Set off and carry forward of house property losses under both regimes

How a house property loss arises

A loss under the head Income from house property arises mainly from interest on borrowed capital:

• Let-out property: the annual value less municipal taxes actually paid by the owner during the tax year (section 21(3)), less 30% of net annual value and the whole interest (no ceiling) can be negative (section 22(1)).
• Self-occupied property (up to two houses, those the assessee specifies; the value is not nil for a house actually let at any time in the tax year or from which the owner derives any other benefit): the annual value is nil (section 21(6)-(7)), so the interest allowed is itself the loss. The interest allowed for all such houses together, current interest and pre-construction instalments alike (section 22(2) as amended by Finance Act, 2026, section 38), is limited to ₹2,00,000 a year where the house was acquired or constructed with borrowed capital, the acquisition or construction is completed within five years from the end of the tax year in which the capital was borrowed, and the assessee furnishes a certificate of the interest payable from the person to whom it is payable; in any other case the limit is ₹30,000 (section 22(2), (5)). The certificate must state the interest payable on the capital borrowed and, where a new loan has been taken to repay the whole or part of that capital, the interest payable on the new loan (section 22(4)).
• Pre-construction interest: interest for the period before the tax year of acquisition or construction is deducted in five equal instalments, for that tax year and the next four (section 22(1)(c)), after reducing it by any amount already allowed under another provision (section 22(3)).
• Interest payable outside India: interest chargeable under the Act 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)).

Old tax regime (the assessee opts out under section 202(4))

The option is exercised in the prescribed manner: with no business or professional income, along with the return under section 263(1) (section 202(4)(b)); with such income, by the due date under section 263(1), and it then applies to later tax years, may be withdrawn only once, and cannot be exercised again unless that income ceases (section 202(4)(a)).

1. Same head (section 108): a loss from one house is first set off against income from another house property.
2. Other heads (section 109): the balance is set off against income under any other head (salary, business, capital gains, other sources), but only up to ₹2,00,000 in a year; the rest is carried forward.
3. Carry forward (section 110): the loss not set off is carried forward to the following tax years and set off only against income from house property, for at most the eight tax years that follow the tax year in which the loss was first computed (section 110(2)). It can be carried forward even if the return for the loss year was filed late.
4. This applies whether the loss comes from a let-out or a self-occupied house.

New (default) tax regime (section 202(1))

1. Self-occupied house: the current interest of section 22(1)(b) is not allowed (section 202(2)(a)(v)), so that interest gives no loss (the income is nil). The clause names only section 22(1)(b); read as written, a section 22(1)(c) instalment is not withdrawn, and any loss it makes follows points 2 to 4.
2. Let-out house: the 30% deduction and the whole interest are still allowed, so a loss can arise. It can be set off against income from another house property in the same year.
3. No set off against other heads: a house property loss cannot be set off against any other head (section 202(2)(b)(ii)).
4. No carry forward: the loss that could not be set off is treated as already given full effect, and no deduction for it is allowed in any later year (section 202(3)). It lapses.
5. A house property loss brought forward from an earlier year under the old regime can be set off against house property income, unless it is attributable to a deduction the default regime withdraws, here section 22(1)(b) interest on a self-occupied house (section 202(2)(b)(i)); it can never be set off against other heads.

Comparison

Illustration (our own)

Ms. Kapoor has a salary of ₹12,00,000 and a let-out flat giving a loss of ₹2,80,000 (after interest of ₹4,50,000); she has no other house property.

• Old regime: ₹2,00,000 is set off against her salary; ₹80,000 is carried forward for up to eight years against future house property income.
• Default regime: none of the ₹2,80,000 can be set off against her salary, and it cannot be carried forward; it lapses.