The newly passed Income Tax Bill, 2025 has addressed a wave of concerns raised earlier this year about how rental income and home loan deductions would be computed under the new tax framework. The law confirms that there will be no changes to the current taxation method for rental income or the deductions available on home loans - whether for self-occupied or let-out properties.
After the Bill was first tabled in February, uncertainty grew among homeowners over whether tax on rental income would be calculated on the gross annual value or the net annual value (gross rent minus municipal taxes) and whether pre-construction interest could be deducted for let-out properties.
Under the existing Income Tax Act, 1961, homeowners are taxed on the net annual value after deducting municipal taxes and can claim a 30% standard deduction on this amount, along with eligible interest deductions on home loans.
What the New Bill Clarifies
Tax experts note that the new provisions have now settled both debates:
- The 30% standard deduction will continue to be calculated on the Net Annual Value after deducting municipal taxes.
- Pre-construction interest deductions will be available for both self-occupied and let-out properties.
For under-construction homes, pre-construction interest can be claimed in five equal annual instalments starting from the year of possession. For example, if a loan is taken in 2025 and possession occurs in 2028, the total interest paid during 2025-28 will be divided into five equal parts and added to deductions each year from FY 2028-29.
Continuity Amid Change
The Finance Ministry's clarification ensures that rental income taxation and housing loan deductions remain consistent with current rules, easing concerns for property owners and investors.
Parliament passed the New Income Tax Bill, 2025, on Tuesday to replace the 62-year-old Income Tax Act, 1961. The new law will take effect from April 1, 2026, aligning with the financial year 2026-27.
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