A second home at a 3% rental yield: the after-tax, after-EMI return over ten years, worked out

Rules and rates as of 12 October 2026.

Listings for a second flat tend to lead with one number: rent divided by price. On a ₹1 crore flat let at ₹25,000 a month, that gross rental yield is ₹3,00,000 ÷ ₹1,00,00,000 = 3%. It is easy to compute and it leaves out almost everything that decides what an owner actually keeps: the purchase costs, the loan, the months the flat sits empty, maintenance, income tax on the rent, the cap on how much of the loss can cut your salary tax, and capital gains tax at exit. This explainer builds the full model, year by year, and shows which assumptions move the answer most.

How the Income-tax Act, 2025 treats a second home

The Income-tax Act, 2025, in force since 1 April 2026, renumbered the house-property rules. Four provisions matter here.

• Annual value, s.21. For a let-out flat, annual value is the higher of the rent it could reasonably fetch and the rent actually received, reduced by municipal taxes the owner actually paid in the year. The nil annual value for a home you live in (s.21(6)) is limited by s.21(7) to two houses you specify. A house that is let at any point in the year does not get the nil value. A third house you keep empty doesn't get it either, so its annual value is worked out on the rent it could reasonably fetch.
• Deductions, s.22. From annual value you deduct a flat 30% under s.22(1)(a), which stands in for repairs and upkeep. Actual maintenance bills are not deducted separately. You also deduct interest on the home loan under s.22(1)(b) (formerly s.24). The ₹2 lakh interest cap in s.22(2) applies to self-occupied houses. For a let-out flat the interest deduction itself is not capped.
• Set-off, s.109 and s.110. The cap comes back in a different place. Under s.109(1)(b), a loss under "Income from house property" can be set off against salary or other income only up to ₹2,00,000 a year. Under s.110, any loss above that can be carried forward for eight tax years, but only against future house-property income.
• Capital gains, s.197. Long-term gains are taxed at 12.5% (plus cess). For land or buildings acquired before 23 July 2024, s.197(3) lets resident individuals and HUFs pay the lower of that and 20% with indexation.

One more rule changes the result a lot. Under the new regime, s.202(2)(b)(ii) says total income is computed without setting off house-property loss against any other head. Interest still reduces the rent, but a loss stays inside the house-property head. The ₹2 lakh set-off is available only in the old regime.

The worked example

Every input below is an illustrative assumption, not a market quote.

• Price ₹1,00,00,000. Stamp duty, registration and other purchase costs taken at 7% (₹7,00,000). The real rate depends on your state, so check its IGR schedule.
• Down payment 20% (₹20,00,000), so ₹27,00,000 of your own cash goes in on day one.
• Loan ₹80,00,000 at 8% for 20 years. EMI = P·r·(1+r)ⁿ ÷ ((1+r)ⁿ − 1), with r = 8%/12 and n = 240, gives ₹66,915 a month, or ₹8,02,982 a year. The rate is held flat, although a repo-linked loan resets at least once every three months. RBI raised the repo rate to 5.50% on 7 October 2026.
• Rent ₹25,000 a month, rising 5% a year, collected for 11 months a year to allow for vacancy and changeovers.
• Maintenance ₹48,000, property tax ₹12,000 and insurance and repairs ₹10,000 a year, all rising 5% a year.
• Owner in the 30% slab under the old regime, so 31.2% with cess. The flat rises 5% a year and is sold after 10 years, with 2% sale costs. LTCG is taxed at 12.5% plus cess (13%), with no s.82 or s.85 exemption claimed.

Year 1, step by step

Rent received is ₹2,75,000. Minus ₹12,000 property tax, annual value is ₹2,63,000. The 30% deduction is ₹78,900. Interest paid in year 1 is ₹6,33,889. Income from house property = ₹2,63,000 − ₹78,900 − ₹6,33,889 = −₹4,49,789. Only ₹2,00,000 of that can be set off against salary, which saves ₹2,00,000 × 31.2% = ₹62,400 in tax. The other ₹2,49,789 is carried forward. Cash flow for the year = ₹2,75,000 − ₹70,000 running costs − ₹8,02,982 EMIs + ₹62,400 tax saved = −₹5,35,582, about ₹44,600 a month from your own pocket.

The pattern holds for all ten years. The top-up shrinks slowly, to ₹4,31,664 in year 10, as rent rises and interest falls. Over the decade it adds up to ₹48.4 lakh on top of the ₹27 lakh paid upfront. House-property income stays negative every year, so the ₹12.6 lakh of loss carried forward is never used.

The exit

At 5% a year, the flat is worth ₹1,62,88,946 after 10 years. Minus 2% sale costs (₹3,25,779) and the ₹1,07,00,000 acquisition cost including stamp duty, the gain is ₹52,63,167 and LTCG tax at 13% is ₹6,84,212. After repaying the ₹55,15,250 still owed on the loan, ₹97,63,705 comes back to you.

Put the cash flows together: −₹27 lakh at the start, ten years of top-ups, and the sale proceeds at the end. Solving for the rate that makes their present value zero gives a net after-tax IRR of about 3.9% a year on your money. That is higher than the 3% gross yield only because of leverage on the price gain. Rent net of running costs, before loan and tax, is just 1.9% of the ₹1.07 crore all-in cost.

What moves the answer

Scenario (all else as above)	Net after-tax IRR on equity
Headline gross rental yield	3.0% (not a return measure)
Base case: 5% appreciation, old regime	3.9%
Same, new regime (no ₹2 lakh set-off)	2.8%
Appreciation 7% a year	7.7%
Appreciation 3% a year	−0.4%
No appreciation	−8.9%
All cash, no loan, 5% appreciation	5.1%

Three points stand out. First, price growth decides the outcome, and rent barely moves it. Going from 3% to 7% appreciation swings the return by eight percentage points. Second, borrowing at 8% to earn a 1.9% net rent yield only pays off if prices rise fast enough, which is why the all-cash case beats the base case at 5% growth. Third, the ₹2 lakh set-off is worth about ₹62,400 a year to someone in the old regime and nothing in the new regime. If you've moved to the new regime, that alone takes about a percentage point off the return.

What the model leaves out

Several costs can tilt the result further: brokerage each time a tenant changes, a major repair, gaps between tenants longer than a month, a rate reset (each 0.25% on ₹80 lakh changes the EMI by roughly ₹1,250 a month), and the return the ₹27 lakh down payment and ₹48 lakh of top-ups could have earned elsewhere. Rent received is taxed. TDS by the tenant, GST on an under-construction purchase, and s.82 reinvestment relief on the sale are also left out. A chartered accountant can rerun these numbers with your own slab, state duty and loan terms.