Tax On Rental Income: Exemptions and Deductions

Investing in real estate is always considered a high-value investment. You can either invest in the property for your personal use or rent it to a tenant in need. Rental income is treated as business income in a lot of circumstances under the IPC and property owners should be aware of the income tax rate on house rent and important factors like how much rental property income is tax-free. If proper planning is done, a property owner can avail of a rental income exemption from paying certain taxes on rental income. Let’s find out what the tax on rental income is in India.

What is Tax on Rental Income in India?

If a property is leased out or rented, the amount received instead of the property is termed as “Rental Income” according to the existing Tax Laws in India. This includes any amount paid in advance as the security deposit. This tax is calculated after the municipal tax deductions.

According to the IPC, the rental income amount is considerable and it should be under the brackets of Section 24 of the Income Tax Act. 
The government makes no differentiation between residential property and commercial property. Even the parking lot attached to your office space or home is considered a house property and if rented out, is taxable. Any property in the shape of a building is a house property and can be taxed. In India, 30% of your rental income is taxable under the head income from house property as a standard deduction. The applicant must be the legal owner of a property for this standard deduction rate to apply to income tax on house rental income in India.

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How is Tax on Rental Income in India Calculated?

While filling your statement for the Income Tax Returns (ITR), it is advisable to use a rental income tax calculator in India to help you figure out the approximate amount you may have to pay as a tax on rental income in India. Here are the steps through which you can determine the approximate amount you may have to pay as income tax on rental property:

1. Find out the Fross Annual Value (GAV) of the property: For a self-occupied property, the GAV is considered zero. For rented property, the amount collected as rent annually is the GAV.
2. Avoid Property Tax: Property Tax, if paid in advance, is allowed as a deduction.
3. Find the Net Annual Value: The difference between GAV and Property Tax Paid. 
4. Reduce 30% as a standard deduction: Under Section 24, 30% of the standard deduction on rental property income is allowed on NAV.
5. Reduce Home Loan Amount: Home Loan interest amount paid during the year can be deducted under Section 24. For a rented-out property, the full amount paid as interest can be deducted. 
6. Pay Tax based on Applicable Rental Income Tax Rate: The resulting amount is the income from the rental property that is taxable under the current tax rate on rental income in India.

The above method gives you a rough idea of taxes on rental income from house property and how they are calculated. 

Tax on Rental Income Based on Type of Property

Any sort of income generated from a property that is sublet to someone else is considered rental income and it is taxable under the current tax laws in India. However, the owner of the property is allowed to make certain rental property deductions to the amount paid as income tax on rental income in India from residential property in India if they have incurred any cost toward the property being made rent-ready and towards the maintenance of the property. The security deposit amount can also be deducted if the owner has the intention to return it. However, if the security deposit is not returned, it will be taxable. If the security deposit is kept against some damage, it can be shown in the income statement and later, the owner can ask for a deduction on it. Deductible expenses include, but are not limited to the following for rental income from commercial property under income tax laws:
Rental income in India is taxable, with deductions allowed for property-related expenses. Security deposit return is deductible, and expenses for property preparation and maintenance can also be claimed under income tax laws

• Advertising
• Commissions
• Cleaning and maintenance
• Depreciation
• Insurance premiums
• Interest expense
• Local property taxes
• Pest control
• Professional fees
• Management fees
• Rental of equipment
• Rents you paid to others
• Yard maintenance
• Supplies
• Trash removal fees
• Repairs
• Travel expenses
• Utilities

The amount for standard deduction cannot exceed 30% of the owner’s GAV on income tax on rental income from commercial property in India. These form the basics of income tax rules for rental income in India.

Tax on Rental Income in India: Is Tax imposed on Vacant Houses?

As per the Income Tax regulations, a vacant house property is treated as a self-occupied property. Prior to the financial year 2019-20, if a taxpayer owned more than one self-occupied house, only one property was considered self-occupied while the others were assumed to be let out. The choice of which property to choose as self-occupied was left to the taxpayer. 

However, starting from the FY 2019-20 and onwards, the benefit of considering two houses as self-occupied has been extended to homeowners. Now, a taxpayer can claim up to two properties as self-occupied and treat the remaining property as let out for the purpose of income tax.

Rental Income Taxation for NRIs

NRIs and PIOs who own property in India are subject to Indian taxation on earnings, including property rentals and capital gains on investments exceeding the basic rental income exemption limit. Rental income is taxable in India and is calculated similarly to a resident's tax. 

Income earned from a property located in India is credited to NRE or NRO accounts after paying taxes and can be easily repatriated. The interest on an NRE account is exempt from tax, while an NRO account is subject to normal taxation. Tenants must deduct 31.2% tax on rental income and provide the NRIs with the certificate for the same.

What is the Section for Taxable Income from House Property?

1. Tax is levied on the annual value of a property under 'income from house property,' as per Section 22 of Indian income tax law.
2. It's important to note that the tax is not on the property itself, but on the notional income derived from it.
3. The computation of income in this category is determined by sections 23-27, which specify the scope of taxable income.
4. Typically, the legal owner of the property is responsible for paying this tax.
5. However, Section 27 outlines exceptions, such as when a property is transferred without adequate consideration or when possession is granted in part performance of a contract.

What are the Rental Income Tax Exemptions in India?

1. Special exemptions and deductions are available for rental income tax in India.
2. Gross Annual Value (GAV) is considered only for income tax on received rent.
3. Owners can claim deductions if the rent is not received.
4. Premises rented for less than 14 days qualify for deductions from the GAV.
5. Homeowners with a home loan can deduct up to Rs lakhs.
6. Budget 2020 introduced section 80 EEA, allowing an additional tax deduction of up to Rs 1.5 lakhs for interest paid on the property.

How are the Rental Income Tax Deductions in India Calculated?

Rental income from the property is a pretty common source of income in India and for the financial year 2023-24, income up to Rs 2,50,000 is tax-free for individual taxpayers. If rental income is the main source of income for a particular individual, let’s see under what circumstances they may have to pay taxes on it. 

Income Tax Calculation for House Rent Received

Suppose the individual has a property they have let out for Rs. 20,000. This makes the GAV of the property be Rs 20,000 x 12 months = Rs. 2,40,000. This amount is under Rs. 2,50,000, so the owner may not have to pay any tax on this income. However, suppose the rent of the property was Rs. 30,000. Now, the GAV= Rs. 30,000 x 12 months = Rs 3,60,000. The owner may have to pay tax on this income as this exceeds the limit of Rs 2,50,000. The owner can also avail of income tax benefits on their home loan under Section 24(b). 

Income from rent is the primary source of income for a lot of households and it’s a great way to invest in the evergreen real estate industry. However, one must be aware of the tax rate on rental income in India and pay all the due tax on rental income on time. In most circumstances, homeowners are not aware of the deductions and exemptions they can avail of while paying rental income tax in India. Don’t worry. Consider your problems solved with Legal Experts from NoBroker. Get all your questions answered and queries resolved by legal experts mastering the property domain. Just drop a comment here and we will reach out to you. 

Tips to Save Tax on Rental Income

To save tax on your rental income in India, you can consider the following tips:

1. Exclude maintenance charges from the rent received to lower your taxable rental income. Instead, mention in the rental agreement that the tenant will pay maintenance charges directly to the society association.
2. If you purchase a property jointly with a trusted family member, you can divide the rental income and save tax proportionately.
3. Deduct municipal taxes such as sewage tax and property tax from your rental income to reduce your tax liability.
4. If you rent out a semi-furnished or fully furnished property with additional services like Wifi, DTH, or pipeline connection, you can ask the tenant to pay for these services separately, which will lower your taxable rental income.

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