Rental Property Tax Deductions in India: What Homeowners Should Know

Owning a rental property offers a steady source of income. The Income Tax Act, 1961, provides several deductions that can help reduce your taxable rental income and increase your overall returns. Let us see how rental property income tax deductions work in India.  

Rental Income and Taxation: The Basics 

Income earned from letting out a property is taxable under the head ‘Income from House Property’. But before calculating the final tax payable, certain deductions can be applied to the gross rental income, helping bring down the total taxable amount. 

Can Property Tax Be Deducted from Rental Income?

Yes, one of the direct deductions allowed from rental income is property tax. The amount of municipal or property tax you actually pay in a financial year can be deducted from the gross annual value of the property. This helps reduce your taxable rental income — but only if the tax is paid, not just due. 

Keep your property tax receipts handy while filing your returns to ensure your deduction is correctly claimed. 

Is Home Loan Interest Deductible for a Rental Property?

If you have taken a Home Loan to buy, build or renovate a rental property, the interest paid on that loan is fully deductible under Section 24(b) of the Income Tax Act. 1961. 

This means you can claim the entire interest component of your Home Loan as a deduction — there is no upper limit if the property is rented out. This is one of the key benefits for homeowners with rented properties, as it can significantly reduce their taxable income. 

Do note that this benefit applies only if: 

• The property is rented during the year 
• The loan is used for acquiring, constructing, repairing, renewing, or reconstructing the property 
• Proper proof of loan and interest payments is available 

Rental Property Income Tax Deductions Available

Here is a detailed look at the tax deductions for rental property owners: 

1. Standard Deduction – 30%

Under Section 24(a), you are allowed a standard deduction of 30% of the net annual value of your rented property. This is available regardless of the actual expenses you incur on maintenance or repairs. For example, if the annual value (after deducting property tax) is Rs.4 Lakh, you can deduct Rs.1.2 Lakh as a standard deduction. 

2. Interest on Home Loan – Full Deduction

As covered under Section 24(b), the full interest paid on a Home Loan for a let-out property is deductible. This makes it especially beneficial for property owners servicing large Home Loans. 

Unlike self-occupied homes (where the cap is Rs.2 Lakh), there is no limit for rental properties. 

3. Municipal / Property Tax

Any property tax paid during the year is deductible from the gross annual value, provided it was paid by you and not the tenant. 

Also Read: 10 Useful Income Tax Deductions 

When is Home Loan Interest Not Deductible?

The tax benefits only apply if the loan amount is used directly for the rented property. You cannot claim interest deductions if: 

• The funds are diverted to another use 
• The loan is taken in someone else’s name, or for a different property 
• You’re not able to produce interest certificates or payment proofs 

Make sure your loan documentation, ownership details and repayment records are in place while filing returns to avoid discrepancies. 

How to Claim These Deductions 

Filing tax returns with rental income is straightforward if you have your paperwork ready. Here is what you need: 

• Interest certificate from your lender for the financial year 
• Proof of property tax paid, such as municipal receipts 
• Loan sanction letter and repayment schedule 
• Details of rental income earned during the year 
• Any rental agreements, if requested 

Declare the property under the ‘Income from House Property’ section while filing your ITR, and fill in the relevant deduction amounts under Sections 24(a) and 24(b). 

Example: How the Deduction Works

Let us say you earn Rs.5 Lakh annually from a rented flat. You have paid Rs.25,000 in property tax and Rs.2.5 Lakh in Home Loan interest. Here is how your taxable income would be calculated: 

• Gross Annual Value (GAV): Rs.5,00,000 
• Property tax paid: Rs.25,000 
• Net Annual Value (NAV = GAV – Property Tax): Rs.4,75,000 
• Standard deduction (30% of NAV): Rs.1,42,500 
• Interest deductible on Home Loan under Section 24(b): Rs.2,50,000 
• Taxable income from house property: Rs.82,500 

Whether you managing a rental property, understanding how income tax deductions work can help you reduce your liability and increase net returns.