New Income Tax Bill clarifies key deductions on house property income

The revised Income Tax (No. 2) Bill, 2025, has brought much-needed clarity for homeowners by explicitly defining two important provisions under Clause 22 -- the 30% standard deduction on annual value and the treatment of pre-construction interest for home loans. These updates align the proposed law with existing practices under the Income-tax Act, 1961, while correcting gaps in the earlier draft of the Bill.

Clearer rules on standard deduction

Clause 22 now specifies that homeowners can claim a flat 30% standard deduction on the annual value of a residential property, calculated after deducting municipal taxes paid. This mirrors the current law and provides certainty for taxpayers, especially those declaring rental income. The provision ensures uniformity in computing taxable income from house property.

In the initial draft of the Income-tax Bill, 2025, Clause 22(1)(a) permitted a 30% deduction from the annual value but failed to clarify whether this calculation should be made before or after subtracting municipal taxes. This ambiguity sparked concerns that it might deviate from the current practice, potentially leading to interpretations where the 30% deduction would be computed on the gross annual value.

Pre-construction interest deduction

One of the most significant changes involves the deduction for interest paid on borrowed capital during the pre-construction period. Under the clarified provision, taxpayers can claim such interest in five equal annual instalments, starting from the year construction is completed.

Crucially, this benefit now applies to both self-occupied and let-out properties—a correction from the earlier draft, which restricted the deduction only to self-occupied homes. Tax experts had warned that the earlier omission would have disadvantaged those who rent out or have deemed-to-be-let properties purchased through home loans.

Provisions offered

According to CA Dr. Suresh Surana, the current Section 24(b) of the 1961 Act already grants pre-construction interest deductions irrespective of occupancy status. The revised Clause 22 preserves this parity, ensuring that property owners are not penalised based on whether they live in or rent out their property.

The Select Committee reviewing the Bill flagged the earlier restriction as a “significant deviation” from existing law. Its recommendation to extend the benefit to let-out properties has now been accepted, aligning the Bill with the principle of equitable treatment for all homeowners.

Impact on taxpayers

For individuals with home loans, these clarifications mean:

The standard deduction continues as before, offering relief on maintenance-related costs.

Pre-construction interest—often a large outflow in early years—remains deductible for rental and deemed-let properties as well as self-occupied homes.

Municipal taxes will be factored in before calculating the 30% standard deduction, ensuring a fairer computation of taxable rental income.

With the Bill slated to replace the 1961 Act from April 1, 2026, tax practitioners say the restored provisions will prevent unnecessary disputes and keep property income taxation consistent with long-standing norms.

In effect, Clause 22 of the new Bill is less about rewriting the rules and more about preserving established homeowner benefits while making the law’s language sharper and more transparent.