Net annual value and the deductions for a let-out house under the new regime

Net annual value

Income from house property is taxed on the property's annual value, the rent it can fetch, not on the rent actually received alone. The provision the question names, section 23 of the Income-tax Act, 1961, is section 21 of the Income-tax Act, 2025. The annual value after deducting municipal taxes paid is called the net annual value.

Steps in computing it (section 21)

1. Expected rent: the sum for which the property might reasonably be let from year to year: the higher of municipal value and fair rent, but not more than the standard rent under a rent control law.
2. Gross annual value: the higher of the expected rent and the actual rent received or receivable (section 21(1)). If the property was vacant for part of the year and, because of the vacancy, the actual rent is lower than the expected rent, the actual rent is taken (section 21(2)). Rent that cannot be realised is left out of the actual rent, subject to the rules (section 21(4)).
3. Less municipal taxes: taxes levied by a local authority and actually paid by the owner during the year, whatever year they relate to (section 21(3)).
4. Net annual value = gross annual value − municipal taxes paid.

For a house occupied by the owner for his own residence (up to two houses), the annual value is nil (section 21(6)-(7)).

Deductions from net annual value: let-out property (section 22)

1. Standard deduction: 30% of the net annual value, whatever is actually spent on repairs, insurance or collection (section 22(1)(a)). No other expense is allowed.
2. Interest on borrowed capital: the interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct the property, without any ceiling for a let-out house (section 22(1)(b)).
3. Pre-construction interest: interest for the period before the year in which the house is acquired or its construction completed, in five equal instalments starting with that year (section 22(1)(c)), after reducing it by any amount already allowed as a deduction under any other provision of the Act (section 22(3)).
4. Interest payable outside India: interest chargeable under the Act and payable outside India is not deductible if tax has been neither paid nor deducted on it under Chapter XIX-B and there is no agent in India for it under section 306 (section 22(6)).

Under the new tax regime (section 202)

All three deductions remain available for a let-out property under the default regime of section 202(1). What the default regime takes away is (a) the deduction for current interest under section 22(1)(b) on a self-occupied house (section 202(2)(a)(v)) and (b) the set-off of a house property loss against any other head (section 202(2)(b)(ii)). A loss that cannot be set off for that reason is treated as already given full effect, so it is not carried forward to later years either (section 202(3)); it can be absorbed only by income from another house property in the same year.

Illustration (our own)

A flat let at ₹30,000 a month has an expected rent of ₹3,00,000; municipal taxes of ₹20,000 were paid; interest on the housing loan is ₹2,50,000. Gross annual value ₹3,60,000 (the higher, actual rent); net annual value ₹3,40,000; less 30% ₹1,02,000 and interest ₹2,50,000; loss ₹12,000. Under the new regime the interest is still allowed, but the ₹12,000 loss cannot be set off against the owner's salary, and it lapses unless he has income from another house property this year.