If you file returns under the new tax regime, if your annual income is up to Rs 12 lacs, then you do not have to pay any taxes. That is a major concession.
Now, assuming you are retired, and your only source of income is house rent, you can earn a fair amount of rental income before you worry about paying taxes. What is that threshold?
In this post, let us understand with the help of examples how rental income is calculated. Which deductions are available? Which are the applicable income tax provisions and how do these provisions come together to provide you with various tax benefits? The applicability of these provisions changes depending on your choice of income tax regime. And finally, we address the question we started with. How much rental income can be exempt from taxes?
What tax rules determine rental income calculation?
Section 23: Specifies how to calculate annual income from house property. The key part is that the rental income for self-occupied property is considered zero.
Section 24: This is important and specifies deductions from the income from house property.
- Standard deduction of 30% of rent collected.
- Deduction for interest paid for a housing loan. The deduction varies depending on the type of property (self-occupied or let-out) and the tax regime chosen for ITR filing.
Section 71: specifies how you can set off loss under income from house property against other heads of income (salary, business, capital gains). No set off is permitted against capital gains. For other heads of income, set off is capped at Rs 2 lacs per financial year.
Section 115 BAC (this section is specifically for the New Tax Regime)
- No deduction for interest on housing loan for self-occupied property. Still permitted for let-out property.
- Even if there is loss under income from house property (for a let-out property) due to interest on housing loans, there shall be no set-off permitted against any other income head.
| Income Tax Sections | Description | Old Regime | New Tax Regime |
| Section 23 | Specifies how to calculate income from house property. Income from self-occupied property considered zero. Up to 2 houses can be considered self-occupied. | Applicable | Applicable |
| Section 24(a) | Deduction of 30% of annual income from house property | Applicable | Applicable |
| Section 24 (b) | Deduction of home loan interest from annual income from house property.
| Applicable for both self-occupied and let-out property | Applicable only for let-out property. Disallowed for self-occupied property under Section 115BAC. |
| Section 71 | Allows set-off against other heads of income if there is loss under income from house property.
| Applicable | Not permitted. No restriction under Section 71 per se, but disallowed under Section 115BAC. |
| Section 115BAC | Only applicable for the New Tax Regime.
| Not relevant | Applicable |
How Do These Provisions Come Together to Provide You with Tax Benefit?
All these income tax sections sound quite confusing, don’t they? For easy understanding, let us pick the simplest case.
Self-occupied property with a home loan
You have taken a home loan for a self-occupied property. You get tax benefit for interest payment up to Rs 2 lacs per financial year (only under the old regime). How does this happen?
For a self-occupied property, income from house property is zero (Section 23).
Now, let us assume you paid Rs 3 lacs as interest on your home loan.
Section 24 (b) allows deduction of up to Rs 2 lacs for self-occupied property (only for the Old Tax regime. Not for the new tax regime).
Income from house property = Zero Income (from self-occupied property) – Rs 2 lacs of interest = – 2 lacs
This means you have a loss of Rs 2 lacs from income under house property.
How does this translate to tax benefit?
Section 71 helps you there. Because Section 71 allows set-off of such loss under income from house property against other heads of income. Set off is capped at Rs 2 lacs (not so much relevant for self-occupied, but for let-out property).
So, if you have salary income of Rs 20 lacs and Rs 2 lacs of loss from house property, you can set off loss against salary and your net taxable income reduces to Rs 18 lacs.
And you pay taxes on Rs 18 lacs and not Rs 20 lacs.
That is how you save taxes from interest paid for housing loans.
What would happen under the New Tax Regime?
The new tax regime does not permit deduction of home loan interest under Section 24(b). Hence, there is no tax relief for home loan interest. You pay income tax on Rs 20 lacs.
| Self-Occupied Property | |||||
| Parameters | Old Tax Regime | New Tax Regime | |||
| Without Home Loan | With Home Loan | Without Home Loan | With Home Loan | ||
| Annual Value of House (A) | – | – | – | – | |
| Standard Deduction of 30% of Annual Value (B) | – | – | – | – | |
| Home Loan Interest | NA | 300,000 | NA | 300,000 | |
| Deduction for Home Loan Interest (C) | NA | 200,000 | NA | Not permitted | |
| Income from House Property (A) – (B) – (C) | – | (200,000) | – | – | |
| Salary | 2,000,000 | 2,000,000 | 2,000,000 | 2,000,000 | |
| Set off of Loss under House Property? | Permitted up to Rs 2 lacs under Section 24 | Not permitted under Section 115BAC | |||
| Net Taxable Income (after adjustment for loss under income from house property) | 2,000,000 | 1,800,000 | 2,000,000 | 2,000,000 | |
What about Let-Out Property?
Let us say you earn Rs 10 lacs in house rent from multiple properties you own.
Annual income from house property = Rs 10 lacs.
Section 24(a) allows deduction of 30% of annual rental income. 30% of 10 lacs = Rs 3 lacs
You have not taken a home loan
Net income from house property = Rs 10 lacs – Rs 3 lacs = Rs 7 lacs (you cannot have a loss under income from a let-out property unless you have taken a home loan).
This gets added to your overall income and you pay tax accordingly.
You have taken a home loan and the interest payout for the year is Rs 5 lacs
The net income from house property = Rs 10 lacs – Rs 3 lacs – Rs 5 lacs = Rs 2 lacs.
Until here, the treatment is the same for both the old tax regime and the new tax regime.
You have taken a home loan and the interest payout for the year is Rs 13 lacs
If the interest payment was higher, say 13 lacs, then the treatment would differ.
Net income from house property = Rs 10 lacs – Rs 3 lacs – Rs 13 lacs = Loss of Rs 6 lacs
Under the old regime, you can utilize loss of up to Rs 2 lacs to set off against other heads of income.
Under the new regime, no such set off is permitted.
| Let-out Property | |||||
| Parameters | Old Tax Regime | New Tax Regime | |||
| Without Home Loan | With Home Loan | Without Home Loan | With Home Loan | ||
| Annual Value of House (A) | 1,000,000 | 1,000,000 | 1,000,000 | 1,000,000 | |
| Standard Deduction of 30% of Annual Value (B) | 300,000 | 300,000 | 300,000 | 300,000 | |
| Home Loan Interest | NA | 500,000 | NA | 500,000 | |
| Deduction for Home Loan Interest (C) | NA | 500,000 | NA | 500,000 | |
| Income from House Property (A) – (B) – (C) | 700,000 | 200,000 | 700,000 | 200,000 | |
| Salary | 2,000,000 | 2,000,000 | 2,000,000 | 2,000,000 | |
| Set off of Loss under House Property? | Permitted up to Rs 2 lacs under Section 71 | Not permitted under Section 115BAC | |||
| Net Taxable Income (after adjustment for loss under income from house property) | 2,700,000 | 2,200,000 | 2,700,000 | 2,200,000 | |
| Let-out Property | |||||
| Parameters | Old Tax Regime | New Tax Regime | |||
| Without Home Loan | With Home Loan | Without Home Loan | With Home Loan | ||
| Annual Value of House (A) | 1,000,000 | 1,000,000 | 1,000,000 | 1,000,000 | |
| Standard Deduction of 30% of Annual Value (B) | 300,000 | 300,000 | 300,000 | 300,000 | |
| Home Loan Interest | NA | 1,300,000 | NA | 1,300,000 | |
| Deduction for Home Loan Interest (C) | NA | 1,300,000 | NA | 1,300,000 | |
| Income from House Property (A) – (B) – (C) | 700,000 | (600,000) | 700,000 | (600,000) | |
| Salary | 2,000,000 | 2,000,000 | 2,000,000 | 2,000,000 | |
| Set off of Loss under House Property? | Permitted up to Rs 2 lacs under Section 71 | Not permitted under Section 115BAC | |||
| Net Taxable Income (after adjustment for loss under income from house property) | 2,700,000 | 1,800,000 | 2,700,000 | 2,000,000 | |
You can notice that old regime turns out better because it allows set-off against other heads of income. Hence, old regime will show a lower net taxable income. However, the tax rates under the old regime are higher.
Hence, at the time of filing returns, do check which tax regime makes you pay lower taxes and file returns accordingly.
What Amount of Rental Income Is Tax-Exempt under the New Tax Regime?
We start with assumptions.
- The property is let-out. Why else would there be rental income?
- There is no other income. No salary or pension or anything.
- You file your returns under the New Tax regime.
Under the New regime, we know that, if your income is up to Rs 12 lacs (from FY2026), you will not have to pay any taxes.
In absence of any other income, how much rental income can you earn without having to pay taxes?
If you do not have a home loan for let-out property
The only deduction available is 30% from annual value. No other deduction available.
We can now solve this mathematically.
X * (1-30%) = Rs 12 lacs
X = Rs 17.14 lacs
To check if this is indeed the correct answer,
Annual income from house property = Rs 17.14 lacs
Deduction of 30% = Rs 17.14 lacs * 30% = Rs 5.14 lacs
Net taxable income from house property = Rs 17.14 lacs – Rs 5.14 lacs = Rs 12 lacs (and you pay no taxes if the income is up to Rs 12 lacs. From FY2026).
If you have taken a home loan
Again, math is our friend.
The entire interest paid can be deducted for a let-out property.
Hence, we need to solve the following equation.
X (1 – 30%) – Home Loan Interest = Rs 12 lacs
X = (Rs 12 lacs + Home Loan Interest) *10/7
So, if the interest paid is Rs 5 lacs, X = Rs 24.28 lacs. You won’t have to pay tax if the rental income is up to Rs 24.28 lacs.
The answer will change as the annual interest payment changes.