Rental Income: What you can and cannot deduct

You collected rental income for the first time last year and now your tax filing has six new questions. The biggest one: which expenses can you actually deduct from rental income, and which ones get rejected on assessment? The rules are tighter than most landlords realise, and missing a single eligible deduction can mean overpaying tax by 20 to 40 percent.

This checklist breaks down the deductible items you can claim with full confidence and the common items that get rejected even though landlords often add them.

Why this matters for your tax bill

Rental income in India is taxed under the head Income from House Property. Unlike business income, you do not get to deduct every expense you paid. The Income Tax Act allows two specific deductions and nothing else. Most attempts to claim repairs, insurance, or society fees on top of those two get disallowed during scrutiny.

The good news: the two allowed deductions are generous if you understand them.

1. Standard deduction of 30 percent

Section 24(a) gives you a flat 30 percent deduction on the Net Annual Value of the property. This covers all repairs, maintenance, insurance, and minor capital improvements. You do not need bills or receipts to claim it.

Even if you spent zero rupees on repairs in the year, you still get the full 30 percent deduction. Even if you spent more, you still get only 30 percent.

Net Annual Value is the gross rent received, minus municipal taxes you actually paid in cash during the year. So the deduction stack is: Gross rent → less municipal tax paid → less 30 percent standard deduction → less interest on home loan.

2. Interest on home loan

Section 24(b) lets you deduct the full interest paid on a home loan against rental income. There is no upper cap when the property is let out, unlike the 2 lakh rupees cap on self-occupied property.

This is the single biggest deduction for most landlords with an active loan. A 50 lakh rupees loan at 9 percent interest in the first year is around 4.5 lakh rupees of deductible interest, which can wipe out most of the taxable rental income.

What you can deduct (the only valid list)

1. Municipal tax actually paid in the year. Cash basis only, not what was due.
2. 30 percent of net annual value as standard deduction.
3. Full interest paid on home loan for the property.
4. Pre-construction interest in 5 equal installments starting the year construction completes.

What you cannot deduct (commonly attempted, always rejected)

• Society maintenance and CAM charges. Already covered by the 30 percent standard deduction.
• Repair bills, painting, plumbing, AC servicing. Same. Bills do not help.
• Property insurance premium. Not allowed as a separate deduction.
• Brokerage paid to find the tenant. Not allowed.
• Legal fees for drafting the rent agreement. Not allowed.
• Furniture and appliances bought for the rented property. Not allowed against rent income.
• Internet, electricity, or water bills you pay. If included in the rent, the rent goes up but no separate deduction.
• Principal repayment of home loan. Not allowed against rent. It can be claimed under section 80C up to 1.5 lakh, but only if you have not used 80C elsewhere.

The municipal tax trick most landlords miss

Municipal tax is deductible only in the year you actually pay it, not the year it relates to. If you pay two years of municipal tax in one financial year to clear a backlog, you can claim both years' worth of payment in that one year. Many landlords use this to bunch deductions in a high-income year.

Quick example to see the math

The 12,000 rupees loss can be set off against salary income in the same year, lowering your overall tax bill. Loss above 2 lakh rupees gets carried forward for 8 years.

Special situations to watch

Joint ownership

If you co-own with a spouse or sibling, rental income and the deductions get split in proportion to the ownership share, not the EMI share. Get the share clearly recorded in the sale deed.

Pre-construction interest

Interest paid during construction is not deductible in the same year. Add it up across all construction years and claim 1/5th each year for 5 years starting the year possession is taken.

Vacancy

If the property was let out but vacant for part of the year despite genuine effort, you can show actual rent received as the gross rent. Save proof: broker emails, ad screenshots, vacancy notice on housing portals.

The official tax department portal at incometax.gov.in publishes the latest section 24 rules under the House Property head if you need the exact wording.

Frequently Asked Questions

Can I deduct society maintenance against rental income?

No. The 30 percent standard deduction already covers maintenance. A separate claim will be disallowed.

Is there a cap on home loan interest deduction for rented property?

No. The cap of 2 lakh rupees applies only to self-occupied property. For let-out property, the entire interest paid is deductible.

Can I deduct brokerage paid to a real estate agent?

No. Brokerage is treated as personal expenditure under the House Property head, not a deductible expense.

Where do I report rental income on my tax return?

Use ITR-2 if you have only one house property. Report it under House Property income with the deductions broken out as above.