Have you rented out your house and generated income from it? Under the Income Tax Act of 1961, income derived from a property is subject to taxation. This article elucidates the process for calculating tax on rental income, outlining the method for determining the gross annual value of a property and providing insights on ways to minimize tax liability on rental income.Tax on rental income
An income earned from renting your property is classified and taxed as income from house property. An income earned from renting your land is classified as income from other sources. A property owner has to pay tax on the rental earned under Section 24 of the Income Tax Act, 1961.
If a person has multiple properties, except the self-occupied property (SOP), all the others would be known as deemed let-out property (DLOP). These will attract taxes.
How to calculate income from house property?
The rental income for a property is computed by considering the gross annual value of the property. This is determined by deducting municipal taxes, such as property tax, interest paid on the housing loan under Section 24, net annual value, standard deductions of 30% of the annual value for expenses like renovation, and any loss from the housing property.
How is the tax on the rental income calculated?
The tax on the rental income is calculated on the annual rental value that has been received by the owner. The annual rental value is based on the annual rental income of the property or an approximation of what it would earn annually.
Tax deduction on home loan interest under Section 24
In case the owner or family resides in the property, the owner can claim up to Rs 2 lakh of deduction on the home loan interest. The deduction on interest is limited to Rs 30,000 in the following conditions:
Condition 1
- Loan taken on or after April 1, 1999
- Property construction or purchase not completed within five years from the end of the financial year in which the loan was availed
Condition 2
- Loan taken before April 1, 1999
Condition 3
- Loan taken for repair or renovation work
How to calculate Gross Annual Value (GAV)?
- Determine the expected rent from the property
- Determine the actual rent received
- Evaluate whether the expected rent or the received rent is more
- Determine the loss, if any, that has occurred due to property vacancy
- The gross annual value is the loss incurred minus the rent received
GST on rental income
As per the GST Act, a rented property would be classified as a provision of services under the GST Act. Note that not all rental income is taxable. Any property that has been rented for business purposes would be taxable as per the GST Act.
How can NRIs file tax on rental income?
Get a tax account number (TAN). The tenant should reduce 31.2% tax at source and submit it to the tax authorities. This amount has to be paid in seven months. The remaining money has to be paid to the owner. Fill out Form 15CA at the time of payment and submit it to the IT department.
Also Read: How to file TDS on property in 2024?
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Ans 1. You cannot claim a deduction on home loan interest for an under-construction property. It can be claimed only once the construction is finished.
Ans 2. Self-occupied property is where you stay with your family. Let-out property is one that you have given on rent. Deemed let-out is the additional property owned but not occupied by the owner or a tenant.
Ans 3. Paying tax on rental income is mandatory.
Ans 4. Section 24 of the Income Tax Act, 1961, details the deductions that can be availed on rental income.
Ans 5. The owner is supposed to pay the tax on income from housing rent.