How is Rental Income Taxed?

Rental income from any residential and commercial property, whether it is a house, apartment, or factory, is subject to taxation. The property’s Gross Annual Value (GAV) is computed to calculate the income tax on house rent after deducting standard deductions, municipal taxes, and interest paid on the home loan. Any deductions on interest are applicable only if the buyer has taken a home loan.

Further, the property’s GAV is based on the amount for which the property can be rented out or the rental income received by the property.

Section 24 of the Income Tax Act of 1961: Income tax on rental income

According to the Income Tax Act of 1961, rental income is taxable under Section 24 for the property owner under the head ‘income from house property.’ Rental income earned from shops is also taxed. But, if the property is used for providing professional services by the owner or running a business, this section is not applicable. Additionally, a taxpayer must pay taxes on ‘income from house property’ only if there is a building in question. Rent earned from vacant land is taxable under ‘income from other sources.’

How to save tax on rental income?

Here are some ways one can claim exclusions and deductions on the amount paid as rental income tax.

  • Maintenance charges:
    Some homeowners increase the total rent by including maintenance fees, which increases the rental income tax rate. One of the easiest ways to save tax in India is by reducing such maintenance charges. Individuals can add a line in the rental agreement stating that the tenant will clear the maintenance charges by paying them directly to the society’s association and not to the landlord. If the tenant is not convinced with the clause, the landlord can receive the two components – rent and maintenance charges, as separate payments from the tenant.
  • Municipal taxes:
    Municipal taxes are levied by any local authority. They can include sewage and property taxes and are deductible from rental income tax. However, the owner can deduct municipal taxes only if they have paid them during the concerned financial year. Therefore, landlords must ensure to pay municipal taxes on time every year. Additionally, one must note that municipal taxes are always paid by the owner, not the renter.
  • 30% Standard deduction:
    Section 24 offers a 30% tax deduction on the net annual value of the property for maintenance and repairs. This amount does not include municipal taxes. A 30% house rent deduction in the income tax section is permitted regardless of whether the actual expenditure of repairs is lower or higher than the 30% deduction.
  • Joint property:
    Another way to save on rental income tax is by buying a joint property. If two people own the property, the rental income is divided into two, and taxes are charged proportionately from all the joint owners.
  • Semi-furnished or fully furnished property:
    Some homeowners provide facilities like DTH/ cable, newspaper, piped gas connection, Wi-Fi, security, etc., to the tenant. Generally, these charges are collected under rent, and bills are paid to the concerned authorities by the owner. To save taxes on rental income, the owner can request the tenant to clear the dues of such services and deduct the equivalent amount from the rent. This lowers the overall rent and the subsequent tax.

Rental income taxation for Non-Resident Indians (NRIs)

NRIs earning rental income by renting a property also need to pay taxes under Section 24 of the Income Tax Act of 1961. NRIs have the same deductions as people residing in India. But, in this case, the tenant is responsible for paying taxes on the property.

Since it is necessary to submit the Tax Deducted on Source (TDS) form to the tax authorities, the tenant will have to deduct a 31.2% TDS on rent and then send the payment to the NRI landlord’s bank account.

To sum it up

Before renting a property to someone, it is vital to go through the rental income tax laws in India to understand how to save tax. A clear understanding of these laws and timely payment of rental income tax can bring a host of home loan and co-ownership benefits for landlords.

Disclaimer- This article is based on the information publicly available for general use. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.