Rental income tax, as well as any relevant deductions

While income tax rules impose some taxes on a person who gets rent from a property that he has rented out, the taxpayer is also permitted to deduct certain expenses from that income. We investigate the legal framework.

Rental income tax

Landlords in India must pay taxes on their rental income, just like any other kind of income. If adequate planning is not implemented, a significant portion of your rental revenue may be lost to taxes. By making use of the deductions provided by India’s tax rules, you can reduce your tax burden. In this post, we’ll go through what rental income is, the many types of taxes it may trigger, and how to keep your rental income tax burden low.


Rental income is subject to taxation.

Real estate not only gives owners a sense of security but also allows them to make money if the property is rented out. In India, the rent generated by the owner is considered income under the current rules. As a result, everyone who earns such an income must pay taxes on it.


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What is the tax treatment of rental income?

The Income Tax Act of India contains a separate section named “Income from House Property,” which taxes the rent earned by a property owner.


What is the revenue from a house?

Rental income from property – this may be a building and the land adjacent to it – is taxed in the hands of the owner under Section 24 of the Income Tax Act, under the heading “income from home property.”

As a result, any rent collected in connection with a rented property is taxed under this heading. Under this heading, rent collected from a residential dwelling as well as commercial property is taxed. Under this heading, even rent earned for leasing out your manufacturing facility or rent obtained on property adjacent to the structure is taxed.


The yearly worth of the property is used to calculate the tax.

The yearly worth of a property is determined by whichever of the following is higher:

Remember that, as a result of a significant number of firms choosing for remote working in the aftermath of the coronavirus epidemic, a huge number of white-collar employees have returned to their hometowns, putting a strain on landlords’ rental earnings in major cities.


Which part of the tax code does income from house property fall under?

Rental income from a property is taxed in the hands of the owner under Section 24 of the Income Tax Act, under the heading “income from home property.” The rent received by renting out unoccupied land, on the other hand, is taxed under the heading of “income from other sources.” The only land that is part of a structure is taxed on income from residential property.

Despite the fact that rent from shops is taxed under the same heading, this section will not apply if the property is utilized for business or to provide professional services by the owner.

As a result, if you rent a property for a minimal fee, the market rent, not the rent you received, is the amount to be considered for taxes Purposes Similarly, if the real rent collected for your property is higher than the market rate, the rent actually received/receivable will be taken into account for tax purposes. Please keep in mind that rental revenue is taxed in your hands on an accrual basis rather than a receipt basis.

The only person who gets taxed for rent received is the owner. As a result, if you sublease a home that you have rented, the money you get will be taxed under the heading “Income from other sources.” Under this heading, even rent received by a person who has encroached on a property would be taxed.

For this reason, ownership is defined broadly and includes situations where you have acquired possession of a property in partial fulfillment of an agreement but the legal title to the items has not yet been transferred to your name.

Even if an individual donates property to his or her spouse, he or she will continue to be recognized as an owner of the property and will be taxed appropriately, even if he or she does not get the real rent for the property. Similarly, even if the property is given to a minor, the donor parent is still responsible for paying taxes on it.

Rental income

Is there a limit to how much rental income is taxable?

It is not the case that the gross rent collected is taxed.

You are permitted to deduct the municipal taxes due for the property from the rent received/receivable for the property. Because rent is taxed on an accrual basis, the law permits you to claim a deduction for rent that you were unable to collect, as long as certain requirements are met.

After subtracting the above two things, you’ll have the yearly value, from which you may take a standard deduction of 30% of the annual value to cover the cost of repairs, maintenance, and so on.

Please keep in mind that the 30% deduction is a standard deduction, regardless of whether you actually spent money on repairs or renovations for the property during the year in question.


What is the maximum amount of rent that is tax-free?

If you borrowed money for the acquisition, construction, repair, or renovation of your home, you can deduct the interest you paid on that money. The money may be borrowed from anybody, and it does not have to be a home loan. There is currently no limit on the amount of interest you can deduct from your rental income.

There is, however, a limit of Rs two lakhs for the loss under the heading ‘Income from residential property, which can be deducted from other sources of income like as pay, company income, or capital gains. Any loss in this category that exceeds Rs two lakhs is permitted to be carried forward for set off for the next eight years.

This clause hurts those who borrow money to buy a house and then rent it out because rental prices are typically three to four percent of the capital value, but the interest rate on such loans is approximately nine percent.

Because house loans are typically taken out for longer periods of time, the condition of loss under this heading will typically persist for longer periods of time, and any excess interest in excess of Rs two lakhs will essentially be lost permanently.


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After the Coronavirus, what are the tax consequences for rental income?

Since remote working has become the norm in the aftermath of the Coronavirus epidemic, a huge number of renters working in various businesses in major cities have returned to their own homes. Those who are still living in their prior leased apartments have also urged their landlords to forgo a portion of their rent due to the pandemic’s financial hardships. Because a significant number of landlords’ rental income has been impacted as a result, there is optimism that the government will publish recommendations on how their rental income should be taxed today.


The most recent news updates

ITAT determines that unrealized rent is not taxed.

3rd of December 2020: An income-tax appeal panel has concluded that landlords are not obligated to pay taxes on unrealized rental revenues, which is a big comfort for them in the face of growing rent defaults. The fact that the renter has deducted tax cannot be the primary justification for the taxability of rent, according to the tribunal’s ruling.

The recent ruling by the Income Tax Appellate Tribunal (ITAT) Mumbai bench, which clearly states that tax on rental income is only applicable when the rent is actually received, will have a direct impact on all cases where tenants have been unable to pay rent due to ongoing Coronavirus-induced economic stress and a sharp drop in employment numbers.

The panel made the ruling while handing down its decision in a case where a tenant deducted TDS (tax deducted at source) from the rent without paying it to a Navi Mumbai-based apartment leasing business.

Despite the fact that the Mumbai branch of the tax tribunal’s decision relates to a case from 2011, the verdict might have a significant influence on existing cases. Taxpayers with comparable facts may wish to examine the implications of this judgment in their situations, according to audit company Deloitte India.


The background

For its property in Vashi, Navi Mumbai, the business entered into a leasing arrangement with the renter. The renter paid rent and received reimbursement for electrical expenditures on a regular basis up to the financial year (FY) 2009-10, which corresponded to the assessment year (AY) 2010-11. However, due to financial difficulties, the tenant did not make any rent payments in the fiscal year 2010-11, which corresponded to the fiscal year 2011-12. Following that, the renter paid a portion of the rent for FY 2010-11, which corresponded to AY 2011-12. In November 2011, the tenant departed the property.

At the same time, the renter deducted TDS and deposited it into the government account, despite the fact that the taxpayer received no rent for FY 2011-12, equivalent to AY 2012-13. As a result, the taxpayer failed to report such rental revenue on its tax return.

While the assessment officer included the unrealized rent in the taxpayer’s total income, the commissioner of income tax (appeals) affirmed the AO’s decision when the taxpayer appealed. The case was then transferred to the ITAT’s Mumbai branch.

“Only when the taxpayer had received, was expected to receive, or had the certainty of receiving (rent) in the near future could the rental income be brought to tax. The taxpayer had no assurance of receiving any rent in the particular case, according to the Mumbai Income Tax Appellate Tribunal. “The fact that the tenant had deducted TDS and disclosed it in the TDS form could hardly be the only justification for the rental income to be sustained,” it continued.



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