Rental Income Tax in India 2026: How the 30% Standard Deduction, Municipal Tax and Loan Interest Cut Your Taxable Rent

By Nitish Bharadwaj · Published Sep 25, 2026 · 7 min

Rent from property you own is taxed under 'Income from House Property'. Start with the annual rent, subtract municipal taxes you actually paid, then take a flat 30% standard deduction that needs no bills. Interest on a loan for a let-out property is fully deductible with no cap. All three deductions are available under both the old and new tax regimes. What the new regime removes is setting off a house-property loss against salary. Tenants paying over ₹50,000 a month deduct TDS, and landlords with enough tax due must pay advance tax.

If you let out a flat, the rent doesn't count as salary or business income. Rent from a building you own is taxed under its own head, 'Income from House Property', with its own formula. Most of the tax savings come from two deductions that many landlords only partly use: municipal taxes and a flat 30%. Both are available under the old and new regimes. Here is how the calculation works for FY 2025-26 (AY 2026-27).

The Four-Step Formula

Whether you let out one flat or three, taxable rental income for each property follows the same steps:

1. Gross Annual Value (GAV): generally the rent you received or were owed for the year. If the property's reasonable market rent (the expected rent) is higher, that higher figure is used instead.
2. Minus municipal taxes that you actually paid during the year. Taxes that are due but unpaid don't count, and neither do taxes your tenant paid. The result is the Net Annual Value (NAV).
3. Minus a standard deduction of 30% of the NAV under Section 24(a).
4. Minus interest on a loan taken to buy, build, or renovate the property, under Section 24(b).

A Worked Example

Say you rent out a flat for ₹30,000 a month, pay ₹12,000 in property tax to the municipal corporation, and have a home loan on the flat with ₹1.5 lakh of interest this year.

Out of ₹3.6 lakh of rent, only ₹93,600 is added to your taxable income. Without the loan, it would be ₹2,43,600, which is still about a third less than the rent you received.

Old Regime vs New Regime

People often think the new regime removes every house-property benefit. It doesn't. For a let-out property, the 30% deduction, the municipal tax deduction, and the full loan interest deduction are all available under both regimes, and there's no ₹2 lakh cap on interest for a let-out property. What the new regime takes away is interest on a self-occupied home. It also stops you from setting off a house-property loss against salary or any other head of income.

Loss set-off is where the two regimes really differ. It happens when the loan interest is larger than the rent after the 30% deduction. We cover it in detail in let-out property loss and the ₹2 lakh set-off rule. From FY 2025-26, up to two homes you don't let out can be treated as self-occupied with nil annual value, even if you don't live in them. A third empty home is still taxed on notional rent; see how deemed let-out property is taxed.

Rules Landlords Often Miss

• Pre-construction interest: interest you paid before construction was completed is deductible in five equal parts, starting in the year you get possession. It is added to that year's 24(b) claim.
• Unrealised and arrears of rent: rent you couldn't collect is left out of GAV. If you recover it later, or get arrears after a rent revision, it is taxed in the year you receive it, with 30% deducted.
• Joint owners: each co-owner pays tax only on their share of the rent. Each also claims their share of the 30% and of the interest, provided they're a co-borrower on the loan.
• Residential rent is never business income: from AY 2025-26, rent from a residential house must be shown under house property, not as business or profession income.
• Furniture and appliances: if the rent for furniture is charged separately from the flat, that part may be taxed as income from other sources rather than house property.
• Security deposit: a refundable deposit is not income. If you keep part of it against unpaid rent, that part becomes rent.

TDS Your Tenant May Deduct

If your tenant is an individual or HUF paying more than ₹50,000 a month, they must deduct 2% TDS under Section 194IB. The rate was cut from 5% from October 1, 2024. If the tenant is a company or a business, Section 194-I applies. That means 10% TDS on building rent once it crosses ₹50,000 in a month or part of a month, a threshold that took effect on April 1, 2025. Either way, the TDS appears in your Form 26AS and you claim it as a credit in your return. It isn't an extra tax.

Reporting It in Your ITR

ITR-1 (Sahaj) can be used only if you have income from a single house property along with salary and interest. With two or more properties, or capital gains beyond the small long-term equity gains ITR-1 now permits, you need ITR-2. You'll enter each property separately in Schedule HP with the tenant's name, PAN if TDS was deducted, rent, municipal tax, and interest. Keep the rent agreement, property tax receipts, and the lender's interest certificate. Match everything against your AIS, which will already show any TDS your tenant deducted.

Rental income is added to your other income and taxed at your slab rate, with no special rate. Under the new regime, the Section 87A rebate still applies if your total income, including rent, stays within ₹12 lakh for FY 2025-26. The new Income-tax Act, 2025 applies from the tax year 2026-27 and keeps the same structure: annual value, then the 30% deduction, then interest. The returns you file in 2026 still follow the existing sections.