Income Tax on Rental Property

In India, Income Tax on Rental Property comes under Section 24 of the Income Tax Act. 

When you rent out your property and receive rent, it is considered rental income and is levied tax as “income from other sources”. To maximize your earnings and save on Income Tax on Rental Property, you ought to know about certain exemptions. This article will give you an insight into how your rental income will be taxed, how to compute the gross annual value (GAV) of a property, and how to save tax on rental income.

How Is Income Tax on Rental Property arrived at? 

Any rental income from a residential or commercial property is taxable on its gross annual value (GAV), which is arrived at after deducting the standard deduction, municipal taxes, and interest paid on a home loan (if any). 

What is Standard Deduction?

It is the amount that you spend annually to cover your expenditures on renovations, repairs, etc. and is a standard deduction (SD) of 30% of the annual value.

The GAV (gross annual value)

The Gross Annual Value (GAV) of your property is arrived at by deducting the loss due to vacancy from the higher of the following:

(a) The anticipated rent

(b) The actual rent received.

For example, your rental estimated value is Rs 12000 p.m. but you are getting only Rs 10000 p.m. The higher value is Rs 12,000. Therefore, your (deemed) rental income is 12000X12 = Rs. 1,44,000. Additionally, the house was vacant for 6 months. So the GAV will be 144000-(12000X6) = 72000, which is the GAV.

Deductions to Income Tax on Rental Property under Section 24

(i) Standard deduction: This is 30% of the property’s GAV to offset expenses for repairs and maintenance.

Important: this amount is computed after deducting municipal taxes. 

(ii) Deduction for home loan interest: The interest paid is fully deductible.

Note: This can be for interest on money borrowed for construction, repair, or renovation. 

How Much Rental Income is Tax-Free? 

If the gross annual value (GAV) of your property is below Rs 2.5 lakh, you need not pay tax on rental income from that property.

How is Taxable Income Calculated 

A. Gross Annual Value (GAV) -Municipal taxes

B. Standard Deductions = 30% of A

C. Taxable = B-home loan interest (if any).

Eg. 1 – 

Rent received = $30,000 per month for a period of 12 months.

The interest on a home loan is Rs 80, 000.

Taxable rental income will be as follows:

GAV = 3,60,000

Because this is more than Rs 2.5 lakhs, you must pay income tax calculated as follows.

NAV (Net annual Value)= 3,60,000 – 30000 = 3,30,000 (Rent minus municipal taxes) 

Deduct: 30% standard deduction of 3,30,000= 99000

Deduct: Home loan interest 80,000

Income from house property = 330000-99000-80000 = Rs. 151000 (taxable amount).

Eg. 2- 

If the rent of the property is Rs 15,000 per month, the GAV will be Rs 1,80,000 (15,000*12), so you do not have to pay rental income tax.

Note: Your self-occupied property is also not taxable 

Income Tax on Rental Property for NRIs

A non-resident Indian (NRI) earning rental income by renting out a property, will also have to pay taxes on the same lines. However, here it is the responsibility of the tenant to deduct a 31.2% tax deduction at the source (TDS) and deposit the amount to the NRI account. The tenant will also fill out a Form 15CA and submit it to the Income Tax department. 

Tips to Save Income Tax on Rental Property

  • Maintenance fees: Always keep the maintenance fees separate from the rent. Including the maintenance charges in the rent will increase your tax liability on the rent income. Your rental agreement should clearly state that the tenant will pay maintenance charges directly to society.
  • Joint property: Register your property with a family member you trust (husband/wife/parents), preferably with an income of less than Rs 5 lakhs. By doing this, you divide your rental income into two and save tax on 50% of the rental income proportioned to your family member.
  • If you have a furnished or semi-furnished property: the cost of benefits like DTH connection, Wifi, cooking gas pipeline connection, etc., ask your tenant to pay these charges separately. Do not incorporate them into the rent. 

When you have Two or More Properties

From FY 2019-20 onwards, you can consider two houses as self-occupied. When you have more than two, assume the remaining house as let out for income tax purposes. Even if the third house is unoccupied, you calculate tax based on the deemed (notional) income prevailing in that area. The choice of property to pick as self-occupied is up to you.