Landlords in India, like anyone else, must pay tax on rental income. If proper planning fails, you may lose a substantial amount of rental income due to taxation. It is possible to lower your tax bill by taking advantage of the deductions provided by India’s tax laws. In this article, we will discuss rental income taxation and how to minimize it.
Renting out property not only allows owners to feel secure, but it can also generate income for them. Currently, the owner generates income from his rent. As a result, the earner must pay taxes on the earnings.
How is rental income taxed?
The Income Tax Act of India has a section titled ‘Income from House Property’ that taxes the rent received by a property owner.
What is income from house property?
According to the Income Tax Act, rental income of a property – this could be a building and the land adjoining it – taxable under Section 24 in the hands of the owner, under the head ‘income from house property’.
As a result, any rent received in relation to a rented property is taxable under this heading. Rent received for a residential house or commercial property is taxable under this heading. Rents received on your factory building, as well as rents received on adjacent land, are taxable.
Since the Coronavirus pandemic, more white-collar workers have returned to their hometowns, impacting rental incomes.
Under which section is income from house property taxed?
Rental income from a property is taxed under Section 24 in the hands of the owner, under the heading ‘income from house property.’ The rent earned from letting out vacant land, on the other hand, is taxed under the category of ‘income from other sources.’ Income from house property is only taxable on land that is part of a building.
Those who own or occupy a property for business use will not have the same tax rates as merchants.
When determining the taxation of a rental property, your market rent would apply, not the rent you paid. Taxes are also levied if your rental income is greater than the market rent. Rental income is taxable in your hands on an accrual basis rather than a receipt basis.
Only the owner pays taxes on the rent received. As a result, if you sublet a property that you have taken on rent, the amount received is taxable under the heading “Income from other sources.” Rent received by a person who has encroached on a property is also taxable under this heading.
For this purpose, ownership is inclusive and includes situations in which you have received possession of a property as part of the performance of an agreement however the legal title to the goods has not altered in your name. Unless the spouse receives any rent from the property, they count as one of the owners and pay taxes accordingly. Similarly, even if the property goes to a minor, the donor parent must continue to pay taxes on it.
How much rent income is taxable?
It is not that the gross rent received becomes taxable. It is possible to deduct the municipal taxes payable for the property from the rent received/receivable for the property. In cases where rent is not available, the deduction is eligible under certain conditions. Using the annual value, you can deduct 30% of the annual value for repairs, etc.
There’s no need to itemize your deductions for repairs or renovations; 30% is a standard deduction.
How much rent is tax-free?
A deduction for interest paid on a loan may also be applicable unless you purchased or built the property yourself. It is possible to get a loan from anyone without having to take out a home loan. Currently, there is no limit to the amount of interest you can deduct from your rental income.
There is a limit of Rs. 2 lakh on the amount that can be set off against other income, such as salary, business income, or capital gains. There is an eight-year set-off period for losses over Rs two lakhs under this heading. This provision has a negative impact on people who borrow money to buy a property and rent it out, because rental values are typically three to four percent of the capital value, whereas the interest rate on such loans is around nine percent. This loss situation typically lasts for longer periods of time than home loans, and any excess interest over Rs two lakh will vanish.
Tax implications on rental income post-Coronavirus
Following the Coronavirus pandemic, a large number of tenants working in various industries in major cities have returned to their own homes, as remote working has become the norm. Those who are still living in their previous rented accommodations have also requested that their landlords waive a portion of their rent due to the financial difficulties caused by the pandemic. Rental income taxation is an issue upon which many landlords hope that the government will soon issue guidelines.