For a let-out property, Section 24(b) allows the full interest on borrowed capital as a deduction — there is no monetary ceiling, because the deduction is set off against actual rental income. For a self-occupied property, where the annual value is Nil rather than a real income figure, the interest deduction is capped at ₹2 lakh a year (including the amortised pre-construction instalment) to prevent an unlimited notional loss. Get the occupancy classification wrong — treating a vacant second house as self-occupied when it should be deemed let-out, for instance, once more than two houses are self-occupied — and both the annual value and the interest cap flip.
The pre-construction interest rule adds a timing wrinkle: interest paid or payable for the period before the year in which construction is completed (or the property is acquired) is not deductible in the year it is paid — it is aggregated and spread over 5 equal annual instalments starting from the year of completion, alongside that year’s regular interest.
For a let-out property, the Gross Annual Value (GAV) is the higher of the "expected rent" — itself the higher of fair rent and municipal value, capped by standard rent where the Rent Control Act applies — and the actual rent received or receivable. Municipal taxes actually paid by the owner during the year are deducted to arrive at the Net Annual Value (NAV), from which a flat 30% standard deduction under Section 24(a) is allowed regardless of actual expenditure, followed by interest on borrowed capital under Section 24(b) with no monetary ceiling.
For a self-occupied property, the annual value is treated as Nil — for up to two such houses per assessee; a third self-occupied house is treated as deemed let-out. With NAV at Nil, the only deduction available is interest under Section 24(b), capped at ₹2 lakh a year (₹30,000 if the loan is not for acquisition/construction, or if acquisition/construction is not completed within 5 years from the end of the financial year in which the loan was taken).
Interest relating to the period before the year of completion ("pre-construction interest") is not deductible in the year it accrues — it is aggregated and claimed in 5 equal annual instalments starting from the year of completion, alongside that year's regular interest, and is itself subject to the same ₹2 lakh self-occupied cap where applicable.
A let-out flat has fair rent ₹6 L, municipal value ₹5.5 L, actual rent ₹7.2 L, municipal taxes paid ₹0.25 L, and current-year home loan interest of ₹3.5 L.
