Home-Loan Interest and House-Property Loss for NRIs: The Rs 2 Lakh Set-Off Cap, the Eight-Year Carry-Forward, and the Regime That Quietly Takes Both Away

A reader in Dubai bought a flat in Gurugram in 2023 on a Rs 90 lakh loan, lets it for Rs 45,000 a month, and pays roughly Rs 6,50,000 of interest a year. He assumed the gap between his rent and his interest, a real economic loss of several lakh, would simply wash against the Rs 7,00,000 of NRO fixed-deposit interest he also earns in India, leaving almost nothing to tax. It does not. The most he can set against that NRO interest in a single year is Rs 2,00,000, and only if he files under the old regime; under the new regime he can set off nothing at all. The rest of the loss does not vanish, but it does not help him this year either. It goes into an eight-year holding pattern where it can only ever shelter future rent, and if he sells the flat before he uses it up, it is gone.

The 30-second answer: A home-loan interest loss on an Indian property is set off, but not freely. Interest is deducted under Section 24(b): capped at Rs 2,00,000 for a self-occupied house, uncapped for a let-out one. When interest exceeds rent net of the 30% standard deduction (Section 24a) and municipal taxes, the property shows a loss. Section 71 sets that loss against your other income only up to Rs 2,00,000 a year. The balance is carried forward under Section 71B for eight assessment years, usable only against future house-property income, and lost if you file late. Under the new regime (Section 115BAC), the inter-head set-off is gone entirely and self-occupied interest is not deductible at all. File the right regime and file on time.

This guide is part of our NRI tax-filing series. For the full mechanics of putting the return together, which schedules apply and how to e-verify from abroad, start with the NRI ITR filing guide for AY 2026-27, then come back here for the set-off detail.

This guide assumes you already know your residency status, what an NRO account is, and the basic shape of how Indian rent is taxed. If the computation of rental income is new to you, read tax on Indian rental income for NRIs first, because this guide picks up where that one leaves off. What follows is the part most NRI landlords with India home loans get wrong: how the interest deduction is sized differently for self-occupied and let-out property, how a loss is actually computed, the Rs 2 lakh ceiling under Section 71 that almost everyone confuses with the Rs 2 lakh interest cap, the eight-year carry-forward under Section 71B and what it can and cannot do, and the single decision, old regime or new, that determines whether any of this benefit reaches you at all. Worked examples run the arithmetic end to end.

First sort the property: self-occupied, let-out, or deemed let-out

Everything downstream, the interest cap, the standard deduction, whether a loss can even arise, depends on which of three boxes your property falls into. Indian tax law treats them differently, and an NRI is in an unusual position because the flat sitting empty in India while you live in London or Dubai is rarely "self-occupied" in the way you might assume.

A self-occupied property is one you occupy as your own residence, or that you cannot occupy because your work keeps you elsewhere and it is not let out. For an NRI this second limb matters: the law does allow a house that you own but cannot live in because you are employed abroad to be treated as self-occupied, with its annual value taken as nil, provided you have not let it out and derive no benefit from it. The practical effect is that the property produces no rental income, the 30% standard deduction does not apply (there is nothing to apply it to), and the only deduction available is home-loan interest under Section 24(b), capped at Rs 2,00,000 a year.

A let-out property is one you actually rent. Its gross annual value is the rent it fetches, you subtract municipal taxes to reach net annual value, take the 30% standard deduction, and deduct the full interest. The interest here is uncapped.

A deemed-let-out property is the trap. Until the rules were eased, owning more than one self-occupied house meant the law treated the extra ones as if they were rented, attributing a notional rent to them even though no rent was received. Since the Finance Act, 2019, you may treat up to two house properties as self-occupied with nil annual value. Own a third (or more) that is neither let nor genuinely self-occupied, and that excess property is deemed to be let out: a notional fair rent is computed, the 30% and municipal taxes come off, and the interest is deducted as if it were a real let-out property. For an NRI holding an inherited flat plus an investment flat plus the family home, this is exactly the kind of arithmetic that arrives uninvited.

The honest framing: before you compute a single rupee, decide which bucket each property sits in, because an NRI with two empty flats and a big home loan has a very different answer depending on whether the second flat is self-occupied (interest capped at Rs 2 lakh) or deemed let out (interest uncapped, but notional rent added).

Section 24(b): the interest cap is for self-occupied, and let-out interest is uncapped

This is the single most common mistake NRI landlords make, so it is worth being precise. Section 24(b) allows a deduction for interest on capital borrowed to acquire, construct, repair, renew, or reconstruct the property. How much you can deduct depends entirely on the bucket.

For a self-occupied property, the deduction is capped at Rs 2,00,000 a year, provided the loan was taken on or after April 1, 1999 for acquisition or construction, and that acquisition or construction is completed within five years from the end of the financial year in which the loan was taken. Miss the five-year window, or take the loan for repairs rather than purchase, or for a loan predating April 1, 1999, and the cap drops to Rs 30,000. There is no rent against which to set the interest, so the interest itself produces the loss, and that loss can never exceed Rs 2,00,000 because the deduction is capped there in the first place.

For a let-out or deemed-let-out property, the interest itself is not capped at all. You deduct the entire year's interest, whether it is Rs 3,00,000 or Rs 6,50,000, against the rental income. This is where the confusion does real damage: people hear "Rs 2 lakh" attached to Section 24(b), carry it into the let-out conversation, and understate what they can deduct by lakhs. For your rented flat, the interest deduction is the full figure.

What is capped on a let-out property is not the interest but the loss it can create and set off against your other income. That is a different provision, Section 71, and a different Rs 2 lakh, and confusing the two is the most expensive error in this whole area. We will get to it after the standard deduction, because you cannot compute the loss correctly without first computing the rental income correctly.

One more point NRIs miss: the interest must actually be on borrowed capital for that property, and it is deductible on an accrual basis, not just when you pay it. Interest payable for the year is deductible even if your EMIs are running behind, and pre-construction interest (interest for the period before the property was ready) is deductible in five equal instalments starting from the year of completion. Keep your lender's annual interest certificate; it is what your CA enters in Schedule HP.

The 30% standard deduction and the municipal-tax line you are tempted to skip

Before any loss can arise on a let-out property, you build the rental income, and two deductions sit above the interest line.

First, municipal taxes actually paid by you during the year, property tax, are subtracted from the gross annual value to reach the net annual value (NAV). The word "paid" matters: it is the tax you actually paid in the year, not the tax that was merely due. If your property manager paid it on your behalf, you can claim it; if it sat unpaid, you cannot.

Second, the standard deduction of 30% under Section 24(a), computed on the net annual value, not the gross rent. This is a flat allowance given whether you spent nothing on the flat all year or spent three times that. It is deemed to cover repairs, painting between tenants, society maintenance, the broker's finding fee, insurance, everything except interest. You do not get a separate deduction for actual repair bills on top of the 30%; claiming them again is simply wrong.

The sequence is not optional, and the trap is the municipal-tax line. Because the 30% comes off the NAV (gross rent minus municipal taxes), skipping the municipal-tax deduction makes your taxable figure larger, not smaller. Subtract municipal taxes first, then take the 30%, then the interest. For a self-occupied property none of this applies: the annual value is nil, there is no NAV, and the 30% standard deduction is unavailable, leaving only the capped Section 24(b) interest.

How the loss is built, and where it goes

Put the lines together on a let-out flat and the loss appears mechanically. Take gross rent, subtract municipal taxes to get NAV, subtract 30% of NAV, subtract the full interest. If the interest is large enough relative to the rent, the result is negative, a loss under the head Income from house property.

That loss does not simply disappear into your other income. Indian law routes it through two provisions in sequence:

1. Section 71 governs the set-off of the loss against income under other heads (salary, capital gains, income from other sources such as NRO interest) in the same year. This inter-head set-off is capped at Rs 2,00,000 a year, regardless of how large the actual loss is.
2. Section 71B governs what happens to the part of the loss that Section 71 could not absorb. That balance is carried forward for up to eight assessment years, and in those later years it can be set off only against income from house property, nothing else.

So a Rs 5,00,000 house-property loss does not knock Rs 5,00,000 off your taxable income this year. At most Rs 2,00,000 of it reaches your other income now; the remaining Rs 3,00,000 goes into the carry-forward bucket, where it waits for future rental income to absorb it. This is the architecture that catches NRI landlords who borrowed heavily and assumed the interest would shelter their NRO interest or India-source capital gains in full.

The Rs 2 lakh that everyone quotes is the wrong Rs 2 lakh

It is worth stating the distinction in one place, because the entire topic turns on it.

There are two separate Rs 2 lakh limits, and they apply to different things:

• The Section 24(b) Rs 2,00,000 cap is on the interest deduction itself, and it applies only to self-occupied property. A let-out property has no interest cap.
• The Section 71 Rs 2,00,000 cap is on the loss that can be set off against other income heads, and it applies to the loss from any house property, let-out included. The interest on the let-out flat is fully deducted within the house-property head; the Rs 2 lakh bites only when that head turns negative and you try to push the negative figure into your salary or NRO interest.

The practical consequence: an NRI with a let-out flat and Rs 6,50,000 of interest deducts all Rs 6,50,000 inside the house-property head (no Section 24(b) cap), but if that produces, say, a Rs 4,00,000 loss, only Rs 2,00,000 of it reaches the rest of the return this year (the Section 71 cap), and Rs 2,00,000 carries forward. For most NRIs whose only India income is the rent, the Section 71 cap rarely bites, because there is little other India income to set the loss against and it would carry forward anyway. It bites hard for the NRI who also has a large NRO fixed-deposit interest line or an India-source capital gain in the same year and was counting on the mortgage loss to wipe it out.

The new regime takes the set-off away, and that decides which regime you file under

Here is the fact that should drive your regime choice, and it is not the slab rates.

Under the new regime (Section 115BAC, the default since AY 2024-25), the inter-head set-off of a house-property loss against other income is gone. Not capped at Rs 2 lakh; zero. If you file under the new regime, a let-out interest loss cannot reduce a single rupee of your salary, NRO interest, or capital gains this year. The loss is still computed and, on the prevailing reading, can be carried forward against future house-property income, but the immediate benefit is removed. The carry-forward treatment of let-out losses under the new regime is not free of doubt: some commentators read the regime as also restricting the carry-forward where the loss arises from interest exceeding rent, and the Income Tax Department's own utility behaviour has not always been consistent. Where the position is unsettled, the conservative planning assumption is that the new regime gives you no current-year relief, and you should not rely on the carry-forward being available; model it both ways.

The new regime is harsher still on a self-occupied property: under Section 115BAC, the Section 24(b) interest deduction on a self-occupied house is not allowed at all. The Rs 2 lakh you could claim under the old regime simply does not exist in the new one. For an NRI carrying a self-occupied flat with a large loan and treating it as self-occupied, that is up to Rs 2,00,000 of deduction surrendered every year you stay in the new regime.

The new-regime slabs for FY 2025-26 (AY 2026-27) run 0% up to Rs 4,00,000, 5% to Rs 8,00,000, 10% to Rs 12,00,000, 15% to Rs 16,00,000, 20% to Rs 20,00,000, 25% to Rs 24,00,000, and 30% above. The higher Rs 4,00,000 basic exemption helps everyone. But the Section 87A rebate that makes income up to Rs 12 lakh effectively tax-free is for residents only, so as an NRI you do not get that zero-tax band; your tax starts above Rs 4,00,000 regardless of regime.

The decision splits cleanly along one line: do you have a mortgage-driven loss, and other India income to set it against this year?

Your situation	Old regime	New regime	Which usually wins
Self-occupied flat, big loan, no rent	Interest deductible up to Rs 2 lakh	No interest deduction at all	Old regime, by the Rs 2 lakh deduction
Let-out flat with interest loss, plus other India income (NRO FD, gains)	Loss set off vs other income up to Rs 2 lakh now	No inter-head set-off; loss only carried forward	Old regime, because the loss works now
Let-out flat with interest loss, no other India income to absorb it	Loss carried forward anyway	Loss carried forward (carry-forward itself debated)	Roughly neutral on the loss; compare slabs
Rental positive (no loss), modest income	Rs 2.5 lakh basic exemption, slab tax	Rs 4 lakh basic exemption, lower slabs	New regime, on the higher exemption

The general recommendation: if you are carrying a genuine interest-driven loss and have meaningful other India income to absorb it this year, or you hold a self-occupied flat with a large loan, the old regime is frequently worth more than the slab difference, because it is the only regime in which the set-off and the self-occupied interest actually work. If rental is positive or you have no loss to deploy, the new regime's higher exemption and softer slabs usually win. Model both in the ITR utility before you commit; the choice is annual, so you can switch year to year as your loan amortises and the interest shrinks.

Worked example: Rs 5,40,000 of rent, Rs 6,50,000 of interest, and where the loss actually goes

Take the Gurugram flat. Rent of Rs 45,000 a month is a gross annual value of Rs 5,40,000. You paid Rs 30,000 of municipal tax during the year, so the net annual value is Rs 5,10,000. The Section 24(a) standard deduction at 30% of NAV is Rs 1,53,000, leaving Rs 3,57,000. Your home-loan interest for the year, fully allowed because the property is let out and there is no Section 24(b) cap, is Rs 6,50,000.

Income from house property: Rs 3,57,000 minus Rs 6,50,000 = a loss of Rs 2,93,000.

Now route that loss. Assume you also earned Rs 7,00,000 of NRO fixed-deposit interest that year, taxable in India under Income from other sources.

Under the old regime:

• Section 71 lets you set off the house-property loss against the NRO interest, but only up to Rs 2,00,000.
• So Rs 2,00,000 of the loss reduces the NRO interest from Rs 7,00,000 to Rs 5,00,000 taxable this year.
• The remaining Rs 93,000 of loss (Rs 2,93,000 minus the Rs 2,00,000 set off) is carried forward under Section 71B for up to eight assessment years, usable only against future house-property income.
• Your taxable India income this year is the Rs 5,00,000 of net NRO interest. The Rs 2,00,000 set-off saved you tax at your slab on Rs 2,00,000, roughly Rs 40,000 of tax if that slice fell in the 20% band, plus cess.

Under the new regime:

• The house-property loss cannot touch the NRO interest at all. The full Rs 7,00,000 of NRO interest is taxable this year.
• The Rs 2,93,000 loss provides no current-year relief, and on the conservative reading you should not count on carrying it forward either.
• You pay tax now on Rs 7,00,000, with no shelter from the mortgage at all.

The difference between the two regimes on these numbers is real money this year, and it is entirely driven by the set-off, not by the slab rates. This is the case the new regime is worst for, and exactly the case so many leveraged NRI landlords fall into.

Worked example: the carry-forward used up in a later year

Stay with the same NRI. Suppose in the following year his interest has fallen (the loan is amortising) and rent has risen, so the let-out flat now shows a positive Income from house property of Rs 1,20,000 rather than a loss.

If he filed the prior year's loss correctly and on time under the old regime, the Rs 93,000 carried forward can now be set off against this year's Rs 1,20,000 of house-property income, leaving only Rs 27,000 of house-property income taxable. That is the carry-forward doing its job: sheltering future rent.

But note the two conditions that had to hold. First, he must have filed the original return by the due date under Section 139(1). File the loss-year return late and the carry-forward of the house-property loss can be forfeited; the loss you reported is then dead. Second, the carried-forward loss can only meet house-property income. If in the eighth year he still has unabsorbed loss and no rental income to set it against, the balance lapses unused. The carry-forward is a real asset, but it is a perishable one with an eight-year shelf life and a narrow use.

How TDS on the rent interacts with all of this

There is a second pot of money in play that has nothing to do with the loss computation but everything to do with your cash flow: the tax your tenant is supposed to withhold.

When rent is paid to a non-resident landlord, the tenant must deduct TDS under Section 195 at 31.2% (30% plus 4% health and education cess, surcharge on top above Rs 50 lakh of total India income) on the gross rent, from the first rupee. There is no Rs 50,000-a-month threshold; that floor belongs to Section 194-IB and applies only to resident landlords. The tenant needs a TAN, files a quarterly Form 27Q, and issues you Form 16A.

The critical point for this guide is the mismatch. The TDS is withheld on gross rent, before the 30% standard deduction and before your home-loan interest. Your actual taxable income, after the 30% and the interest, is far smaller, and where the property is in loss it is negative. So on a let-out flat with a mortgage loss, the tenant may be withholding 31.2% of gross rent against a tax bill that is nil or negative. Every rupee withheld is then a refund you have to claim back by filing ITR-2, and you finance the department for the year at a 6% consolation rate under Section 244A.

This is the practical case for two levers. First, a lower-deduction certificate under Section 197 (Form 13), applied for in April, can cut the withholding to something near your real liability, which on a loss-making let-out flat is close to zero. Second, where your tenant is an individual who deducts nothing at all (the common reality), you still report the rent and the loss honestly in ITR-2; the loss computation and carry-forward work the same way whether or not anyone withheld. The full mechanics are in tax on Indian rental income for NRIs, the lower-TDS certificate guide, and TDS for NRIs and how to claim it back.

What NRI landlords with India home loans most often miss

A short list, because these are the errors that recur.

• Quoting the Rs 2 lakh interest cap on a let-out flat. The cap is for self-occupied. On a rented flat you deduct the full interest; the Rs 2 lakh limit you are thinking of is the Section 71 set-off cap, a different thing.
• Assuming the whole loss reduces this year's tax. At most Rs 2 lakh reaches your other income, and only under the old regime. The rest carries forward.
• Filing the new regime by default and losing the set-off. The new regime is the default since AY 2024-25. If you have a leveraged let-out flat and other India income, the default is often the wrong regime, and nobody warns you.
• Treating a self-occupied flat in the new regime as still giving the interest deduction. It does not; self-occupied Section 24(b) interest is fully disallowed under Section 115BAC.
• Filing late and forfeiting the carry-forward. A house-property loss carried forward under Section 71B survives only if the loss-year return was filed by the Section 139(1) due date.
• Forgetting the loss is perishable. Eight assessment years, and usable only against future house-property income. Sell the flat or let it go vacant, and an unused carried-forward loss can simply expire.
• Skipping the municipal-tax line. It is deducted before the 30%, so omitting it inflates every deduction below it and your taxable figure with it.

Edge cases

Old regime versus new regime, year to year. The choice is annual for an NRI without business income, so you can sit in the old regime in the early years of a loan, when interest is high and the set-off is valuable, and switch to the new regime later as the loan amortises and the rental income turns positive. Re-run both each year in the ITR utility; do not set it and forget it.

Multiple properties. With the two-property self-occupied limit, an NRI holding three or more houses must designate which two are self-occupied (nil annual value, Section 24(b) interest capped at Rs 2 lakh each under the old regime) and accept that the third is deemed let out with a notional rent, the 30%, and uncapped interest. Choosing which property is which is a genuine optimisation: put your highest-interest loan on a property you treat as let-out or deemed-let-out, where the interest is uncapped, rather than burying it under the Rs 2 lakh self-occupied cap.

Co-owned property. Where a flat is co-owned, say with a spouse, the rent, the municipal taxes, the 30%, the interest, and therefore the loss split in the beneficial-ownership ratio, which the department reads from who actually funded the purchase, not from the names on the deed. Each co-owner reports their share and applies their own Rs 2 lakh Section 71 cap and their own eight-year carry-forward. Two genuine co-owners can therefore set off more loss against their respective other income than a single owner could, but only if the funding was genuinely shared; fund the whole purchase yourself and add a spouse for convenience, and Section 64 clubbing can pull their share back to you. The full treatment is in NRI joint property tax.

Self-occupied flag for an NRI living abroad. A house in India that you own, cannot occupy because your job keeps you abroad, and have not let out can be treated as self-occupied with nil annual value, so the only deduction is the capped Section 24(b) interest (old regime) or none (new regime). The moment you let it, even informally, it becomes let-out and the full computation, and the uncapped interest, applies.

Loss in the year of sale. A house-property loss and the capital gain on selling the same flat are different heads and different computations. A carried-forward house-property loss cannot be set against the capital gain on the sale; it meets only house-property income. The sale itself triggers its own TDS regime and capital-gains treatment, covered in selling property in India as an NRI.

The closing read

The honest read on home-loan interest and house-property loss for an NRI is that the deduction is real but the benefit is smaller and slower than the headline interest figure suggests, and the regime you tick on the return decides how much of it you ever see.

So commit to this. Sort each property first, self-occupied, let-out, or deemed let-out, because the interest cap and the standard deduction both turn on it. On a let-out flat, deduct the full interest; the Rs 2 lakh you may have heard is the self-occupied cap, not yours. Understand that a loss buys you at most Rs 2,00,000 of set-off against other income this year under Section 71, with the balance carried forward under Section 71B for eight assessment years against future rent only, and lost if you file late or sell the flat before you use it. Above all, choose the regime deliberately. If you are leveraged on a let-out flat with other India income to shelter, or you hold a self-occupied flat with a big loan, the old regime is usually worth keeping, because the new regime gives you no set-off and no self-occupied interest at all. If your rental is positive and you carry no loss, the new regime's higher exemption usually wins. Model both every year, because the answer flips as your loan amortises. And if your tenant is over-withholding 31.2% on gross rent against a loss-making flat, apply for a Section 197 certificate in April rather than financing the department for a year. The deduction rewards the organised landlord who files the right regime on time, and quietly shrinks for everyone else.

Related guides

• Tax on Indian rental income for NRIs
• NRI joint property tax: how rent and gains split
• NRI home loans in India: rates, tax and the exit
• Set-off and carry-forward of capital losses for NRIs
• The lower-TDS certificate (Form 13, Section 197)
• TDS for NRIs and how to claim it back
• Tax on NRO interest
• NRI ITR filing guide for AY 2026-27
• Advance tax for NRIs
• NRI residency and RNOR rules
• DTAA relief for NRIs
• Buying property in India as an NRI
• Selling property in India as an NRI
• The NRO repatriation process
• All taxation guides

This guide explains the law as it stands for FY 2025-26 (AY 2026-27) and is general information, not personal tax advice. The classification of a property, the regime choice, the Section 71 set-off, and the Section 71B carry-forward all depend on your full income picture and your country of residence, and the section numbers change when the Income Tax Act, 2025 takes effect on April 1, 2026, renumbering the house-property and set-off provisions. The treatment of let-out loss carry-forward under the new regime is not entirely settled; where it matters to your return, take the conservative position and confirm it. The worked examples are illustrative. Before you file, reconcile your TDS against Form 26AS and the AIS, and where the amounts are material or your situation is not straightforward, consult a chartered accountant or a qualified cross-border tax adviser.