Taxes On Rental Income: Overview And Calculation Of Rental Income

Income Tax

The Income Tax Act prescribes rental income taxability for individuals receiving rent from a let out property. Meanwhile, this taxation or taxability of rental income is also eligible for specific deductions and exemptions under the IT Act. What are they, and how is rental income actually calculated?

Read on to find out.

An Overview of Rental Income Taxability in India

Any income arising in the country is taxable in the hands of resident taxpayers and non-resident taxpayers. As a result, income generated from a rented or leased out property is taxable. 

Rental income also includes the overall amount that one pays as a security deposit or advance. Moreover, there is no differentiation between residential and commercial property in terms of tax on rental income. Even the parking space attached to your house is considered a property, and if you let it out, the income generated is taxable. 

Furthermore, the IT Department levies tax on the property depending on its annual value. You can determine the annual value by considering the higher of the following values:

• The actual rent received from a property
• A reasonable rent amount that the property can generate (if let out)

As per the Income Tax Act, rental income from a property is taxable as per Section 24 under the heading ‘Income from house property.’ Meanwhile, any rent earned from a let out land is taxable under the heading ‘Income from other sources.’ 

Note that if the establishment is used for business or professional purposes, then this section is not applicable.

Also read: Section 80CCD(1B) Of Income Tax Act: Who Can Benefit From It?

Taxation of rental income

Rental income is the income you earn from renting out a property (either commercial or residential). The income earned from such a source is taxed under ‘Income from house property” as per Section 24 of the Income Tax Act. That said, if you earn an income by renting out a vacant land, it is considered under ‘Income from other sources.’

Gross Income Value calculation

Gross income value is the ratio of property value and gross income. This calculation uses annual income and excludes expenses such as maintenance, utilities. If you want to calculate the gross income value of your property you have to divide the property value by the total income from the property. 

Calculation of Rental Income

Follow these steps to calculate your income tax on rental income:

Step 1

Calculate the property’s Gross Annual Value (GAV). For let out properties, the amount collected as rent is the GAV.

Step 2

If you have paid property tax in advance, you can claim a deduction on that. 

Step 3

Determine your property’s Net Annual Value (GAV – property tax).

Step 4

Claim 30% standard deduction on NAV available under Section 24 of Income Tax Act.

Step 5

If you have taken a home loan for that property, you can claim a full tax deduction on the interest component towards that loan. 

Step 6

The remaining amount is your income from property, which is taxable as per your current tax slab and regime.

Scenarios Where Income from Property is Not Taxable

The ground floor of a property is not taxable under ‘Income from House Property’. It is taxable under the income head ‘Business Profession Head’. It is considered as a self-occupied property and any income earned from this will be considered zero. 

Meaning of Income from House Property

Any taxable income earned from renting out a property or from its transfer is considered ‘Income from House Property’ under the Income Tax Act. This is applicable for both residential and commercial properties.

Tax Deductions/Exemptions on Rental Income

There are specific provisions that allow exemption or deduction with regard to tax on rental income. As per Section 24 of Income Tax Act, you can claim the following deductions:

Standard deduction

Standard deduction under this section is applicable to every taxpayer. So, if you own a property, you can claim a tax exemption of 30% of the property’s Net Annual Value.

However, this deduction is not applicable if you are staying in the house and it is the only property you own.

Interest deduction

If you have purchased a property via a home loan and have rented out the property, then you can claim a tax deduction on the entire interest component that you pay towards your home loan annually. 

Taxation of Rental Income for NRIs

If you have a property and you earn income by renting it out, the tax rates will be applied on income at the marginal rate for NRIs. If the total income incurred comes to less than Rs. 2.5 lakh, then no tax will be deducted. 

However, if the income is more than that you have to pay taxes at a rate of 31.2% along with 4% education cess and surcharge. If you reside in a country which has a DTAA agreement with India then you can avoid the double-taxation on the income earned from your property. 

Top Ways to Save Tax on Rental Income

The following are the ways in which you can save tax on rental income:

• Maintenance charges: In most of the cases, maintenance charges are included in the rent. However, excluding the maintenance charges is one of the easiest ways to save tax on your rental income.
• Joint property: If you have joint ownership of the property with your spouse, then you can take advantage of the lower tax rates of your spouse.
• Municipal taxes: You can deduct municipal taxes like sewage taxes, property taxes from your rental income to reduce taxes. However, these taxes should be paid by the owner and not the tenant.
• Standard deduction: If you have bought a property for investment purpose and put it on rent, then you can claim 30% of Net Asset Value as standard deduction.
• Semi/fully furnished properties: If you rent out a fully or semi furnished property, then the expenses with regard to certain amenities like WiFi, gas connection, DTH connection are paid by the tenant and such amount can be deducted from the rent. 

Key Points to Remember Regarding Tax On Rental Income

There are a few key points that you must remember regarding the taxability of rental income. Find them below:

1. Only your property’s NAV is considered for taxation. You can arrive at this value by deducting the property tax from GAV. For instance, suppose you receive Rs. 1,00,000 as rent annually. At the same time, you pay Rs. 30,000 towards municipal taxes. In this case, your property’s NAV will be (1,00,000 – 30,000) = Rs. 70,000.
2. If your house is lying vacant without any tenants, then you must consider the actual rent amount and not calculate it against the entire year. For example, if your house yields Rs. 12,000 as rent per month but is vacant for 3 months, then the GAV of the property will be (12,000×9) = Rs. 1,08,000.
3. If your property is vacant and you do not receive rental income, but you are paying regular municipal taxes, then you can cover this loss from other income sources. They may include your salary or rent from another property. If you cannot cover this loss for the current financial year, you can carry this forward for 8 years.

Also read: Section 115BA of Income Tax Act

Final Word

Knowing the intricacies of rental income taxabilityis crucial for every taxpayer who receives any income from a let out property. Go through the above sections in detail and claim the tax deductions to minimise your tax outgo.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.