Tax on Rental Income in India

How can taxpayers ensure they comply with current regulations while optimizing their tax liabilities? The Income Tax Act sets the rules for tax on rental income, mainly classifying it as Income from House Property. Many people are concerned about figuring out how much of their rental income is taxable and what deductions they can claim.

The new changes in the Finance Bill 2024 will make it clear that rental income from homes should be reported as Income from House Property instead of Business Income. This change aims to prevent tax evasion and ensure people report their income correctly. This rule will take effect on April 1, 2025, and it shows how important it is to classify rental income accurately for tax compliance.

Property owners have several options to save on taxes, such as reporting losses from empty properties and claiming deductions for rental expenses. If multiple people own a property together, they can share these tax benefits, which can help lower their overall tax bills. Landlords in India need to learn the tax details on rental income. To reduce their tax bills effectively, they need to know the current rules and use available deductions.

Under Indian tax laws, rental income can originate from various sources, each of which is treated differently. In this section, we will look at the various forms of rental income and how they are categorized for taxation, from residential to commercial properties.

Types of Rental Income

According to the Income Tax Act, tax on rental income in India is classified based on the type of property it comes from. The various forms of rental income and their tax ramifications are broken down in detail below:

Rental Income from Land, Buildings, and Apartments

Income from house property includes income from renting out apartments, land, and residential or commercial buildings. The Gross Annual Value (GAV), or the total amount of rent received for the year, is the first step in the tax computation. The Net Annual Value (NAV) is obtained by subtracting municipal taxes from this amount. If there is a housing loan, the interest paid can also be deducted. Property owners can also claim a standard deduction of thirty percent of the Net Annual Value (NAV) to cover maintenance costs.

Income from Rent on a House Property with Partial Self-Occupation

Although homeowners can choose to treat two properties as self-occupied, the taxable portion of their rental income is still present for partially self-occupied properties. Rent collected from the portion that is leased is subject to taxation in accordance with general provisions, with expense deductions allowed.

Also Read: Lease Accounting and Its Importance in Rent Payment Process

Composite Rent from Building and Asset Letting

When the rental income includes costs for the property as well as additional assets like amenities or equipment, it is referred to as composite rent. The entire rent in this scenario is still taxable as rental income; however, to receive the proper tax treatment, the owner might need to distinguish between services other than property rental. Making the appropriate deduction claims requires this distinction.

Retail Revenue from Stores on an Owner’s Property

Real estate owners may also be subject to taxation under the income from house property category if they rent out stores or commercial spaces on their property. Calculating GAV, NAV, and allowable deductions follows the same guidelines. Subletting and commercial space rentals are liable to the same deductions as residential properties, which is a crucial point to note.

While property owners can take advantage of several deductions to lower their taxable income, rental income is still subject to taxation in India. To ensure compliance with tax laws, property owners must maintain a record of their rental income and expenses and seek advice from tax experts when necessary.

Owners of real estate must know how to calculate taxable rental income. You will find the correct numbers for your tax returns by following the detailed instructions in this section.

Calculating Tax on Rental Income

There are multiple steps involved in tax on rental income in India, which are listed below:

Calculate Expected Rent

Start by projecting the property’s anticipated rental income. This includes the total amount that, given current market rates, you expect to receive over the course of the year.

Calculate Actual Rent and Gross Annual Value (GAV)

The next step is to figure out how much rent was actually received over the course of the year. The higher of the actual rent received or the anticipated rent is used to compute the Gross Annual Value (GAV). For instance, the GAV for the year would be ₹300,000 if the rent was ₹25,000 per month.

Deduct Municipal Taxes to Determine Net Annual Value (NAV)

The NAV can be calculated by subtracting any municipal taxes paid during the year from the GAV. For example, the NAV would be ₹280,000 if the GAV was ₹300,000 and the city taxes were ₹20,000.

Apply Standard Deduction (30% of NAV)

Maintenance and repairs can be accounted for with a standard deduction of 30% of the NAV. If your NAV is ₹280,000, the standard deduction would be ₹84,000 (30 percent of ₹280,000), further decreasing your taxable income.

Also Read: Tapping into Section 57 of the Income Tax Act, 1961: A Manual to Tax Efficiency

Deduct Home Loan Interest

The interest paid on the home loan can be written off if the property is mortgaged. In accordance with Section 24(b) of the Income Tax Act, this deduction is applicable regardless of whether the property is rented out or self-occupied. For instance, after the standard deduction, ₹60,000 in interest paid is deducted from the NAV.

Calculate Tax on Rental Income

After that, you deduct the standard deduction and home loan interest from the NAV to determine the taxable rental income. Continuing with the earlier example, this sum is then subject to taxation in accordance with the relevant income tax slabs.

• NAV: ₹2,80,000
• Standard Deduction: ₹84,000
• Home Loan Interest: ₹60,000

The calculation would be:

Taxable Rental Income = NAV − Standard Deduction − Home Loan Interest

Taxable Rental Income = ₹2,80,000 − ₹84,000 − ₹60,000 = ₹1,36,000

This amount is then taxed according to the applicable income tax slabs​.

Generally regarded as passive income, rental income is taxable as income from house property. Rental income may not be subject to taxes if the total GAV is less than ₹250,000.

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In order to give you a better idea of the taxation process, we will walk through an example that includes every step we have discussed thus far. This will make it easier for you to see how each element affects taxable rental income.

Example Calculation

As it impacts their overall tax liability, property owners in India must know the tax on rental income. Using the example calculation provided, the following offers a detailed explanation of the taxation of rental income:

Gross Annual Value (GAV)

The potential income that a property could produce if it were rented out is its Gross Annual Value (GAV), which in this instance is ₹300,000.

Property Tax Paid

One cost associated with the property that the owner bears is the property tax. To determine the Net Annual Value (NAV), this amount is subtracted from the GAV. The amount of property tax paid in this case is ₹20,000. Regardless of the actual cost incurred, the Income Tax Act permits a standard deduction for maintenance and repairs of thirty percent of the Net Annual Value. The standard deduction is computed in this instance as follows:

Net Annual Value (NAV)

The Net Annual Value is calculated by subtracting the property tax from the GAV:

Net Annual Value = Gross Annual Value − Property Tax

NAV = ₹3,00,000 − ₹20,000 = ₹2,80,000

Also Read: Understanding Section 193: TDS on Interest on Securities in Income Tax Act

Standard Deduction

The Income Tax Act allows a standard deduction of 30% on the Net Annual Value for maintenance and repairs, irrespective of the actual expenditure incurred. In this case, the standard deduction is calculated as follows:

Standard Deduction = 30% × Net Annual Value

Standard Deduction = 30% × ₹2,80,000 = ₹84,000

Interest on Home Loan

If a home loan is used to finance the property, the interest paid on the loan is also tax-deductible. The interest on this home loan amounts to ₹80,000.

Calculation of Taxable Income

To determine the taxable income from the property, the following formula is used:

Taxable Income = Net Annual Value − Standard Deduction − Interest on Home Loan

Plugging in the numbers:

Taxable Income = ₹2,80,000 − ₹84,000 − ₹80,000 = ₹1,16,000

This example shows how to calculate taxable rental income in India and emphasizes the importance of the different types of deductions that are available to property owners. Accurately accounting for these deductions can greatly decrease a rental income’s tax liability.

Property owners can benefit from a number of tax advantages in addition to the usual deductions. This section will outline the main tax deductions that can drastically lower your tax obligation under Indian law.

Tax Benefits and Deductions

The numerous tax benefits and deductions that can drastically lower tax liability is essential for tax on rental income in India. The following provides a thorough summary of the pertinent sections of the Income Tax Act that deal with rental income and house ownership:

Standard Deduction for Repairs and Renovations (Section 24A)

The net annual income from residential property, which includes rental income, is subject to a standard deduction of 30% for taxpayers under Section 24. This deduction, which is taken before deducting any other costs, is intended to offset maintenance and repair costs, thereby reducing taxable income. If specific requirements are met, it is possible to claim the actual expenses incurred for repairs and renovations.

Section 24B: Deduction of Home Loan Interest

Section 24B permits the deduction of home loan interest. The annual maximum deduction for self-occupied properties is ₹2 lakh. This clause, however, is especially advantageous for property owners who rent out their properties because it allows for the unlimited deduction of the entire amount of interest paid if the property is rented out.

Also Read: Understanding Section 16 of the Income Tax Act: Standard Deduction and Rules

Additional Benefits for First-Time Homeowners under Sections 80EE and 80EEA

For home loans approved between April 1, 2016, and March 31, 2017, Section 80EE provides a supplementary deduction of up to ₹50,000 for first-time homebuyers on interest paid on those loans. This advantage is further enhanced by Section 80EEA, which permits interest deductions of up to ₹1.5 lakh for loans approved between April 1, 2019, and March 31, 2022. Several requirements pertaining to the borrower’s ownership status and the property’s value must be satisfied for the loan amount to be eligible for these deductions.

Co-Owners Can Deduct Certain Expenses to Lower Their Tax Liabilities

If a property is co-owned, each co-owner is eligible to deduct expenses on their own. Subject to the overall caps specified in each section, each co-owner may claim the deduction under Section 80C for the principal repayment and interest on home loans. As a result, if several people jointly own a property and take out a joint home loan, each of them may deduct up to the maximum amount permitted, thereby lowering their combined tax obligation.

Properly navigating these sections enables both renters and property owners to optimize their tax deductions. When it comes to rental properties and first-time homebuyers in particular, knowing the subtleties of each section can result in significant tax savings. You can look up more specific information about each provision on websites run by the Income Tax Department or financial advisory firms that focus on tax planning.

Master all relevant deductions and allowances to maximize your rental income and fully benefit from tax advantages. When managing your real estate investments, don’t just focus on maximizing tax savings—use Tap Invest to explore brilliant investment opportunities such as P2P Investments, Asset Leasing, Unlisted Bonds, and more. Follow Tap Invest on Instagram to know more and stay updated with the latest insights and trends.

In India, some properties are exempt from taxes, even though rental income is usually taxable. This article will discuss the types of properties that are exempt from income tax and the reasons behind their eligibility.

Properties Not Taxable in India

A number of properties in India are not subject to tax on rental income. An outline is provided here:

Properties Used for Business

Rental income from properties used exclusively for business purposes is usually not subject to taxation under the same tax laws that apply to residential properties.

Revenue from Agricultural Lands

Because agricultural land is essential to rural livelihoods, rental income from it is typically tax-exempt.

Real Estate Held by Local Authorities

Municipalities and other government entities that own real estate are exempt from taxes.

Also Read: Understanding the Difference Between Direct and Indirect Taxes

Charitable or Religious Institutions

To encourage non-profit endeavors, properties owned by religious or charitable organizations are likewise exempt.

Institutions of Medicine and Education

Similar exemptions also apply to properties used by these organizations to support their operations.

Owner-Occupied Homes

As self-occupied homes don’t produce any rental income, they are not subject to the rental income provisions.

These exemptions aim to assist several industries by reducing taxes on necessities, services, and agricultural operations. For more specific information, read more about India’s tax laws.

Rental income management isn’t always straightforward. From co-ownership tax treatment to rent defaults, landlords confront a number of particular difficulties. Let’s examine these typical problems and how to resolve them successfully.

Common Issues and Special Scenarios

It can be difficult to understand tax on rental income in India, particularly when considering common issues like rent defaults, the taxation of arrears, and how jointly owned properties are handled. An outline of these elements is provided below:

Handling Non-Payment or Defaulted Rent

Landlords must factor in non-payment or defaulted rent when calculating income taxes. According to the Income Tax Act, rent is assessed using the Gross Annual Value (GAV), which takes into account the entire amount of anticipated rental income from the property, regardless of actual payments received. In cases of default, landlords may deduct unrealized rent under the Net Annual Value (NAV), allowing them to compensate for amounts that were not collected. This means that when determining their taxable income, property owners can subtract the amount of unrealized rent from their GAV.

Taxation of Overdue Rent

Regardless of when the rental period occurred, rent arrears are taxable in the year they are received. When a landlord gets arrears, only 70% of the amount is taxable, as they can deduct a standard amount of 30% for expenses. This provision is critical because it enables landlords to manage their tax burden effectively in case tenants fail to make payments on time. Sections 23(1) and 25(A) of the Income Tax Act are relevant sections that regulate this.

Also Read: Special Allowance: Meaning, Taxation, and Exemptions

Taxation of Properties Held in Common

In India, jointly owned properties require each co-owner to report their portion of the rental income. Each co-owner is eligible to deduct standard deductions and home loan interest based on their respective shares of the property. However, the loan must be taken out in the co-owner’s name; if only one co-owner takes out a loan, then only that co-owner can deduct expenses associated with the loan.

For example, when two people jointly own a property and split the rental income equally, each can deduct their respective portions of expenses from their taxes, but only to the extent of their actual contributions and ownership ratios.

In general, managing the taxation of rental income in India requires to know the implications of non-payment of rent, how arrears are handled, and the specific tax obligations related to jointly owned properties. Landlords and property owners should seek advice from tax experts to ensure compliance and effectively maximize their tax positions.

Conclusion

Tax on rental income in India is significant for property owners because it affects their finances and legal responsibilities. If landlords know the tax rules, they can follow the law and avoid penalties. Since many people rely on rental income for extra money, knowing how taxes work can help them make better financial choices.

Landlords can lower their tax bills by using available deductions. For example, they can automatically deduct thirty percent of their property’s yearly value for maintenance and repair costs without needing to track every single expense. Additionally, property owners can deduct the interest they pay on their home loans, making their rental investments even more financially attractive. To get the most deductions, landlords should keep detailed records of all their property-related expenses.

Tax laws are constantly changing, so landlords need to stay updated on recent court rulings and new regulations that affect taxes on rental income. For instance, recent changes explain how to handle taxes on unpaid rent and deductions for empty properties. Property owners in India should learn tax on rental income, make the most of their deductions, and stay current with tax laws to manage their finances and legal obligations effectively.

Although it’s a key component, tax on rental income is only one aspect of optimizing returns on your real estate investments. At Tap Invest, we make it simple for you to handle the challenges of earning returns even from alternative investments. Regardless of your level of experience, our professional advice guarantees that you will not only remain in compliance with tax regulations but also make higher returns. Invest with Tap Invest and access new opportunities through more innovative alternative investments.

FAQs about Tax on Rental Income

There are various aspects to comprehend when it comes to tax on rental income in India, particularly for Non-Resident Indians (NRIs). The following are some common queries about this subject:

1. Is rental income taxable for NRIs in India?

Yes, rental income from properties located in India is taxable for NRIs. The applicable tax rate for Tax Deducted at Source (TDS) on rent, including cess and surcharges, is 30%. Under the new tax regime, this can effectively increase the rate to about 31.2%. NRIs are eligible to deduct a standard thirty percent from their rental income, along with any property taxes and home loan interest.

2. Tax implications of receiving arrears of rent

If an NRI receives rent arrears, they must pay taxes on this income in the year it is received, regardless of whether it relates to a prior fiscal year. In addition to being able to deduct the appropriate amounts, the arrears will be taxed as part of their overall income. Similar to regular rental income, such income has the same TDS implications.

3. What are the consequences of not paying taxes on rental income?

Defaulting on taxes on rental income can have serious repercussions, including heavy fines, interest on overdue taxes, and legal disputes. If non-compliance is found, the Income Tax Department may impose penalties, which could vary from a percentage of the unpaid tax amount to more serious consequences if the violation is determined to be intentional. Unresolved tax debt can also impact an NRI’s Indian credit rating and financial standing.

4. How is rental income classified for tax purposes?

For tax purposes, rental income is classified as income from house property. Property owners may deduct property tax and a standard deduction of thirty percent of their net rental income under this classification. Income from rental properties is deemed income earned or accrued in India for NRIs and, therefore, is governed by Indian tax laws.

5. How to save tax on rental income?

NRIs can reduce their tax on rental income liability by employing several strategies, including:

• You are claiming a 30% standard deduction for rental income.
• Deducting home loan interest and paying municipal taxes, if applicable.
• Considering the advantages of the Double Taxation Avoidance Agreement (DTAA), which could help prevent double taxation in the NRI’s home nation.
• They are applying for a Lower Deduction Certificate, which can lower the amount of TDS that the renter is required to deduct.