garden and driveway; since these areas are essential for the resident’s use, they are taxed as part of the house property.

Meaning of ownership

Here ownership includes legal ownership & Deemed ownership U/s 25 of income tax Act 2025 (erstwhile section 27 of income tax act 1961). If Assessee is identified as a Deemed owner, then Income from House Property shall be taxable in the hands of such Deemed owner instead of legal owner.

MEANING OF DEEMED OWNERSHIP [ SECTION 25 (ERSTWHILE SECTION 27 of income tact act 1961)]

Section 25 of the Act expands the meaning of the term “owner” by including certain persons who may not be the legal owners but are treated as deemed owners for taxation purposes. This provision prevents tax avoidance and ensures that income is taxed in the hands of the person who effectively enjoys the property.

“Deemed ownership” ensures that person who enjoys the economic benefits of a property is held responsible for its legal and tax obligations. even if legal title lies elsewhere.

Categories of Deemed Owners

Section 25 specifies five categories of persons who shall be treated as owners for the purpose of computing income from house property for the purpose of sections 20 to 24 of income tax Act 2025.

Transfer of property to spouse without consideration [ Section 25(a)]

In case of transfer of house property by an individual to his or her spouse otherwise than for adequate consideration, the transferor is deemed to be the owner of the transferred property.

Transfer of property to a minor child other than Married Daughter [ Section 25(a)]

In case of transfer of house property by an individual to his or her minor child otherwise than for adequate consideration, the transferor would be deemed to be owner of the house property transferred however In case of transfer to a minor married daughter, the transferor is not deemed to be the owner

Exception of Section 25(A)

In case of transfer to spouse in connection with an agreement to live apart, the transferor will not be deemed to be the owner. The transferee will be the owner of the house property.

HOLDER OF AN IMPARTIBLE ESTATE [SECTION 25(B)] 

The impartible estate is a property which is not legally divisible among family members. The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate. A ruler inherits an impartible estate under a government grant. The entire income from the estate will be taxed in his individual capacity.

MEMBER OF A CO-OPERATIVE SOCIETY ETC. [SECTION 25(C)]

Section 25(c)  of the act provides that where a building or any part thereof is allotted or leased to a member of a co-operative society, company, or any other association of persons under a house building scheme, such member shall be deemed to be the owner of the property for the purposes of taxation under the head “Income from House Property.” In such cases, although the legal ownership of the property may technically vest with the society or company, the beneficial ownership and enjoyment rest with the member or allottee. Accordingly, the income from such property is taxable in the hands of the member and not in the hands of the society or association.

PERSON IN POSSESSION OF A PROPERTY [SECTION 25(D)]

Section 25(d) of the Act provides that A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act shall be the deemed owner of that house property. This would include cases where the – 1. Possession of property has been handed over to the buyer 2. Sale consideration has been paid or promised to be paid to the seller by the buyer 3. Sale deed has not been executed in favour of the buyer, although certain other documents like power of attorney/agreement to sell/will etc. have been executed. In all the above cases, the buyer would be deemed to be the owner of the property although it is not registered in his name.

PERSON HAVING RIGHT IN A PROPERTY FOR A PERIOD NOT LESS THAN 12 YEARS [SECTION 25(E)]

Section 25(e) extends the concept of deemed ownership to a person who acquires substantial rights in a property, even though legal ownership may not formally pass to him. It provides that where a person acquires any rights in or with respect to any building or part thereof—other than rights arising from a short-term lease (i.e., month-to-month or for a period not exceeding one year)—such person shall be treated as the deemed owner for the purposes of taxation under the head “Income from House Property.”

This provision primarily covers two broad situations. First, where rights are acquired through transfer by way of sale, exchange, or a long-term lease of not less than twelve years (including extendible leases), the transferee is regarded as the owner. A long-term lease, in substance, transfers the economic control and enjoyment of the property to the lessee, and therefore, the law treats such lessee as the owner for tax purposes. Secondly, the provision also covers cases where rights arise through any arrangement or transaction, such as becoming a member of a co-operative society, acquiring shares in a company, or entering into any agreement that effectively grants possession and enjoyment of the property. Even if such arrangement is not a formal sale, exchange, or lease, it will still result in deemed ownership if it confers the right to use and enjoy the property.

The underlying objective of this clause is to prevent tax avoidance through structured transactions where legal ownership is retained by one person, but possession, control, and benefits are transferred to another. By focusing on the substance of the transaction rather than its legal form, the law ensures that the person who actually enjoys the property is taxed accordingly.

For example, where an individual enters into a long-term lease agreement of 15 years for a commercial property and derives rental income by sub-letting it, such individual will be treated as the deemed owner, and the income will be taxable in his hands under the head “Income from House Property.” Similarly, where a person acquires rights in a flat through a shareholding arrangement in a company that grants exclusive possession and enjoyment, such person will also be regarded as the owner for tax purposes.

 Summary Chart:- Categories of Deemed Owners

 DETERMINATION OF ANNUAL VALUE SECTION 21(ERSTWHILE SECTION 23 of income tact act 1961)]

Section 21 of the act lays down the fundamental rule for determining the Annual Value of a property for the purpose of taxation under the head “Income from House Property.” The Annual Value represents the inherent earning capacity of the property and forms the basis for computing taxable income.in determination the annual value there are four factors which are normally taken into considerations. While determining the Annual Value, certain key factors are generally taken into account to arrive at a fair and reasonable figure. These include:

• Actual rent received or receivable,
• Municipal valuation,
• Fair rent of the property, and
• Standard rent (where applicable under rent control laws).

These elements help in assessing the realistic rental value of the property and ensure that the income is neither understated nor overstated for taxation purposes.

House Property which is let throughout the tax year (Section 21(1))

Step-1: – Determine the gross annual value: –

For the purposes of section 20, the annual value of any property shall be deemed to be the higher of the following: —

• the sum for which it might reasonably be expected to let from year to year; or
• the actual rent received or receivable by the owner, if the property or any part of it is let.

The intention behind adopting the higher of the two values is to ensure that the taxpayer does not understate income by letting out the property at an artificially low rent. At the same time, if the actual rent is higher than the expected rent, the higher actual rent will be taken as the basis of taxation.

 Step-2: – Taxes Levied by any local authority in respect of the property ( Section 21(3)

Section 21(3) of the Act provides that while computing the Annual Value of a property, a deduction shall be allowed for municipal taxes (including service taxes) levied by a local authority, provided such taxes are actually paid by the owner during the tax year. The crucial point is that the deduction is allowed only on payment basis, irrespective of the year in which the liability to pay such taxes arose. Thus, even if the taxes pertain to earlier years, they can be claimed as a deduction in the year in which they are actually paid, thereby reducing the taxable Annual Value.

Notes: After determining the Net Annual Value (NAV) by deducting municipal taxes actually paid from the Gross Annual Value, further deductions are allowed under Section 22(a) and 22(b) (corresponding to the erstwhile Sections 24(a) and 24(b) of the Income-tax Act, 1961). These include the standard deduction of 30% and interest on borrowed capital, subject to prescribed limits. The amount remaining after these deductions represents the taxable income under the head “Income from House Property.”

Determination of Annual Value for Vacant Properties (Section 21(2)

 According to Section 21(2) (formerly Section 23(1)(c) of the Income Tax Act, 1961), the law provides a critical relief for property owners who lose rental income due to a vacancy As per this provision, where the property or any part of it is let and was vacant during the year, and due to such vacancy the actual rent received or receivable is less than the expected rent (as determined under Section 21(1)(a), i.e., reasonable expected rent), then the actual rent received or receivable shall be deemed to be the annual value of the property. In simple terms, the law recognizes that vacancy is a genuine hardship and ensures that the owner is not taxed on notional income which was never earned due to the property remaining vacant.

Treatment of Unrealized Rent in the Computation of Actual Rent(Section 21(4))

Section 21(4) provides that while computing the annual value of a property, the rent which cannot be realised by the owner shall be excluded from the actual rent received or receivable. This relief is, however, subject to the fulfilment of conditions prescribed under Rule 21. As per Rule 21(formerly rule 4), unrealised rent refers to rent which was legally receivable but could not be recovered from the tenant and is proved to be irrecoverable. For claiming such deduction, the following conditions must be satisfied: the tenancy must be genuine (bona fide); the defaulting tenant must have vacated the property or the owner has taken steps to evict him; the tenant should not be occupying any other property of the assessee; and the assessee must have taken all reasonable steps to recover the rent, including initiating legal proceedings, or demonstrate that such action would be useless. Only when all these conditions are met, the unrealised rent is excluded from taxable rental income, ensuring that tax is levied only on income actually realizable.

This provision ensures that the taxpayer is not burdened with tax on income which has not been actually received and is not recoverable.

Annual Value of Unsold Inventory (Stock-in-Trade) Held by Builders – Deemed Nil Provision (Section 21(5)(erstwhile section 23(5) of income taxt act 1961)

Section 21(5) provides relief to builders and real estate developers in respect of unsold inventory held as stock-in-trade. As per this provision, where a property (or part thereof) is held as stock-in-trade and is not let out at any time during the tax year, its annual value shall be taken as nil for a period of up to two years from the end of the financial year in which the completion certificate is obtained from the competent authority. This means that during this specified period, the developer is not required to pay tax on notional rental income for such unsold units. However, after the expiry of this two-year period, if the property still remains unsold and not let out, its annual value will be determined as per normal provisions, and notional rent may become taxable.

Deductions from Income from House Property (Section 22)

Section 22(1) of the act provides the manner of computation of income under the head “Income from house property” by allowing specified deductions from the annual value determined under Section 21. The first and most significant deduction is a standard deduction of 30% of the annual value under clause (a), which is allowed irrespective of the actual expenses incurred by the assessee. This deduction covers expenses such as repairs, maintenance, and collection charges, and no separate claim for these expenses is permitted.

Further, under clause (b), a deduction is allowed in respect of interest payable on borrowed capital where the property has been acquired, constructed, repaired, renewed, or reconstructed using such borrowed funds. This ensures that the cost of financing the property is recognized while computing taxable income. Additionally, clause (c) deals with pre-construction or pre-acquisition interest, i.e., interest payable for the period prior to the year in which the property is acquired or constructed. Such interest is not allowed as a lump sum deduction; instead, it is permitted in five equal instalments, starting from the year in which the construction is completed or the property is acquired, and continuing for the next four succeeding tax years.

Restriction on Interest Deduction for Self-Occupied Property [Section 22(2)]

Section 22(2) places a limit on the deduction of interest on borrowed capital in respect of self-occupied properties referred to in Section 21(6), where the annual value is taken as nil. In such cases, the aggregate deduction under Section 22(1)(b) and (c), i.e., interest on borrowed capital including pre-construction interest, shall be restricted to a maximum of ₹2,00,000, subject to certain conditions. These conditions include that the property must be acquired or constructed out of borrowed capital, such acquisition or construction should be completed within five years from the end of the tax year in which the capital was borrowed, and the assessee must furnish a certificate from the lender specifying the amount of interest payable.

In cases where these conditions are not satisfied, the maximum deduction allowable is restricted to ₹30,000 only. This lower limit generally applies where the loan is taken for repairs, renewal, or reconstruction, or where the construction is not completed within the prescribed time limit.

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Further Provisions Relating to Interest Deduction – Section 22(3) to 22(6)

Section 22(3) clarifies that the deduction in respect of pre-construction interest under Section 22(1)(c) shall be allowed only after reducing any portion of such interest which has already been claimed as a deduction under any other provision of the Act. This ensures that the same interest amount is not claimed twice, thereby avoiding double deduction.

Section 22(4) prescribes the particulars to be mentioned in the certificate required for claiming interest deduction. Such certificate, issued by the lender, must specify the amount of interest payable on the original borrowed capital and also the interest payable on any subsequent loan taken for repayment of the original loan. This is relevant in cases where the assessee refinances or restructures the loan.

Section 22(5) further provides that in case of self-occupied properties covered under Section 21(6), the aggregate deduction of interest under Section 22(2) shall not exceed ₹2,00,000, even if the assessee owns more than one such property. Thus, the overall cap applies collectively and not property-wise.

Lastly, Section 22(6) deals with interest payable outside India. It provides that such interest shall not be allowed as a deduction if tax has not been deducted or paid in accordance with the provisions of Chapter XIX-B, and there is no agent of the recipient in India as per Section 306. This provision ensures compliance with tax withholding requirements and prevents allowance of deductions in cases of non-compliance.

Together, these provisions regulate the allowability, documentation, and limits of interest deductions to ensure proper and fair computation of income from house property.

 Quick Reference Summary – Determination of Annual Value

Arrears of Rent and Unrealised Rent Received Subsequently (Section 23) (erstwhile section 25A of income act 1961)

Section 23 deals with the taxation of arrears of rent and unrealised rent that is recovered in a later year. As per sub-section (1), any arrears of rent received or any unrealised rent subsequently realised from a tenant shall be deemed to be income from house property in the tax  year of receipt, irrespective of the year to which such rent relates. Sub-section (2) further clarifies that such income shall be taxable under the head “Income from house property” even if the assessee is not the owner of the property in the year of receipt, which means ownership in the year of taxation is not a requirement for taxing such receipts.

Further, to provide relief, sub-section (3) allows a standard deduction of 30% of such arrears or unrealised rent, and no other deduction is permitted against such income.

 Property Owned by Co-owners [Section 24 (erstwhile Section 26)]

Section 24 provides that where a property is owned jointly by two or more persons and their respective shares are definite and ascertainable, such co-owners shall not be assessed as an Association of Persons (AOP). Instead, the income from the property shall be computed separately for each co-owner in accordance with their respective share, and such share of income shall be included in their individual total income under the head “Income from house property.” This ensures that taxation is done at the individual level rather than collectively.

Further, as per sub-section (2), each co-owner is entitled to claim the benefit of self-occupied property under Section 21(6) individually, as if he were the sole owner of the property. Thus, the relief of nil annual value (subject to the limit of two houses) is available separately to each co-owner.