Understanding the tax implications of rental income is essential for property owners in India. The Income Tax Act of 1961 provides a structured framework for calculating taxable rental income. This guide explains the different income categories, the calculation process, and the latest updates from the Union Budget 2024-25.
Types of Income under the Income Tax Act
The Income Tax Act classifies an individual's income under five distinct heads:
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Heads of Income |
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1. Income from Salary |
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2. Income from House Property |
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3. Income from Profits and Gains of Business or Profession |
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4. Income from Capital Gains |
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5. Income from Other Sources |
Rental income from residential properties is taxed under "Income from House Property", subject to specified deductions.
What is Taxable under 'Income from House Property'?
Not all rental incomes are taxed under this head. The table below differentiates taxable and non-taxable components:
|
Taxable |
Non-Taxable |
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Rental Income from House Property: Income from houses, apartments, or attached land. |
Rental Income from Sub-Leasing: Rent earned by tenants sub-letting a property. |
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Partially Self-Occupied Property: Rent from portions let out while another part is self-occupied. |
Composite Rent: Rent for additional assets like furniture (taxed under other heads). |
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Commercial Property with Integrated Assets: Rent is taxed under 'Other Sources' when inseparable assets are involved (e.g., a theatre). |
Section 22: Conditions for Taxing Rental Income
Under Section 22 of the Income Tax Act, rental income is taxable only if:
- There is a physical property (building or attached land).
- The taxpayer owns the property.
- The property is not used for business or professional purposes.
Applicability of GST on Rental Income
|
Property Type |
GST Applicability |
|
Residential Properties |
Exempt |
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Commercial Properties |
18% GST |
Steps to Calculate Tax on Rental Income
Follow this step-by-step process to determine the taxable rental income:
- Gross Annual Value (GAV): Total annual rent received.
- Net Annual Value (NAV): Subtract property taxes from GAV.
- Standard Deduction (30% of NAV): Deducted for maintenance expenses under Section 24A.
- Home Loan Interest Deduction: Deduct interest paid on the loan under Section 24B.
- Taxable Rental Income: The amount remaining after deductions is taxed as per your income tax slab.
Example Calculation
|
Parameter |
Calculation |
|
Monthly Rent |
Rs 25,000 |
|
Gross Annual Value (GAV) |
12 x Rs 25,000 = Rs 3,00,000 |
|
Property Tax |
Rs 20,000 |
|
Net Annual Value (NAV) |
Rs 3,00,000 - Rs 20,000 = Rs 2,80,000 |
|
Standard Deduction (30% of NAV) |
30% of Rs 2,80,000 = Rs 84,000 |
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Home Loan Interest Deduction |
Rs 80,000 |
|
Total Taxable Income |
Rs 2,80,000 - Rs 84,000 - Rs 80,000 = Rs 1,16,000 |
The taxable rental income of Rs 1,16,000 will be taxed as per applicable slabs.
Exemptions: Properties Not Covered Under Rental Income
Certain properties are not included in rental income taxation:
|
Property Type |
Relevant Section |
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Properties for personal use |
Section 23(2) |
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Farmhouses generating agricultural income |
Section 10(1) |
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Properties under local authority possession |
- |
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Properties owned by political parties |
Section 13A |
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Properties owned by Scheduled Caste/Tribe members |
- |
Taxation for NRIs on Rental Income
Rental income earned by NRIs is taxable under Section 24 of the Income Tax Act. Key points to note:
- TDS Deduction: Tenants deduct TDS and deposit it with the government.
- Compliance: NRIs must file Form 15CA to report the rental transaction.
- Double Taxation: Relief can be claimed under the Double Taxation Avoidance Agreement (DTAA) if applicable.
Example
If an NRI earns Rs 2,40,000 annually from renting out their property, the tenant must deduct TDS at 30% and deposit it.
Ways to Save Tax on Rental Income
|
Method |
Details |
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GAV Adjustments |
Adjust for vacancy loss or unrealized rent. |
|
Standard Deduction |
Claim a 30% deduction on NAV. |
|
Home Loan Interest Deduction |
Deduct the entire interest paid on the loan (Section 24B). |
Conclusion
Understanding rental income taxation helps property owners optimize tax liabilities effectively. By leveraging available deductions and exemptions, you can reduce your tax burden significantly.
If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.