After the Income Tax Bill was tabled in February, concerns mounted among homeowners regarding the computation of rental income from housing property after deducting municipal taxes, and the deduction of pre-construction interest for let-out properties.
The newly passed Income Tax Bill, 2025 confirms there will be no change in the taxation of rental income nor in deductions claimed on home loans, for both self-occupied and rented properties.
“After February, there was a confusion on whether the tax on the rental income be imposed on the gross annual pay or on the net annual pay received from let-out properties,” an tax expert said.
Under the Income Tax Act, 1961, homeowners are taxed on the net annual value of rental income (gross rental income minus municipal tax) and can claim the standard deduction on home loans, whether the property is self-occupied or let out.
The February bill created uncertainty over whether the deduction applied only to self-occupied properties. It also left unclear whether pre-construction interest could be deducted for let-out properties when computing income under ‘House Property’.
As per another tax expert, “The Bill has given a clear and crystal view on both the matters. Now it has been explicitly provided that standard deduction of 30% will be calculated on Net Annual Value after deduction of Municipal Taxes. The February bill was giving the opinion that Pre-construction interest will be allowed on self occupied properties only, now it is clarified that pre-construction interest deduction will be allowed for let out properties also.”
He explained that for pre-construction properties, deductions can be claimed in instalments after possession. For instance, if a homeowner takes a loan for an under-construction property in 2025 and takes possession in 2028, the total deduction for three years (2025–28) will be divided by five and added to deductions in subsequent years.
Parliament on Tuesday passed the new Income Tax Bill 2025 to replace the six-decade-old Income Tax Act, 1961, that will be effective from April 1, 2026.
Source form: https://www.newindianexpress.com/business/2025/Aug/13/fresh-i-t-bill-brings-clarity-on-taxation-of-rental-income
