What are the Taxes on Rental Income: Calculation and How to Save Tax on It?
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.
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.
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.’
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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:
1. 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.
2. 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:
- 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.
- 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.
- 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.
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.
FAQs
Ans: No, you earn rent by letting out your personal property. So, rental income is not an earned income. Instead, it is considered a passive income as per the ongoing income tax laws in the country.
Ans: There are no exceptions for any property regarding rental income taxability. Income tax for income earned from a property is applicable for residential and commercial properties alike. Even factories or garage extensions also come under this.
Ans: Property tax is a tax that is levied on a property. It is an annual amount that the property owner has to pay to the municipal corporation or local government. So, no, tenants do not have to pay the property tax. The sole person liable to pay this tax is the property owner.
Ans: Income accumulated from a let-out property is taxable in the hands of both non-resident and resident taxpayers. So, if an NRI owns a property in India and enjoys rental income from that property, he/she is liable to pay tax on that said income.
Ans: An NRI who has property in India must be a resident of a foreign nation. Now, he/she is also liable to pay tax in the foreign country on the rental income generated against a property situated in India. This is double taxation. To avoid this, the Income Tax Department analyses if there is any DTAA (Double Tax Avoidance Agreement) between India and that foreign country.
Ans: Gross Annual Value or GAV is recognised for the purpose of income tax. This means that the owner can claim a deduction against the particular amount of rent not received by him/her.
Ans: Ans: The tax on rental income is calculated by deducting the municipal taxes and deductions under Section 24 from the actual rent receivable/received or deemed rent.
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