How To Save Tax On Rental Income: Latest Rules and Strategies (2025)

Having a property and earning rent from it is a great secondary income source. However, as per the Indian Income Tax Act, rental income is also taxable, just like you have to pay tax on your salary, business revenue, and earnings from other sources of income. Read the blog further to know about all the taxation rules applicable for the financial year 2024-25 (assessment year 2025-26). Learn about all the applicable deductions and exemptions and how to calculate taxable rental income from house property.

Table of Contents

• Income Tax on Rental Income
• Basics of House Property Tax
• Types of Properties Not Covered Under the Rental Income Computation
• Calculate the Gross Annual Value of a Let-out Property
• Compute Taxable Income from House Property
• Tax Slabs for Income from House Property
• Other Applicable Tax Deductions
• Conditions to Claim Deductions on Home Loan
• Exclusions to Income from House Property
• Strategies to Save Tax on Rental Income
• Recent Changes in Rental Income Taxation
• Using Rental Income Tax Calculators

Understanding Income Tax on Rental Income

The income tax on rental income is calculated based on the annual rental earnings from your property. This income is added to your total taxable income and taxed according to your income tax slab rate. The rental income tax rate depends on your total income and can range from 5% to 30%.

Basics of House Property Tax

Before we delve into the computation of income from house property, let us first understand the fundamentals of house property tax:

1. Self-Occupied Property

A self-occupied property is one where the owner resides and doesn’t rent it out. The Gross Annual Value (GAV) of such a property is assumed to be zero, and there is no taxable income from it. However, the owner is eligible for a deduction of up to ₹ 2,00,000 for interest on a home loan under Section 24(b).

2. Let Out House Property

A let-out property is one that the owner has rented out to tenants. The income from house property is taxable, and the tax is calculated as per the Gross Annual Value (GAV) of the property.

3. More Than Two or Inherited Property

Notably, a house property, in addition to 2 self-occupied properties, is deemed as a rent-out property, regardless of whether it’s rented out. Therefore, the owner has to pay tax on it.
In simple words, if you own more than two house properties, only two properties can be self-occupied, and the third or more properties are treated as a ‘deemed let-out’ property for tax purposes.
Similarly, inherited property (one that is bequeathed from parents or anyone from the family) can be self-occupied and let out as discussed above. Accordingly, a tax on rental income will be levied.

Suggested read: Security Deposits in Rent Agreement

Types of Properties Not Covered Under the Rental Income Computation

Owners should remember that only income from habitable property is taxed under Sections 22 and 24 of the Income Tax Act. Income generated from renting out vacant land is taxed under the category ‘Income from Other Sources.

1. Self-Occupied Properties: Used by the owner for residence.
2. Vacant Properties: Not rented out during the year.
3. Business/Professional Use: Used for the owner’s business or profession.
4. Agricultural Land: Used for agricultural purposes.
5. Government Properties: Owned or leased by the government.
6. Inheritances/Gifts: Not rented out or generating income.
7. Charitable Properties: Used by registered charitable organizations.

Also read our latest web story on How to Save Tax on Rental Income: https://www.basichomeloan.com/blog/web-stories/save-tax-on-rental-income

How to Calculate the Gross Annual Value of a Let-out Property?

The Gross Annual Value (GAV) of the property is required for the computation of income from house property. The GAV of the property is the highest of the following:

1. The actual rent received
2. The expected rent based on similar properties in the locality
3. The rent assessed by the local authorities (municipal valuation)
4. Standard rent as per the Rent Control Act

Suggested read: 11-Month Lease Agreement

How to Compute Taxable Income from House Property?

To compute taxable income from house property, the GAV of the property is required. Certain deductions and exemptions are allowed on the rental income from house property by the government, after which the final taxable income is calculated. The following are the steps to calculate the income from house property for income tax purposes:

Step 1: Compute Gross Annual Value (GAV)

As discussed above, the GAV of a house property is the higher of the following:

• Actual rent
• Expected rent – municipal valuation or fair rental value. However, it should be limited to standard rent as per the Rent Control Act.

The GAV of the self-occupied property is taken as zero.

Step 2: Deduct Municipal Taxes Paid

The municipal taxes paid to the local authority during the year are deducted from the GAV of the property to arrive at the Net Annual Value (NAV).

Step 3: Deduct Standard Deductions & Interest Paid on Home Loan

As per the Indian Income Tax Act, a standard deduction of 30% and interest on home loans are allowed on the income from house property.

• 30% Standard Deduction: A flat 30% deduction is allowed on the Net Annual Value (NAV) of the house property under Section 24(a). This deduction is allowed to cover repairs, maintenance, and other property-related expenses.
• Interest on Home Loan: If the owner has availed a loan on the let-out property, he is allowed a deduction for the interest paid toward the loan under Sector 24(b). Notably, for self-occupied properties, the maximum deduction is ₹2,00,000 per annum.

Step 4: Net Taxable Income

After subtracting the deductions and exemptions discussed above, the remaining amount is deemed to be the net income from the house property, which is subject to the applicable income tax slab rates.

Please note that all the deductions discussed above can only be claimed under the old tax regime only. Also, that the property owners can only get deductions of up to ₹200,000 on home loan interest for self-occupied properties. However, there is no limit on the deduction for let-out properties.

Suggested read: Home Loan vs. Renting

Tax Slabs for Income from House Property

Old Tax Regime

 

New Tax Regime

 

Taxpayers are eligible for a rebate of up to 100% of income tax, subject to a maximum limit depending on tax regimes.
Please note: The above-mentioned tax slabs are only applicable for individuals less than 60 years of age.

Other Applicable Tax Deductions

1. Tax Deduction on Principal Repayment

Under Section 80C, a house owner can claim up to ₹1,50,000 for the principal repayment of home loans. However, this deduction is only applicable under the old tax regime.

2. Tax Deduction for First-Time Homeowners

Under Section 80EE, a homeowner can claim:

• An additional deduction of ₹50,000 for home loan interest is allowed
• The home loan amount must be ₹35 lakh or less, and the property value should be ₹50 lakh or less
• This deduction is only applicable to first-time buyers

Under Section 80EEA, a homeowner can claim:

• An additional deduction of ₹1,50,000 for home loan interest is allowed
• The home loan must have been sanctioned between April 1, 2019, and March 31, 2022
• The property value should be ₹45 lakh or less
• This deduction is available for first-time homebuyers only

3. HRA and Deduction on Home Loan

If the homeowner lives in a rented house but owns another property, he can claim both:

• House Rent Allowance (HRA) under salary benefits
• Home loan deductions under Sections 24, 80C, and 80EE/80EEA

However, the taxpayer must be living in rented accommodation in the city where he works. And he must have availed a loan for a property in a different city where his family resides.

4. Tax Deductions in case of Joint Ownership

If the home loan is availed jointly, the owners can claim the following deductions:

• Each of the co-owners can claim a ₹ 2,00,000 deduction on interest (Section 24)
• Both co-owners can claim ₹ 1,50,000 deduction on principal repayment (Section 80C)
• Please note that this effectively doubles the tax benefits if both co-owners have taxable income.

Conditions to Claim Deductions on Home Loan

The following are the conditions to claim home loan deductions on house property:

• The homeowner must have availed the loan from a recognized lender, bank, NBFC (Non-Banking Financial Institution), HFC (Housing Finance Company), etc.
• The homeowner must maintain loan repayment receipts and interest certificates.
• The homeowner can file the deduction claims while filing income tax returns (ITR).

Exclusions to Income from House Property

The following are certain exclusions that can’t be claimed as a deduction under house property income tax:

• Agricultural land and farmhouses
• Vacant land without any construction
• Property used for business or a profession
• Rental income from letting (tax on rental income is taxed under ‘Income from Other Sources)

Strategies to Save Tax on Rental Income (2025)

1. Claim Standard Deduction: The Income Tax Act allows a standard deduction of 30% on the NAV of your rental income. This deduction is available irrespective of your actual expenses on the property.
   Example: If your NAV is ₹5,00,000, you can claim a deduction of ₹1,50,000 (30% of ₹5,00,000).
2. Deduct Municipal Taxes: Municipal taxes paid during the financial year can be deducted from the GAV to arrive at the NAV. Ensure you keep records of all property tax payments.
3. Home Loan Interest Deduction: If you have taken a loan to purchase or construct the rental property, you can deduct the interest paid on the loan from your rental income. There is no upper limit on the amount of interest that can be claimed as a deduction for rental properties.
   Example: If you paid ₹2,00,000 as interest on a home loan, this amount can be deducted from your rental income.
4. Joint Ownership: If the rental property is jointly owned, the rental income can be divided among the co-owners based on their ownership share. This can help in reducing the tax liability as the income gets divided.
5. HRA and Rental Income: If you live in a rented house and also earn rental income from another property, you can claim the House Rent Allowance (HRA) exemption. This helps in reducing your overall taxable income.
6. Maintenance and Repair Costs: While the standard deduction covers maintenance and repair, significant renovations or structural repairs can be claimed separately if they are not covered under the standard deduction. Ensure you maintain proper documentation for these expenses.

Recent Changes in Rental Income Taxation: Budget 2024-25 Announcements

1. Simplified Filing: The Government of India has introduced a simplified process for filing rental income. Make sure to use the updated ITR forms for accurate reporting.
2. Revised Standard Deduction: The standard deduction of 30% on NAV remains unchanged for the current financial year.
3. Interest on Home Loans: Continued deduction of the full interest amount on home loans for rental properties, without any upper limit.
4. Budget 2025: The new ruling mandates that all rental income from residential properties must be declared under ‘Income from House Property’ and not under ‘Profits and Gains from Business and Profession.’ This aims to curb excessive deductions claimed against rental income.

Using Rental Income Tax Calculators

A rental income tax calculator can be a handy tool to estimate your tax liability on rental income. These calculators take into account all allowable deductions, including standard deductions, municipal taxes, and home loan interest, to provide an accurate assessment of your taxable rental income.

Managing income tax on rental income efficiently requires a thorough understanding of the deductions and exemptions available under the latest rules of the Income Tax Act. By leveraging standard deductions, claiming home loan interest, and using rental income tax calculators, you can significantly reduce your tax on rental income and maximize your earnings. Always keep detailed records of all expenses and tax payments to ensure you can substantiate your claims and make the most of the available tax benefits.

Investing in rental properties can be highly rewarding, and with the right tax strategies, you can enhance your profitability while staying compliant with tax regulations. Stay updated with the latest tax rules and utilize these strategies to make the most of your rental income.

FAQs about Save Tax On Rental Income