Tax on rental income and applicable deductions


While income tax laws prescribe certain taxes on a person, who receives any rent from a property which he has let out, the tax payer is also allowed to claim certain deductions out of such income. We examine the legal provisions

How is rental income taxed?

The Income Tax Act of India has a specific head of income, titled ‘Income from house property’, to tax the rent received by an owner of a property.

So, any rent received with respect to a property that is let out, is taxable under this head. Rent received with respect to a residential house, as well as commercial property, is taxable under this head. Even the rent received for letting out your factory building or rent received on land appurtenant to the building, is taxable under this head. 

 

The property is taxable on the basis of its annual value. The annual value of a property, is determined on the basis of whichever is higher:

  • The rent actually received by the property or;
  • The amount of rent for which the property can reasonably be expected to be let out.

 

Under which section income from house property is taxed?

 According to the income tax act, rental income of a property is taxed under Section 24 in the hands of the owner under the head income from house property.

But, the rent earned by letting renting vacant land is not taxed under this category, but 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 carry out profession services by the owner, this section will not be applicable.

 

So, if you let out a property for a nominal amount, the amount to be considered for taxation of such property, would be the market rent and not the rent that you have received. Likewise, if the actual rent received by you for your property is higher than the market rent, the rent actually received/receivable by you, will be considered for taxation purpose. Please note that the rental income becomes taxable in your hand on accrual basis and not on receipt basis.

It is only the owner, who is taxed for rent received. Hence, 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.

How much rent 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.

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 deduction for the interest payable on 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.

 

FAQs

Under what head is rental income taxed?

The rental income from a property is taxed under the head 'Income from house property'.

What types of properties attract tax on rental income?

Tax is applicable on rental income earned from residential houses, commercial properties, factory buildings and even the land appurtenant to the building.

What is the annual value of a property?

The annual value of a property is deemed to be the higher of: (a) The actual rent received for the property or (b) The reasonable amount that property can fetch, if it is let out.

What are the tax deductions available on rental income?

From the rental income, a property owner is allowed to deduct municipal taxes on the property, rent that is not realised, a 30% standard deduction on the annual value of the property, as well as interest on the money borrowed for the renovation of the property.

(The author is a tax and investment expert, with 35 years’ experience)

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