Tax on rental income and applicable deductions

Renting out a property to a tenant allows the owner to earn a monthly rent. Under the income tax laws in India, this rent is counted as income and the landlord is liable to pay tax on this rental income. Rental income is taxed under the head ‘Income from house property’ as per the Income Tax Act, 1961. It is important for landlords to understand how rental income is calculated and the applicable deductions so that they can reduce their tax liability in line with the regulations. 

What is income from house property?

The money a landlord earns in a year by letting out his house is considered rental income. The rental income is taxed under Section 24 under the head ‘income from house property’.

So, any rent received with respect to a property that is let out is taxable under this head. This can include rent from subletting and notional rent – the income that is assumed to have been generated from a property if it were let out. The property can be a residential or commercial property, a factory or land.

Under which section is income from house property taxed?

Under the Income Tax Act, rental income is taxed under Section 24 in the hands of the owner, under the head “income from house property”. However, the rent earned by letting out vacant land is not taxed under this category but is taxed under ‘income from other sources’. Income from house property is charged only on land which forms part of a building.

Even though the rent generated from shops is also taxed under the same head, in case the property is being used for business or to carry out professional services by the owner, this section will not be applicable. In such cases, the rental income is taxed under ‘Profits and Gains from Business or Profession’.

Income generated from subletting a rental property is also taxed under the head Income From Other Sources.

It is worth noting that the rental income becomes taxable in the owner’s hands on accrual basis and not on a receipt basis.

It is only the owner, who is taxed for rent received. So, if you sublet any property that you have taken on rent, the amount received would become taxable under the head ‘Income from other sources’. Even the rent received by a person who has encroached on a property, would become taxable under this head. The ownership for this purpose is broadly defined and even covers cases where you have received possession of a property in part performance of an agreement and where the legal title of the goods may not have been transferred in your name. Even when an individual gifts the property to one’s spouse, except under an agreement to live apart, he shall continue to be treated as an owner of the property and taxed accordingly, even though he may not have received the actual rent for such property. Similarly, even if the property is gifted to a minor, the donor parent shall continue to be taxed for such property.

Check out Housing.com’s tool to generate rent receipt for income tax

How much rental income is taxable?

It is not that the gross rent received becomes taxable.

From the rent received/receivable for the property, you are allowed to deduct the municipal taxes payable for the property. As the rent is taxable on accrual basis, the law allows you to claim deduction for the rent which you have not been able to realise, subject to the fulfilment of certain conditions. After deducting the above two items, what you get is the annual value, from which you are allowed a standard deduction of 30% of the annual value, to cover the expense for repairs, etc.

Please note that the deduction of 30% is a standard deduction, irrespective of whether you have actually incurred any expenditure for repairs or renovation for the property, during the year under review.

See also: All about HRA calculation & HRA exemption  

How much rent is tax-free?

In case you have borrowed any money for the purpose of purchase, construction, repair/renovation of the property, you are also allowed to claim a deduction for the interest payable on the money so borrowed. The money can be borrowed from any person and not necessarily as a home loan. Presently, there is no restriction on the amount of interest which you can claim against your rental income.

However there is a ceiling of Rs two lakhs, for loss under the head ‘Income from house property’, which can be set off against your other income, likes salary, business income or capital gains. Any loss under this head, beyond Rs two lakhs, is allowed to be carried forward for set off, during eight subsequent years. This provision adversely affects people who borrow money to buy a property and let it out, as rental values are generally around three to four per cent of the capital value, whereas the rate of interest on such loans is around nine per cent. As home loans are usually taken for longer periods, the situation of loss under this head, will normally continue for longer periods and the excess interest beyond Rs two lakhs will, effectively, be lost forever.

See also: Can I claim HRA for different city?

Taxation based on different property types

Residential properties are classified into the following categories:

• Self-occupied house property: Such properties are used by the owners as a residence and so no rental income is generated. 
• Let-out house property: This refers to a residential property that the owner has rented out and generates annual rental income. In this case, actual rent is received and the entire amount is taxable with deductions allowed under Section 24. 
• Deemed let-out property: Properties that a landlord owns beyond two self-occupied properties come under this category. Even if the property is vacant, a notional rent is calculated and taxed. 

Tax on rental income from REITs

REITs or the Real Estate Investment Trusts are like mutual funds, wherein investors get a chance to invest in commercial real estate assets and get the advantage of the rent that these assets generate, without buying the physical asset itself. REITs are becoming popular in India as the rental yields and rental income is quite high on commercial properties, as compared to other types of properties. The tax on rental income of commercial properties is quite simplified, as far as REIT laws are concerned.

As per the regulations, around 90% of the taxable income is distributed among the investors or the unit holders of the REITs. This distribution is made mandatory by law. The investors receiving these distributions also enjoy tax exemptions.

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