If you live in India and earn income by renting out property, you may need to pay taxes on that rental income. The Indian Income Tax Act taxes rental income under specific provisions. However, there are several exemptions available that can help you save on taxable rental income. This article will explain how rental income is taxed, how to calculate the gross annual value of a property, ways to save tax on rental income, details about Section 24, and more.
Tax on Rental Income According to the Income-tax Act, income received as rent from a building or house is taxed under the category, 'Income from House Property.' If you rent out a property and receive rent, it will be considered rental income and assessed accordingly. Additionally, income from vacant land is taxed under 'Income from Other Sources.'
Tax on Rental Income for a Vacant House If an individual owns more than one property, one property can be treated as a Self-Occupied Property (SOP). The other property will be considered a Deemed Let Out Property (DLOP) under Section 24 and will be taxed as if it were rented out. The rental value of the DLOP is considered the gross taxable rent for such property.
Relevant Section for Tax on Rental Income Owners must pay income tax under Section 24 of the Income Tax Act, categorized as 'Income from House Property.' Rental income from vacant land is taxed under 'Income from Other Sources.'
Understanding these tax regulations and exemptions can help you manage your rental income effectively and minimize your tax liability.
Calculation of Tax on Rental Income
In India, rental income is taxed under the category 'Income from House Property.' This applies to rent received from residential properties, shops within buildings, or factory buildings. The property is taxed based on its Gross Annual Value (GAV), which is determined after deducting municipal taxes, a standard deduction, and any interest paid towards a home loan, if applicable. Property owners can claim a 30% standard deduction on the annual value to cover expenses such as renovations and repairs.
What Constitutes Rental Income?
According to the Income Tax Act, rental income is the rent received by the authorized property owner for letting out a property (a building or adjoining land). The tax on rental income is calculated based on the annual rental value received by the property owner.
How to Determine the Annual Value
The annual value of a property is either the actual rental income received or the expected amount it can be let out for. Property owners must calculate the Gross Annual Value (GAV) of their property to determine the taxable amount.
By understanding these tax rules, property owners can effectively manage their rental income and take advantage of available deductions to minimize their tax liabilities.
Also Read: What repairs are tenants responsible for in a rental property?
Conditional Deductions on Tax on Rental Income
There are specific conditional deductions available for property owners under various circumstances:
- Owner or Family Occupies the Property: If the property is occupied by the owner or their family, a deduction of up to ₹2 lakh can be claimed on the home loan interest.
- acant Property: If the property is not occupied by any person, the same deduction rule applies, allowing up to ₹2 lakh on home loan interest.
- Rented Property: For properties that are rented out, the entire home loan interest amount can be deducted.
Restrictions on Home Loan Interest Deductions:
The deduction amount for home loan interest is restricted to ₹30,000 if any of the following conditions are met:
- The home loan was taken before April 1, 1999, for purchasing or constructing the property.
- The home loan was taken on or after April 1, 1999, for reconstruction, renovation, or expansion of the property.
- The loan was borrowed on or after April 1, 1999, but the construction of the property was not completed within five years from the date of loan disbursement.
Understanding these conditional deductions can help property owners manage their taxable rental income more effectively and take full advantage of available tax benefits.
Tax on Rental Income: Gross Annual Value (GAV) Calculation
The Gross Annual Value (GAV) of a property is calculated as follows:
- Expected Rent: Determine the expected rent from the property.
- Actual Rent Received: Identify the rent actually received.
- Higher Value: Compare the expected rent and the actual rent received, and take the higher value.
- Vacancy Loss: Account for any loss incurred due to vacancy.
- Calculate GAV: Deduct the vacancy loss from the higher value obtained in step 3. This gives you the GAV.
Deductions Available Under Section 24
Section 24 of the Income Tax Act provides two main exemptions for rental income:
- Standard Deduction: A standard deduction of 30% of the gross value of the property for repairs and maintenance, calculated after deducting municipal taxes. This 30% deduction is allowed regardless of actual expenditure.
- Home Loan Interest Deduction: Deduction for actual interest paid on a home loan. This deduction is applicable for rented, deemed to be rented, or self-occupied properties. The interest on money borrowed for construction, acquisition, repair, or renovation is 100% tax-deductible on an accrual basis. If the net income is higher than the Net Annual Value (NAV), it can be adjusted against other income heads or carried forward for up to 8 years to set off against taxable income.
Tax-Free Rental Income
Under the New Tax Regime, rental income up to ₹10 lakh is tax-free. With no other sources of income or deductions, you wouldn't pay any taxes on rental income up to this amount. Deductions include:
- Property tax paid
- Home loan interest
- 30% flat deduction on the Net Annual Value (NAV) of the property
These deductions help reduce the chargeable rental income, potentially eliminating tax liability on rental income up to ₹10 lakh in the New Tax Regime.
Tax on Rental Income: Taxable Rental Income Calculation
Taxable rental income is calculated on the Gross Annual Value (GAV) after deducting municipal taxes, standard deductions, and home loan interest.
Example Calculation
Suppose an owner receives ₹30,000 per month in rental income and pays municipal tax of ₹30,000. Additionally, the owner pays ₹80,000 in home loan interest. Here's how the taxable income is calculated:
- Annual Rental Income: ₹30,000 × 12 = ₹3,60,000
- Deduct Municipal Tax: ₹3,60,000 - ₹30,000 = ₹3,30,000
- Standard Deduction (30%): 30% of ₹3,30,000 = ₹99,000
- Net Annual Value (NAV): ₹3,30,000 - ₹99,000 = ₹2,31,000
- Home Loan Interest Deduction: ₹2,31,000 - ₹80,000 = ₹1,51,000
Thus, the taxable income would be ₹1,51,000.
Understanding these calculations and deductions can help property owners effectively manage their rental income tax liabilities.
In this scenario, you must pay tax on your rental property because the GAV is ₹3,60,000, which exceeds the ₹2,50,000 threshold. However, if the rent is ₹15,000 per month, resulting in a GAV of ₹1,80,000 (₹15,000 x 12), you will not be required to pay rental income tax.
Also Read: GST on Construction 2024: All You Need to Know
GST's Role in Tax on Rental Income
According to the Goods and Services Tax (GST) Act, renting an immovable property is classified as a provision of services. However, not all rental income is subject to GST.
A property is considered a supply of services if it is leased, rented, or licensed to occupy, and therefore, it would attract GST. Any property, whether commercial, industrial, or residential, rented for business purposes, is taxable under the GST Act.
On the other hand, rental income from an immovable property solely rented for residential purposes is exempt from GST. This means properties rented out for living purposes are not subject to GST.
However, properties rented out for business activities are liable to pay 18% GST on the rental income, as renting out a property for business is considered a supply of services under the GST Act.
Income Tax on Rental Income: When Property is Not Taxable
You are exempt from paying tax on rental income in the following scenarios:
- Receiving rent from a farmhouse.
- Income from a local authority.
- Income from an approved scientific research association.
- Income from an educational institute.
- Income from a trade union.
- Property rented for charitable purposes.
- Property income of a political party.
- If you use the property for your own business.
- Self-occupied property.
Rental Income Taxation for NRIs
If you are a Non-Resident Indian (NRI) earning rental income from renting out a property, you must pay taxes under Section 24. The limits and deductions are the same for NRIs as for residents of India. However, in this case, the tenant renting the property is responsible for tax payment. The tenant must deduct 31.2% tax at source (TDS) and deposit it into the NRI's account. The TDS form must be submitted to the tax authorities, and Form 15CA must be filed with the Income Tax Department.
NRIs are subject to double taxation: once in India under Section 24, and again in the country where they reside. To avoid double taxation, it is essential to check if there is a Double Taxation Avoidance Agreement (DTAA) between India and the country of residence. If there is no DTAA, India has the right to tax the NRI's rental income. If a DTAA exists, both countries may tax the income. However, if you live in Bangladesh, Greece, or UAR (Egypt), only India, as the source country, can tax the rental income.
Also Read: Freehold Property vs Leasehold Property - Differences, Benefits, Owner Rights
Process to File Income Tax on Rental Income for NRIs
Follow these steps to file tax on rental income for NRIs:
Step 1: Obtain a tax account number (TAN) from the Tax Information Network portal of the Income Tax Department.
- Step 2: Once you have got the TAN number, the tenant should deduct 31.2 percent tax at source and submit that amount to the tax authorities. This amount has to be paid at 7 months of the calendar month. Rest of the amount is paid by the tenant to the property owner.
- Step 3. To make the payment, you should fill in Form 15CA and submit it to the IT department. It is mandatory to pay the taxes on rental income irrespective of the amount.
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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.