Direct and Indirect Taxation · Income from House Property

Exempt Income from House Property under Income-tax Act 2025

Updated 10 October 2026 · Fact-checked

Income from house property is the annual value of buildings and attached land you own. Under section 20(2), the portion you occupy for your own business or profession is outside this head, because its profits are taxed as business income. Check ownership, then use, then head, before computing anything.

Understand Exempt Income from House Property

Income from house property is taxed on the annual value of buildings and lands appurtenant to them, owned by the assessee. Section 20(1) gives this charge. The test is ownership, not rent received. So the first question in any problem is: does the assessee own the property, and how is it used?

Section 20(2) carves out an exception. The charge does not apply to those portions of the property that the assessee occupies for his business or profession, the profits of which are chargeable to income-tax. Here the building is only a tool of the business. The benefit of using it is already inside business profit, so taxing a notional annual value as well would tax the same thing twice.

There is a second kind of boundary. Section 26(4) says income from letting out a residential house, or a part of it, by the owner is not included in business income. It is chargeable only under house property. Letting of a residential house therefore cannot be shifted to the business head, even if the owner calls it a business.

So the word exempt needs care. Property used for own business is not taxed under this head, but the business profit is taxed, and rent paid or depreciation claimed on it is dealt with in business computation. The property is outside the head, not free of tax overall. Many exam questions test exactly this: pick the correct head, then compute.

Also remember the five heads in section 13: Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Every receipt must fall in one of them. Your job is to place the property in the right one.

Key rules to remember

Charge on house property: Chargeable: annual value of buildings and appurtenant lands owned by the assessee (section 20(1)); Ownership is the key condition. Rent paid by a tenant to someone else is not taxed here for the tenant.
Own business or profession exclusion: Portion occupied for own business or profession, whose profits are chargeable to tax = not under house property (section 20(2)); Applies only to the portion so occupied. Any other portion, such as a let-out floor, remains under house property.
Letting of residential house: Letting of a residential house or part by the owner = only house property, never business income (section 26(4)); Overrides any claim that letting is a business for a residential house.
Heads of income: Salaries | House property | Business or profession | Capital gains | Other sources (section 13); Use this list to name the head in your answer.

How to solve Exempt Income from House Property questions

Use this order for any question asking whether a property income is taxed under house property.

1List each property and note who owns it. If the assessee is not the owner, section 20(1) does not apply to him.
2Note the use of every portion: own business or profession, self-occupied residence, let out, or vacant.
3Apply section 20(2): the portion occupied for own business or profession whose profits are taxable gives nil under this head.
4Check any letting. If a residential house or part is let out by the owner, section 26(4) fixes the head as house property.
5For the remaining taxable portions, compute annual value and allowed deductions as per the computation chapter.
6Mention where the excluded portion is taxed: the business profit includes its running costs and depreciation.
7State the final figure under house property and the reason for each exclusion in one line.

Quickest way: Three-question filter

When to use it: Use in MCQs and in the first minute of a written question with several properties.

Owner? No means nothing under house property for this person.
Used in own business or profession? Yes means that portion is outside the head under section 20(2).
Let out residential house? Yes means house property only under section 26(4).
Whatever is left goes to annual value computation.

Common mistakes in Exempt Income from House Property

Taxing the whole building under house property when part is used for own business.
Students look at the building, not its portions.
Fix: Split by use. Only the portion occupied for own business or profession is excluded; the rest stays in the charge.
Saying business-use property is completely tax free.
The word exempt is read too literally.
Fix: Write that it is not taxed under house property, but its income is taxed as business profit.
Treating rent from a let-out residential house as business income because the owner lets many houses.
Confusing frequency of letting with the business head.
Fix: Section 26(4) places such rent only under house property.
Applying section 20(2) when the business profits are not chargeable to tax.
The condition at the end of the sub-section is skipped.
Fix: Read the full condition: the profits of the business or profession must be chargeable to income-tax.
Taxing a tenant on property he does not own.
Occupation is confused with ownership.
Fix: Section 20(1) needs ownership. The tenant's rent is a business or personal expense, not house property income.

Worked examples

Example 1

Mr. Ramesh Iyer owns a two-floor building in Pune. He runs his taxable consulting practice from the ground floor and lives on the first floor. How is the building treated under house property?

Show the solution

Ownership: Mr. Iyer owns the building, so section 20(1) is relevant.
Ground floor: occupied for his own profession, whose profits are chargeable to tax. Under section 20(2), it is not charged under house property.
The profession's income, including costs linked to this floor, is computed under business or profession.
First floor: used as his own residence. It is the only portion that remains for house property computation, under the rules for self-occupied property.

Answer: The ground floor is outside income from house property under section 20(2) and is covered through professional income. Only the residential first floor is dealt with under house property.

Example 2

Ms. Kavita Shah owns a flat in Mumbai and lets it out as a residence for ₹30,000 a month. She says she lets many flats and wants the rent taxed as business income. Which head applies?

Show the solution

Ownership: she owns the flat, so the charge in section 20(1) applies.
Use: the flat is a residential house let out by the owner.
Section 26(4): income from letting a residential house or part of it by the owner is not included in business income.
The rent is therefore chargeable only under house property.

Answer: The rent is chargeable only under the head Income from house property, not business income.

Exam tips

In MCQs, watch for the words own business or profession and residential house letting; they point to section 20(2) and section 26(4).
In written answers, always name the section and state the head, then the reason. Step marks go to reasoning.
When a building is mixed-use, split it in a short table of portions in your working.
Do not quote the 1961 Act numbers. Use section 20, 26 and 13 of the Income-tax Act, 2025 and the term tax year.

Practice questions from Income from House Property

Exempt Income from House Property in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Exempt Income from House Property: frequently asked questions

Is property used for my own business taxed as house property?

No. Section 20(2) excludes the portion you occupy for your own business or profession, if its profits are chargeable to tax. Its benefit is taxed through business profit.

Does section 20(2) cover the whole building?

Only the portion occupied for the business or profession. Other portions, such as let-out floors, stay under house property.

Can rent from a house I let out be shown as business income?

For a residential house or part of it let out by the owner, no. Section 26(4) says it is chargeable only under house property.

Who is taxed under house property, owner or occupier?

The owner. Section 20(1) charges the annual value of property owned by the assessee.