Let-Out Property Home Loan Tax: Rent, Interest and Loss

If you rent out a house bought with a home loan, the rent is taxable, but you can deduct a flat 30% of the annual value and the full interest on the loan, with no ₹2 lakh cap. If that creates a loss, the old regime lets you set off up to ₹2 lakh against salary and carry the rest forward for eight years. The new regime allows the interest only up to the rent; any loss is simply lost. Rules are as of October 2026, FY 2026-27.

How rental income is computed

Income from a let-out house is worked out in four steps, under Sections 21 and 22 of the Income-tax Act, 2025 (old Sections 23 and 24 of the 1961 Act).

1. Gross annual value: usually the rent you received or were entitled to for the year.
2. Less municipal taxes you actually paid during the year. The result is the annual value.
3. Less 30% standard deduction on the annual value, for repairs and upkeep. No bills are needed, and actual repair spending is not deductible on top of it.
4. Less interest on the loan taken to buy, build, repair or renovate the house. For a let-out house, the whole interest is deductible, including any one-fifth instalment of pre-construction interest.

The result is income (taxable at your slab) or a loss.

Worked example 1: a small loss

Vikram rents out a flat for ₹30,000 a month. He pays ₹10,000 municipal tax and ₹4,00,000 interest on the home loan in FY 2026-27. He is in the 30% slab.

• Old regime: the full ₹1,55,000 loss is set off against his salary. Tax saved: ₹1,55,000 × 31.2% (30% plus 4% cess) = ₹48,360.
• New regime: the loss cannot be set off or carried forward. His house property income is treated as nil, and the rent is in effect tax-free, but the extra ₹1,55,000 of interest gives no benefit.

Worked example 2: a large loss

Same flat, but Vikram's loan is bigger and he pays ₹5,50,000 interest.

Income from house property: ₹3,50,000 − ₹1,05,000 − ₹5,50,000 = (−) ₹3,05,000.

• Old regime: ₹2,00,000 is set off against salary this year, saving ₹62,400. The remaining ₹1,05,000 is carried forward for up to eight years, but only against future house property income. Carry-forward needs a return filed by the due date.
• New regime: the whole ₹3,05,000 loss is lost.

Worked example 3: a profit

If the interest were only ₹1,80,000, house property income would be ₹3,50,000 − ₹1,05,000 − ₹1,80,000 = ₹65,000. This is taxed at your slab in both regimes. There is no loss to worry about, and the new regime treats it the same way as the old.

Old regime vs new regime for landlords with a loan

The rule of thumb:

• If the property produces taxable income after interest, the regime choice depends on your other deductions, not the house.
• If the property makes a loss, the old regime gives up to ₹2 lakh of set-off (worth up to ₹62,400 a year in the 30% slab) plus carry-forward. That can tilt the choice, but it has to beat the new regime's lower slabs and ₹75,000 standard deduction.

Compare both totals in our income tax calculator instead of looking only at the house. Our guide to the home loan tax benefit in the new regime goes through what survives under the default regime.

Let out or self-occupied: which gives more relief?

If your interest is well above ₹2 lakh, letting the house out can unlock more of it under the old regime. As a self-occupied house, Vikram's ₹4,00,000 interest in example 1 would be capped at ₹2,00,000, all of it set off against salary, and the remaining ₹2,00,000 lost for good. Let out, the first part of the interest is absorbed by the rent, only ₹1,55,000 is set off against salary, and he also collects ₹3,60,000 of rent that is not taxed. With a bigger loan, as in example 2, any loss above ₹2 lakh is carried forward instead of lost.

Under the new regime the comparison is simpler: a self-occupied house gives nothing, while a let-out house at least lets the interest wipe out tax on its rent. The decision to let out should still rest on whether you need to live in the house, not on tax alone.

Points that trip people up

Vacant months. If the house is let out for part of the year and vacant for the rest, the annual value is based on the rent actually receivable, so vacancy reduces taxable rent. Our guide to rental income, vacancy and maintenance shows how this hits your real return.

Society maintenance. Maintenance charges paid to a housing society are not deductible separately; the 30% standard deduction is meant to cover upkeep.

Rent paid by the tenant for amenities. Rent for furniture or amenities billed separately may be taxed under a different head; keep the agreement clear.

Two houses. You can treat up to two houses as self-occupied with a combined ₹2 lakh interest cap. A third house is treated as let out even if it is vacant, and a notional rent is taxed. See home loan tax benefit on a second home.

Principal and stamp duty. These qualify under Section 123 (old 80C) in the old regime even for a let-out house, within ₹1.5 lakh. The five-year rule applies: if you sell within five years of the end of the year of possession, these deductions are reversed.

Joint owners. Rent, the 30% deduction and interest are split by ownership share. Each co-owner gets their own ₹2 lakh set-off limit in the old regime.

Unpaid interest. Interest is deductible for the year it is payable. Keep the lender's year-wise interest certificate.

How to report it

1. In the house property schedule of your return, mark the house as let out.
2. Enter gross rent, municipal tax paid and interest from the lender's certificate. The 30% deduction is computed automatically.
3. Under the old regime, the set-off up to ₹2 lakh is applied against your other income; any excess goes to the carried-forward loss schedule. File on time to keep it.
4. If you are salaried, you can declare the rent and interest to your employer so that TDS reflects the loss (old regime) or the income.

The full set of limits for self-occupied and let-out homes is in our pillar on home loan tax benefits.

Key takeaways

• Rent from a let-out house is taxable in both regimes, after municipal tax and a flat 30% deduction.
• Home loan interest on a let-out house is fully deductible, with no ₹2 lakh cap.
• Old regime: a loss can be set off against salary up to ₹2 lakh a year and the rest carried forward for eight years.
• New regime: interest only reduces that rent to nil; the loss cannot be set off or carried forward.
• In example 1, the old regime saved ₹48,360 on a ₹1,55,000 loss; the new regime saved nothing extra.
• Principal and stamp duty count under Section 123 only in the old regime.