If you own any residential or commercial property and rent it out, you’re required to declare the rental income under the head “Income from House Property” in your income tax return. But the question is, how much tax do you need to pay on this rental income? The calculation is based on a formula defined in the Income Tax Act, which might seem complex at first glance. However, don’t worry—this blog will guide you through the steps of calculating income from your let-out property in a simple and easy-to-follow manner.
What exactly is let-out property? Letting out means renting out assets, such as a residential property, commercial space, or vacant land, to another party for a certain period in exchange for rent. To generate rental income, it could be rented out all or part of the year. A property that remains vacant or used for purposes other than earning rental income is classified as a deemed let-out property.
Understanding the Calculation’s Key Elements Annual Value
The Annual Value of a property is a crucial factor in determining taxable income from house property. It is basically the amount of rent the property can generate if you rent it out. There are two key elements of annual value:
Gross Annual Value (GAV)
GAV is higher of the Actual Rent received or the Fair Rent. It refers to the potential annual rental income that a property could bring in. The anticipated rent is taken into account for tax purposes even if the property is vacant.
Net Annual Value (NAV)
NAV is derived by deducting municipal taxes paid from the Gross Annual Value (GAV). This is the income on which tax is calculated.
Municipal Taxes
Property taxes are paid to the local municipal authority as part of municipal taxes. These taxes can be deducted from the Gross Annual Value (GAV) to arrive at the Net Annual Value (NAV) of the property. However, this deduction can only be claimed if the municipal taxes are paid by the property owner. If the tenant has made the payment, the owner cannot claim this benefit. In addition, it is not required that the municipal taxes only apply to that fiscal year. Both old and new tax regimes allow deduction of Municipal taxes paid.
Standard Deduction
As a standard deduction, you can deduct a fixed amount equal to 30% of the Net Annual Value (NAV). The intent behind providing this benefit is to cover repair & maintenance expenses and other property-related expenses. This deduction is allowed regardless of whether these expenses have actually been incurred. Both old and new tax regimes allows standard deduction.
Interest on Home Loan
It is possible to claim a deduction for the interest that is paid on the repayment of a loan used to purchase, construct, or renovate a house. You can claim the deduction of the actual interest amount paid.. The interest paid on a home loan for let-out properties can be deducted in accordance with both the old and new tax systems.
Principal repayment
Under the old tax regime, principal repayment of up to ₹1.5 lakh p.a. is deductible under Section 80C. This deduction is not available in the new tax regime.
Loss Set-off
Under the old tax regime, you can set off loss from house property against income from any other sources, such as salary or business income. The set-off is restricted to ₹2 lakh per annum. However losses from let-out property cannot be set off against income from other heads under new tax regime.
Carry-Forward
Under old tax regime you can carry forward the excess loss (more than ₹2 lakh) for up to next 8 years. Only future house property income can be used to offset the loss. There is no scope for carry forward of losses in the new tax regime.
Step-by-Step Guide to Calculating Income from Let-Out Property
Let’s break down the process into a series of simple steps:
First, figure out the Gross Annual Value (GAV). Step 2: Deduct Municipal Taxes
NAV = GAV – Municipal Taxes
Step 3: Apply Standard Deduction
Standard Deduction = 30% of NAV
Step 4: Deduct Interest on Home Loan
Step 5: Calculate Income from House Property
NAV minus the standard deduction minus the interest on the home loan is the property income. Case Study for Income Estimation (Based on the Old Tax System) Mr. Rahul Roy owns a Mumbai apartment for rent. He bought this property in 2022, paid for it with a mortgage, and has been renting it out since April 2024. For the financial year 2024-25, Rahul needs to calculate his income from the let-out property to report in his income tax return.
Property Details for FY 2024-25:
Mumbai, India Monthly Rent Received: ₹30,000
30,000 a year in rent, or 3,60,000 a year in rent Annual payment of 15,000 in municipal taxes Interest Paid on Home Loan: ₹3,50,000 annually
Year of Purchase: 2022
Now, let’s calculate the taxable income:
First, find the Gross Annual Value (GAV). The first step is to determine the Gross Annual Value (GAV), which is the total rent Rahul receives in a year.
Monthly rent received: ₹30,000
Annual rent received: ₹30,000 × 12 = ₹3,60,000
The GAV is 3,60,000 yen because there is no vacant unit or other deductions that could lower the rent. Step 2: Subtract Paid Municipal Taxes Municipal taxes paid to the local authority are fully deductible. In the case of Rahul, the year’s municipal taxes totaled $15,000 for him. Net Annual Value (NAV) = GAV – Municipal Taxes
NAV = ₹3,60,000 – ₹15,000 = ₹3,45,000
Step 3: Apply Standard Deduction (30% of NAV)
You are allowed a fixed deduction of 30% on the Net Annual Value to cover repairs and maintenance costs.
The standard deduction is 30% of 3,45,000 yen, or 1,03,500 yen. Income before interest on home loan = NAV – 30% deduction
Income = ₹3,45,000 – ₹1,03,500 = ₹2,41,500
Step 4: Deduct Interest on Home Loan
One of the major benefits of owning a let-out property is the deduction allowed on home loan interest under Section 24(b) of the Income Tax Act as there is no upper limit for claiming deduction on let-out properties. Rahul has paid ₹3,50,000 as home loan interest in the financial year 2024-25.
Net Income from Let-Out Property = Income before Interest – Interest on Home Loan
Net Income = ₹2,41,500 – ₹3,50,000 = -₹1,08,500 (Loss)
Final Result: A Loss of ₹1,08,500
According to the applicable tax laws, Rahul can carry this loss forward for the next eight years and offset it against income from other house properties or rental income in subsequent years. Conclusion
By understanding the basic components involved in calculating income from a let-out house property, you can easily compute your taxable income. The available deductions should be leveraged to reduce your tax liability. For hassle-free tax compliance, ensure that you keep accurate records of your payments and deductions. A qualified financial advisor can help you in computing the income from let-out property correctly. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.
