How will showing rental income exclusively under income from house property impact you?

This time, several Budget announcements may impact the realty market, including developers and property buyers. Many investors choose realty investment for attractive rental income. There’s an announcement related to the rental income that may impact the tax obligation of those who earn money as rental income. The question is, what’s that announcement related to the rental income and how is it going to impact tenants?

In the Budget 2024, the government has proposed to amend Section-28 of the IT Act. The proposed amendment may change the tax obligation for many tenant taxpayers. The amendment is related to the classification of the rental income under ‘Income from Property’, whereas earlier it was allowed to be classified under ‘Business and Profession’.

“It has been proposed that rental income generated out of residential property to be classified as income from house and property and not as any other income under different sections,” said, Nitin Chaudhary, founder of NC Financial Advisory Services.

The change can have a big impact on tenant taxpayers. Let’s first understand how it will change the previous setup.

Tax on rental income from residential property: Before versus after Budget 2024

“Earlier, when taxpayers used to claim the rental income under the head of business and profession, they were allowed to book expenses against these incomes with no capping and on an actual basis. But now as they need to show the income under the head income from house property, they will get a straight deduction of 33% of the total rental income generated and the remaining 67% will be available for tax as per the tax slab of the taxpayer,” said Chaudhary.

Consider an example of rental income of Rs 30,000/- generated from house and property.  As per the earlier provision if you had any expenses like office boy salary – Rs 12,000/, office utility – Rs 5,000/- they were allowed to be deducted from the income generated. Hence 30,000 – 12,000 (salary) – 5, 000 (utility) = Rs 13, 000/- (net amount available for tax as per tax slab of the taxpayer)

Chaudhary simplified, as per the amended Section-28 now straight 33% deduction is allowed, and no other expenses can be booked against it. Hence 30,000 – 10,000 (30,000*33%) = 20,000 (net amount available for tax as per the tax slab of the taxpayer).

So, as per the proposed amendment, the rental income can no longer be reported as professional or business income. After the budget, it must be separately declared under its category. This rental income will only be subjected to the standard deduction and nothing beyond that.

Impact analysis

“Apart from the standard deduction that is allowed, this big move by the government on the budget day will make it difficult for anybody to use other provisions, particularly those who have devised shortcuts to build rental income, trading, and loss-making transactions. All these loopholes will stop. So, I believe it’s a positive step,” opined, Anand K Rathi, co-founder of MIRA Money.

Note: Table provided by MIRA Money; PGBP – Profit and Gains of Business & Profession; HP- Housing Property

The question is who will be impacted due to the proposed amendment in Section 28 of the IT Act? 

Will the recent announcement related to tax on rental income impact all types of properties?

Experts believe that rental income generated from commercial properties or renting of premises, such as hostels, dormitories, etc., can still be treated under profit from business and profession. However, income generated from a residential property used for private residence purpose cannot be claimed under any other head.

“How you cannot claim a car purchase under business for deductions and GST benefits unless you are in the transport business; if you are in the business of renting and leasing hostels, you should be able to prove it. If so, it will be classified under business income. Ensure that you conduct your activities properly and legally,” added Rathi.

So, if you also generate income from private property, you make sure that such income is claimed only under income from property. The proposed amendment in Section-28 is expected to attract the attention of serious players into renting as a business and segregating it from renting private properties.