Taxation on rental income: A Brief Overview

What is rental income?

The revenue obtained by leasing or renting an item of real estate, including down payments such as security deposits, is referred to as "rental income". The tax computed as a percentage of this income is known as the "tax on rental income." This tax is computed after subtracting local taxes. Rental income tax is levied for both residential and commercial properties in India. A parking lot that is connected to a house or business is also regarded as property.

In India, rental income that falls under the income from housing property category is subject to a 30% tax.

What is the tax implication?

In India, the majority of rental income is taxed as "income from house property." Taxes must be paid by every property owner who receives rent for a home, business, or factory.

The yearly rent value (determined in gross annual value) that the property owner receives is the basis for determining the tax on income from rentals. To calculate their tax obligation on rental income, taxpayers must subtract basic deductions, house loan interest, and municipal taxes.

In India, rental income from a property is taxed according to the tax slab rate of the individual. However, there would be no tax on rental income if the Gross Annual Value (GAV) was less than ₹2.5 lakh. The Income Tax Act allows for a number of deductions that lower one's rental tax obligation.

Taxpayers may deduct 30% of the normal deduction for repairs and renovations, per Section 24A of the Income Tax Act. However, individuals must be the legitimate owners of the property in order to claim this deduction for rental income.

Furthermore, in accordance with Section 24B of the Income Tax Act, a person may deduct, after the ordinary deductions, the whole amount of loan interest paid on a given financial year if they rent out a property they bought with a home loan.

Which properties don't have tax implications?

• Individuals do not have to pay taxes on revenue from properties they use for commercial purposes, per Section 22 of the Revenue Tax Act. Let's say someone owns a piece of real estate that they utilise as an office. In this instance, they are exempt from paying taxes on the area they occupy.

• Income from properties in or near agricultural fields is classified as rural income under Section 10(1) of the IT Act. For instance, owners of farmhouses are exempt from paying taxes on rental income received from the property.

• Property owners who rent out their properties to municipal authorities are exempt from paying taxes under Section 10(20) of the Income Tax Act.

• According to the Income Tax Act Section 10(21), individuals who rent or lease their premises to recognised science research associations are exempt from paying taxes.

• Section 10 (24) exempts rental revenue from a registered trade union's real estate.

• Rental revenue from healthcare and educational facilities is tax-exempt under Section 10(23C).

• Rental revenue from properties owned by charities or religious institutions is free from taxes, per Section 11 of the Income Tax Act.

• According to Section 13A of the Income Tax Act, rental income from properties that are part of political properties is completely tax-exempt in India.

• According to Section 23(2) of the Income Tax Act, the yearly value of a property that the owner uses as their primary residence is not considered taxable income.

Conclusion

For retirees in particular, rental income is a crucial source of passive income. As a responsible citizen, every homeowner must understand the tax implications of rental income. The financial year draws to an end, and ensuring your all tax liabilities are fulfilled will ensure you avoid penalties and fines.