Finance Minister Nirmala Sitharaman tabled the revised Income Tax Bill, 2025 in the Parliament. This marked a significant milestone in India’s ongoing efforts to overhaul and modernize its direct tax laws, originally governed by the Income Tax Act, 1961. The revised bill replaces a draft that was withdrawn last week due to ambiguities and concerns raised by stakeholders and lawmakers.
This updated version incorporates key recommendations made by the Parliamentary Select Committee (PSC), chaired by BJP leader Baijayant Panda, which reviewed the initial draft in detail. The committee made 285 suggestions, including 32 principal recommendations, most of which have been integrated into the revised bill. The government emphasizes that these changes aim to provide clarity, reduce litigation, and simplify tax compliance for individuals and businesses alike.
The revised Income Tax Bill 2025,brings several significant changes that directly impact property owners in India. These amendments are designed to clarify taxation rules related to rental income, increase allowable deductions, and reduce disputes that often arise from ambiguities in the earlier legal framework.
Clearer Rules on Rental Income Valuation
One of the longstanding challenges for property owners has been the ambiguity in how rental income is assessed for tax purposes. The revised bill addresses this by removing vague phrases like “in normal course” from the legal text. Now, the taxable rental income will be determined based on the higher of the actual rent received or the deemed rent.
The deemed rent refers to a notional value usually calculated based on municipal valuations or fair rental value of the property in question. This means if the actual rent paid by tenants is lower than what municipal authorities consider reasonable, the property owner will be taxed on the higher amount.
This approach aims to standardize the valuation process and reduce the scope for property owners to under-report rental income. While this may lead to higher taxable amounts in some cases, it ensures uniformity and fairness in tax treatment across the sector.
Deduction of Municipal Taxes Before Income Calculation
Another important clarification concerns municipal taxes, which property owners pay to local authorities for services like water supply, drainage, and property maintenance. The revised bill explicitly states that municipal taxes paid by the owner will be deducted from the gross rental value before computing the taxable income.
This deduction recognizes that municipal taxes are an expense borne by the property owner and should not be counted as income. By allowing this deduction, the taxable rental income decreases, leading to a lower tax liability. This provision aligns with longstanding practices but removes any prior uncertainty around its application.
Protection Against Tax on Unrealized Rent
In many cases, property owners face difficulties when tenants fail to pay rent on time or at all. Previously, tax authorities sometimes sought to levy tax on the rental income that was due but not received, causing hardship for property owners.
The revised bill rectifies this by excluding unrealized rent from taxable income. This means property owners will not have to pay tax on rent amounts that remain unpaid or unrecovered during the tax year. Tax liability arises only on rent that is actually received.
This change provides significant relief to landlords, especially in situations of tenant default or delays in payment. It helps align tax obligations more closely with real cash flows, improving fairness and reducing compliance stress.
Extended Deduction for Pre-Construction Interest
Property loans often involve interest payments during the period before construction completion—known as pre-construction interest. Earlier tax rules allowed deduction of this interest primarily for self-occupied properties, limiting benefits for owners who rented out their homes.
The revised Income Tax Bill 2025 broadens this benefit, permitting property owners to claim pre-construction interest deduction on both self-occupied and let-out properties. However, this deduction will be spread equally over five assessment years, starting from the year the construction is completed and the property becomes habitable.
This amendment recognizes the financial burden on property investors and landlords who carry interest costs during construction phases. By allowing deductions for rental properties as well, it eases their tax burden and encourages investment in the housing sector.
Standard Deduction Calculated After Municipal Taxes
Property owners can claim a standard deduction of 30% on net rental income, which is intended to cover expenses like repairs, maintenance, and other property-related costs without requiring detailed bills.
The bill clarifies that this 30% deduction should be applied after subtracting municipal taxes from the gross rent. This means municipal taxes reduce the income figure before the standard deduction is calculated, leading to a slightly lower taxable amount.
This clear sequencing helps avoid confusion and ensures consistent application of the deduction, supporting property owners in claiming the correct amount of relief.
Tax Relief for Unused Commercial Properties
Owners of commercial properties often face tax liabilities on “notional rent” when their premises remain vacant, meaning they pay tax on an assumed rental income even if the property is unused.
The revised bill addresses this issue by stipulating that temporarily unused commercial properties will not be subject to tax on notional rent. This relief acknowledges real-world scenarios where economic downturns, business changes, or restructuring cause temporary vacancies.
By exempting such premises from tax on hypothetical income, the government provides critical financial relief to commercial property owners, reducing pressure during periods of vacancy and encouraging long-term property retention.
What These Changes Mean for Property Owners?
Collectively, the amendments in the Income Tax Bill 2025 bring clarity and fairness to the taxation of property income. Property owners will benefit from standardized rental income valuation that reduces disputes, increased deductions that lower taxable income, and protection from tax liabilities on unrealized rents and vacant commercial properties.
Owners who finance under-construction properties for rental purposes gain extended relief through the ability to claim pre-construction interest deductions over multiple years. The sequencing of municipal tax deduction before the standard deduction calculation ensures an accurate and equitable tax base.
For commercial property owners, exemption from notional rent tax during vacancy periods offers practical financial relief that reflects market realities.
What Property Owners Should Do Next?
- Maintain Accurate Records: Ensure all municipal tax payments and rental receipts are documented carefully to support deductions and income declarations.
- Track Pre-Construction Interest: Collect and preserve loan interest statements related to construction periods, especially if the property is intended for rental use.
- Review Rental Agreements: Confirm that rents charged are in line with municipal valuations to avoid unexpected tax liabilities on deemed rents.
- Consult Tax Professionals: Seek guidance on how to best apply new provisions, especially for complex portfolios or mixed-use properties.
- Stay Updated: Monitor government notifications and circulars that may provide additional guidance on implementing the new tax rules.
Way Forward
The Income Tax Bill 2025 advances the goal of a clearer, more just tax system for property owners. By addressing ambiguity and expanding deduction opportunities, it offers greater transparency and relief for millions who earn income through residential and commercial real estate. Property owners should familiarize themselves with these provisions to optimize their tax planning and compliance. As India’s property market continues to grow and evolve, such legislative refinements are vital to balancing government revenue needs with taxpayer fairness.