Income Tax on Rental Income FY 2026-27: Calculation, Deductions and ITR Filing

Understanding income tax on rental income is essential if you own a rented property. The rent you receive is fully taxable and must be declared every year.This is not optional and there is no minimum exemption limit specifically for rental income. However, the Income Tax Act gives you certain deductions that can significantly reduce your tax liability on that rent.

This guide covers everything you need to know for FY 2026-27: how rental income is calculated, which deductions are available, what happens if you leave your second house vacant, and which ITR form you need to file.

Income Tax on Rental Income: How It Works

Rental income falls under the head “Income from House Property.” This applies when you rent out:

• A residential flat or house
• A commercial shop or office space
• Any building or part of a building

If you have rented out your property and are receiving regular rent, that amount is your Gross Annual Value (GAV) and forms the basis of your taxable income under this head.

Step-by-Step Calculation of Tax on Rental Income

Let us take a real example to understand how rental income is calculated.

Example: Rajesh owns a 2BHK flat in Pune that he has rented out at Rs. 25,000 per month. He pays municipal taxes of Rs. 8,000 per year. He also has a home loan on this property and pays Rs. 1,20,000 as interest per year.

Step 1: Calculate Gross Annual Value (GAV)

GAV is the higher of:

• Actual rent received, or
• Expected rent (fair market rent of the property)

In most practical cases, actual rent received is taken as GAV.

Rajesh’s GAV = Rs. 25,000 x 12 = Rs. 3,00,000

Step 2: Deduct Municipal Taxes Paid

You can deduct municipal taxes (property tax) paid to the local authority during the year. This must be actually paid by you (not just due).

Net Annual Value (NAV) = GAV – Municipal Taxes Paid NAV = Rs. 3,00,000 – Rs. 8,000 = Rs. 2,92,000

Step 3: Standard Deduction of 30%

This is a flat deduction of 30% on NAV. You get this regardless of your actual maintenance expenses, repairs, or depreciation. No bills or receipts are required.

Standard Deduction = 30% of Rs. 2,92,000 = Rs. 87,600

Step 4: Deduct Home Loan Interest

If you have taken a home loan on the rented property, the entire interest paid is deductible. There is no upper limit for a let-out property (unlike Rs. 2,00,000 limit for self-occupied property).

Home Loan Interest Deduction = Rs. 1,20,000

Step 5: Calculate Net Income from House Property

Net Income = NAV – Standard Deduction – Home Loan Interest Net Income = Rs. 2,92,000 – Rs. 87,600 – Rs. 1,20,000 = Rs. 84,400

This Rs. 84,400 is added to Rajesh’s total income and taxed at his applicable slab rate.

Summary Table: Rental Income Calculation

Deductions Available on Rental Income

1. Municipal Tax Deduction (Section 23)

Property tax paid to the municipal corporation is fully deductible from GAV. Key points:

• Only taxes actually paid during FY 2026-27 are allowed
• Arrears paid in the current year can also be claimed
• If your tenant pays the property tax, you cannot claim this deduction

2. Standard Deduction: 30% of NAV (Section 24a)

This deduction is automatic. You do not need to show any receipts for repairs, water charges, or maintenance. The 30% covers all of that. Even if your actual expenses are higher, you get only 30%. Even if your actual expenses are zero, you still get 30%.

3. Home Loan Interest Deduction (Section 24b)

For a rented property, the entire home loan interest is deductible. There is no ceiling.

Example: If you pay Rs. 3,50,000 as home loan interest on a rented property, the full Rs. 3,50,000 is deductible. This is very different from self-occupied property where the limit is Rs. 2,00,000.

Important: Principal repayment on home loan is not deductible under house property income. It is claimed separately under Section 80C (now Section 123 under Income Tax Act 2025) subject to the Rs. 1,50,000 overall limit.

What If the Property Vacant?

If your property was vacant for part of the year, the rent received only for the occupied months is taken as actual rent. There is no penalty for vacancy per se.

However, if the property was vacant the entire year, the situation changes.

Tax on Self-Occupied vs Let-Out Property

What About a Second House?

If you own more than one house property and both are self-occupied, only one can be treated as self-occupied for tax purposes. The other is treated as “deemed to be let out” even if it is actually vacant.

In that case, the deemed rental value (fair market rent or municipal rateable value, whichever is higher) is taken as GAV and taxed accordingly. This often surprises property owners who assume a vacant second home has no tax implications.

Loss from House Property: Set-Off and Carry Forward

Sometimes, after deductions, the house property income becomes negative. This is called a loss from house property. This happens most commonly when home loan interest is higher than the rental income.

Set-off against other income: Loss from house property can be set off against other heads of income (salary, business, etc.) up to a maximum of Rs. 2,00,000 per year.

Carry forward: The remaining loss can be carried forward for 8 years and set off against future house property income only.

Example: If NAV after deductions is Rs. 50,000 but your home loan interest is Rs. 3,00,000, your loss from house property is Rs. 2,50,000. You can set off Rs. 2,00,000 against your salary income this year and carry forward Rs. 50,000 to next year.

Rental Income from Commercial Property

If you have rented out a shop, office, or warehouse, the taxation is the same under Income from House Property. The same deductions apply: municipal taxes, 30% standard deduction, and home loan interest.

One important point: if your tenant is a business entity or individual paying rent above Rs. 50,000 per month, they are required to deduct TDS at 5% (Section 194I) before paying you. You will see this reflected in your Form 26AS (now Form 168 under Income Tax Act 2025) and can claim credit for this TDS when filing your return.

For details on checking your TDS credits, see our guide: How to Read Form 26AS Before Filing ITR

TDS on Rental Income: What Tenants Must Deduct

If TDS has been deducted on your rental income, do not forget to check Form 168 (old Form 26AS) before filing your ITR. The TDS credit will reduce your final tax payable.

Which ITR Form to File for Rental Income?

This depends on what other income you have:

Deadline for ITR-1 and ITR-2: July 31, 2026

For a detailed guide on choosing the right form, see: Which ITR Form to File for FY 2025-26

Rental Income Under New vs Old Tax Regime

The deductions under Income from House Property are available under both tax regimes with one critical exception.

Old Tax Regime: All deductions available – municipal taxes, 30% standard deduction, home loan interest without limit.

New Tax Regime: Municipal tax deduction and 30% standard deduction are allowed. However, home loan interest deduction on a self-occupied property is NOT allowed. For let-out property, the home loan interest deduction IS allowed but the loss that can be set off against other income is restricted to Rs. 2,00,000.

This distinction is important for people who have a rented property with a large home loan. In such cases, the old tax regime may work out better due to the unlimited interest deduction.

Rental Income If You Are a Senior Citizen

Senior citizens (age 60 and above) are taxed on rental income the same way as other individuals. The deductions available are identical. The only advantage is the higher basic exemption limit:

• Below 60 years: Rs. 3,00,000 (new regime), Rs. 2,50,000 (old regime)
• 60 to 79 years: Rs. 3,00,000 (new regime), Rs. 3,00,000 (old regime)
• 80 years and above: Rs. 3,00,000 (new regime), Rs. 5,00,000 (old regime)

These higher exemption limits mean senior citizens with modest rental income may end up with zero tax liability. For a complete guide, see: Income Tax for Senior Citizens FY 2026-27

Important Points to Remember

• Rental income is taxable even if you receive rent in cash. The mode of receipt does not matter.
• If you own multiple properties, each property is calculated separately under Income from House Property.
• Pre-construction interest on a home loan (interest paid before possession) can be claimed in 5 equal instalments starting from the year of possession.
• GST does not apply to residential rental income. However, if you are renting out a commercial property and your total GST turnover exceeds Rs. 20 lakh, GST registration may be required.
• Do not forget to report rental income even if TDS has been deducted. Many taxpayers skip this assuming TDS equals final tax. It does not – you must still declare the income and compute tax properly.
• As per the Income Tax Department, rental income is taxable under house property head.

Quick Reference: Rental Income Tax for FY 2026-27

Conclusion

Rental income is fully taxable but the deductions available – 30% standard deduction, municipal taxes, and full home loan interest – can bring down your tax liability substantially. The key is to calculate correctly, claim every deduction you are entitled to, and file the right ITR form.

If you own multiple properties or have a combination of let-out and self-occupied homes, running the numbers under both old and new tax regimes before filing will help you make the right choice.

Written & Reviewed by

Diksha Chawla

Financial Educator & Content Creator | FinLecture.in

Diksha covers Indian income tax, mutual funds, ITR filing, and personal finance. FinLecture content is cross-checked against official government portals and SEBI/AMFI guidelines.

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