Latest version of new tax bill, 2025 clarifies two key laws on income from house property

Aug 12, 2025

Synopsis
The New Tax Bill 2025 clarifies rules for house property income. It focuses on standard deductions and pre-construction interest on home loans. A Lok Sabha Committee suggests changes for fairness. These changes affect homeowners who rent out their properties. The new bill aims to align with existing tax laws. It ensures clarity on deductions for municipal taxes and interest payments.

Clause 22 of the latest version of the New Income Tax Bill, 2025 has clarified two key laws relating to taxation of income from house property. The first clarification is regarding standard deduction of 30% from the annual value of a residential house property. The second clarification is about availability of tax deduction for pre-construction interest for home loan taken for construction of a house.

In the earlier version of the bill, this tax deduction for pre-construction interest and standard deduction were not explicitly clarified. Therefore, the Lok Sabha Select Committee had said:

“The Committee, after deliberations on Clause 22, identified the need to clarify the computation of deductions to enhance fairness and transparency for property owners. The Committee, recommend two key amendments:

firstly, in Clause 22(1)(a), to explicitly state that the standard 30% deduction is computed on the annual value after deducting municipal taxes; and

secondly, in Clause 22(2), to ensure the deduction for pre-construction interest is available for let-out properties in addition to selfoccupied ones, aligning it with the existing Act. Further, the Committee accept the remaining provisions of Clause 22 as proposed in the Bill.”

Here's what the new version of the bill states:

22. (1) The income under the head “Income from house property” shall be computed after making the following deductions:––
(a) 30% of the annual value as determined under section 21;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital;
(c) where the capital referred to in clause (b) is borrowed during any period prior to the tax year in which the property has been acquired or constructed, the amount of any interest payable for the said prior period in five equal instalments for the said tax year and for each of the four immediately succeeding tax years

What does this mean for homeowners?

If you are a homeowner who bought a residential property by taking a home loan from a financial institution, you can claim some tax deductions on both the principal and the interest components of the loan. The amendments proposed by the Select Committee relate to a situation where you have put your house bought on loan on rent (let-out).

Chartered Accountant Abhishek Soni, co-founder, Tax2Win explains: “A let-out house property is one that is rented out or leased to another party. The rental income received from such a property is taxable under the heads of income – "Income from House Property." Individuals can claim tax deductions on the municipal taxes paid, standard deduction (30% of the net annual value), and interest on home loans.”

CA (Dr.) Suresh Surana, explains:

Revised Income Tax Bill, 2025 provides clarification on the deduction mechanism

In accordance with the existing provisions of the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act’), the computation of income under the head “Income from House Property” is governed by Sections 23 and 24. Section 23 provides that the annual value of a property is to be reduced by municipal taxes actually paid by the owner during the year, to arrive at the net annual value. Section 24(a) then allows a standard deduction of 30% on this net annual value, representing allowances for repairs and maintenance irrespective of actual expenditure. This sequence of deductions i.e. firstly the municipal taxes, then standard deduction ensures that taxpayers are taxed on their net real income, taking into account statutory liabilities such as property tax.

However, in the original draft of the Income-tax Bill, 2025, Clause 22(1)(a) allowed a 30% deduction from the annual value but did not specifically provide whether this deduction was to be applied before or after deducting municipal taxes. This lack of clarity raised concerns around possible deviation from the existing practice and could have led to interpretations whereby the 30% deduction would be applied on the gross annual value.

Recognising this ambiguity, the Select Committee recommended a clarifying amendment to Clause 22(1)(a) to restore the fairness and consistency of the computation mechanism. The revised Bill now explicitly states that the 30% standard deduction is to be computed on the annual value as determined under Clause 21 i.e. after deducting municipal taxes from the annual value. This amendment aligns the proposed provisions with the existing legal framework.

Deduction for Pre-Construction Interest Extended to Let-Out Properties in Revised Income-tax Bill, 2025

Section 24(b) of the Income-tax Act, 1961 provides for a deduction w.r.t. interest on borrowed capital used for the acquisition or construction of house property. In cases where such interest pertains to the pre-construction or pre-acquisition period, the law permits a deduction in five equal annual instalments, beginning from the year in which the construction is completed. This benefit is available regardless of whether the property is self-occupied or let out, ensuring equitable treatment across both categories of ownership.

However, in the original draft of the Income-tax Bill, 2025 provided for the deduction of pre-construction interest only in respect of self-occupied property, with no corresponding provision for let-out or deemed to be let out properties. This marked a significant deviation from the current law and could have led to unintended hardship for taxpayers owning such properties.

Recognising this inconsistency, the Select Committee recommended an amendment to Clause 22(2) to restore parity by extending the deduction for pre-construction period interest to let-out properties as well. The revised Bill now aligns with the existing legal framework by allowing such deduction across both self-occupied and let-out property categories.

Both of these suggestions have been duly incorporated into the Income-tax (No. 2) Bill, 2025. However, the Government has revised the wording in clause 22(1)(a), specifying that the 30% standard deduction will be applicable to the annual value as computed under clause 21.

Ashish Agrawal, Partner, Dhruva Advisors LLP, says:

Under the current Income Tax Act, 1961, homeowners can claim deductions for municipal taxes, a 30% standard deduction (post municipal taxes), and interest on home loans, including a pre-construction interest. Loss from house property can be set off against other income up to Rs 2 lakh in the year of loss, with the balance carried forward for 8 years.

The New Direct Tax (No. 1) Bill, 2025 retained similar provisions but was unclear on two aspects: whether calculation of the 30% deduction is after municipal taxes and availability of deduction of pre-construction interest for let-out properties. The Lok Sabha Select Committee, in its July 21, 2025 report, had recommended clarifying both these aspects. The Revised Direct Tax (No. 2) Bill, 2025 introduced in Parliament on August 11, 2025 is updated with both the suggestions and the provisions are now aligned with the existing Income Tax Act.

[The Economic Times]