Income from House Property — GAV, NAV, and Deductions

The income from house property head in the Indian income tax framework was distinctive in that it taxed a notional or imputed income — the annual value of a property — rather than only actual cash received. Even a self-occupied property carried a notional annual value, though this was deemed nil under the law for up to two self-occupied properties, eliminating tax on homeowners who did not let out their homes.

The computational sequence began with the Gross Annual Value (GAV). For a let-out property, GAV was the higher of actual rent received and the fair rent (market rent for a similar property in similar locality), subject to the municipal rental value wherever it was higher than fair rent. The concept reflected the tax authority's view that a property generates income equal to its earning potential, not merely the contractually agreed rent. Where rent was lower than market rates — as in cases of properties given to relatives at nominal rent — the fair rent served as the floor for GAV.

From GAV, municipal taxes actually paid by the owner during the previous year were deducted to arrive at the Net Annual Value (NAV). Municipal taxes paid by a tenant were not deductible. The NAV represented the base on which the subsequent deductions under Section 24 applied. A 30% standard deduction under Section 24(a) was then allowed on NAV without any requirement to prove or substantiate actual maintenance, repair, or management expenses. This flat deduction was intended to cover insurance, repairs, and other property management costs on a deemed basis.

After the 30% standard deduction, interest on borrowed capital under Section 24(b) was deducted. For let-out properties, this deduction was unlimited — the full interest paid on any loan used to purchase, construct, repair, or renovate the property was deductible. The combination of 30% standard deduction and unlimited interest deduction frequently resulted in a negative figure — a loss from house property. Under Section 71(3A) (inserted by the Finance Act 2017), such losses could be set off against other income only up to Rs 2 lakh per year, with the balance carried forward for eight years for set-off exclusively against future house property income.

For self-occupied properties, the annual value was deemed nil under Section 23(2). This meant no GAV, no NAV, and no standard deduction — but the Section 24(b) interest deduction up to Rs 2 lakh was still available, creating a notional negative income from house property that was set off against salary income.

The treatment of unrealised rent and arrears of rent under Section 25A was another important nuance. Rent that could not be realised and was written off was deductible in the year of write-off after compliance with certain conditions. Arrears of rent received in a subsequent year after the property was vacated were taxable in the year of receipt, with a 30% deduction from such arrears to account for standard maintenance, even if the property was no longer owned.

For taxpayers under the new tax regime, the 30% standard deduction under Section 24(a) and the interest deduction under Section 24(b) were both available for let-out properties. The Rs 2 lakh self-occupied interest deduction, however, was not permitted under the new regime, reinforcing the regime choice asymmetry between property owners with self-occupied home loans and those with rental properties.