Income Tax Return Filing: Common Mistakes Property Owners Make and How to Avoid Them

Filing income tax returns (ITRs) is more than just an annual compliance exercise—it’s an important step in ensuring your financial health and avoiding unnecessary scrutiny from the tax department. For property owners, the process can get tricky. With multiple rules around rental income, notional rent, deductions, and capital gains exemptions, even small mistakes can trigger reassessment notices, penalties, or the loss of legitimate tax benefits.

As the deadline for Income Tax return filing approaches, it’s crucial to understand the common errors property owners make and how to steer clear of them. This guide covers the most frequent mistakes, expert insights, and practical solutions to help you file accurately and stress-free.

Overlooked Rental Income Components

One of the most common mistakes in Income Tax return filing is underreporting rental income. Many taxpayers assume that only the monthly rent needs to be declared, forgetting that other payments tied to the property also count as rental income.

This includes:

• Maintenance charges paid by the tenant.
• Parking fees associated with the rented property.
• Furniture and fixture rentals, if the property is furnished.

Failing to disclose these amounts can create a mismatch with tenant-reported payments or Form 26AS records, leading to scrutiny. To avoid this, property owners should maintain a consolidated record of all rent-related receipts and report them as part of the total rental income.

Also Read: Are Rising Real Estate Prices Pushing Middle-Class Indians Away from Homeownership?

Notional Rent on Additional Properties

Another frequent oversight occurs when taxpayers own more than two properties. Under income tax rules, notional rental income must be declared on the third and subsequent properties, even if they are not actually rented out.

A common mistake is declaring all properties as self-occupied, which is against the law. This misreporting can result in reassessment, penalties, or additional tax liability once the discrepancy is detected.

Fortunately, Budget 2025 provided relief by allowing homeowners to claim two properties as self-occupied without attracting deemed rental income. However, from the third property onward, notional rent remains mandatory. Property owners must ensure compliance by classifying properties correctly.

Errors in Claiming Deductions

Many taxpayers lose money or worse, get penalized because of errors in claiming deductions. The Income Tax Act offers several provisions for homeowners, such as Section 24(b), Section 80C, Section 80EE, and Section 80EEA, but confusion is common.

Frequent errors include:

• Claiming interest before construction completion: Only post-completion interest qualifies under Section 24(b). Pre-construction interest can be claimed in five installments after completion, but not before.
• Exceeding the ₹2 lakh cap: For self-occupied properties, the maximum deduction for home loan interest is ₹2 lakh. Anything beyond this is disallowed.
• Mixing up principal and interest deductions: Principal repayment falls under Section 80C, while interest belongs under Section 24(b). Misclassifying them often leads to rejections or delays in refunds.

Maintaining documentation like loan sanction letters, interest certificates, and proof of possession is essential to support your claims.

Misclassifying Property Status

Misclassification of property status is another common pitfall in Income Tax return filing. The tax treatment of a property varies depending on whether it is:

• Self-occupied: No rental income required, but interest deduction capped at ₹2 lakh.
• Let-out: Actual rental income must be reported; unlimited interest deduction on home loans is allowed.
• Deemed let-out: Applies to additional properties beyond two, where notional rent must be declared.

Some taxpayers mistakenly declare multiple properties as self-occupied to avoid paying tax on notional rent. This may appear convenient in the short term but often triggers red flags when cross-verified with records, resulting in audits or penalties. Correct classification ensures accurate reporting and lawful deductions.

Missing Capital Gains Exemptions

Perhaps the costliest mistake in property-related Income Tax return filing is missing out on capital gains exemptions. When a property is sold, the gains are taxable unless reinvested under specific provisions such as Section 54 or Section 54F.

A common misconception is that the exemption is available only if gains are reinvested immediately. In reality, the Capital Gains Account Scheme (CGAS) allows taxpayers to temporarily park their gains and still remain eligible for exemptions, provided the reinvestment is done within the prescribed period.

Failing to use CGAS means taxpayers may unnecessarily pay heavy taxes, despite having future plans to reinvest. Awareness and timely action can prevent this costly oversight.

Correcting Mistakes in Income Tax Return Filing

Even with the best intentions, mistakes happen. Thankfully, the law provides mechanisms to correct errors in Income Tax return filing:

1. Revised Return: Can be filed up to three months before the end of the relevant assessment year or before the assessment is completed, whichever is earlier. This is the easiest and most cost-effective correction method.
2. Updated Return: Can be filed after the revised return deadline but attracts additional taxes and interest. The later you file, the higher the extra liability.

If you realize an error, act quickly. Filing a revised return early is always better than waiting and facing a heavier tax burden later.

Also Read: Credai Pushes for Land Reforms, Digital Registry, and Land Banks to Drive Housing Growth

Expert Tips to Avoid Errors

To simplify Income Tax return filing for property owners, experts recommend the following practices:

• Keep organized records of rent agreements, receipts, and loan documents.
• Cross-check Form 26AS with reported income to avoid mismatches.
• Verify deduction claims carefully before submission.
• Consult tax professionals if dealing with multiple properties, capital gains, or complex transactions.

Being proactive not only saves money but also prevents the stress of receiving tax notices.

Conclusion

Income Tax return filing for property owners involves more than just reporting income—it requires careful attention to rental receipts, property classification, deduction limits, and capital gains exemptions. Small mistakes like forgetting notional rent or misclassifying a property can result in penalties and financial setbacks.

By understanding the rules, using tools like the Capital Gains Account Scheme, and staying updated with recent changes like the two-property exemption under Budget 2025, taxpayers can ensure compliance while maximizing benefits.

In short, accurate filing protects you from tax scrutiny, saves money, and gives peace of mind. The key lies in awareness, documentation, and timely corrections.