Table of Contents
- What is Income from House Property?
- How Income Tax on Rental Income is Calculated?
- Under Which Section is Income from House Property Taxed?
- How Much Rent is Tax-Free?
- Maximum amount of deduction on Home Loan that can be claimed under section 24
- No Tax on Unrealised Rent- ITAT
- Charitable Trusts are Not Eligible for Standard Deduction on Rental Income
- Tax on Rental Income from REITs
- Conclusion
- Faq's
Investing in real estate and earning rental income can be a lucrative venture, but it also comes with tax implications that property owners need to navigate effectively. Understanding how income tax on rental income is calculated and knowing the various deductions available can significantly impact one's tax liability.
Income from house property, whether residential or commercial, falls under the purview of taxation in India and is subject to specific rules and regulations.
This article delves into the intricacies of saving tax on rental income, shedding light on essential aspects such as the calculation of taxable rental income, deductions available under the Income Tax Act, and the tax treatment of rental income from different sources.
What is Income from House Property?
Income from house property refers to the income earned from renting out a property, whether residential or commercial.
This income is taxed under the head 'Income from House Property' in India
How Income Tax on Rental Income is Calculated?
How is income tax on rental income calculated?
Income tax on rental income is calculated by following a step-by-step process that involves several key components.
The first step is to compute the Gross Annual Value (GAV) of the property, which is the higher of the reasonable expected rent or the actual rent received.
This GAV is then reduced by municipal taxes paid during the year to arrive at the Net Annual Value (NAV).
Next, a standard deduction of 30% of the NAV is allowed, which covers expenses such as renovation and repairs. Additionally, if the property was purchased through a home loan, the interest paid on the loan can be deducted up to a maximum of Rs 2 lakh.
The remaining NAV is then taxed as income from house property under Section 24 of the Income Tax Act. The tax rate applicable is based on the taxpayer's marginal slab rate. For instance, if the GAV of a property is below Rs 2.5 lakh, no tax is payable.
However, if the rental income is a primary source of income, the individual might have to pay taxes. This calculation process ensures that the tax liability on rental income is accurately determined and reflects the actual income earned from the property
Under Which Section is Income from House Property Taxed?
Income from house property is taxed under Section 24 of the Income Tax Act in India. This section specifically deals with the taxation of income earned from owning a property, whether it is rented out or self-occupied.
Under Section 24, homeowners can claim deductions for the interest paid towards home loans, making it a crucial provision for individuals with property investments. The deductions allowed under this section play a significant role in determining the taxable income from house property.
Homeowners can benefit from deductions such as a standard deduction of 30% on the Net Annual Value (NAV) of the property and deductions on the interest paid on home loans. These deductions help in reducing the overall tax liability on rental income or income from a self-occupied property.
Understanding the facets of Section 24 is essential for property owners to help optimise their tax liabilities and also ensure that they are being complaint with tax regulations. By taking advantage of the deductions provided under this section, homeowners can effectively manage their tax obligations related to income from house property and enhance their tax savings legally.
How Much Rent is Tax-Free?
The maximum amount of rent that can be tax-free under the New Tax Regime is up to Rs 10 lakh. Individuals with rental income up to this threshold may not be required to pay any taxes, assuming they have no other sources of income or deductions. This tax-free limit is a significant benefit for those whose sole income comes from rent, allowing them to enjoy tax-free rental income up to Rs 10 lakh.
The tax calculations consider deductions such as property tax paid, interest on home loans, and a standard deduction of 30% on the Net Annual Value (NAV) of the property. By leveraging these deductions, individuals can effectively reduce their taxable rental income and potentially eliminate their tax liability on rental income up to Rs 10 lakh under the New Tax Regime
Maximum amount of deduction on Home Loan that can be claimed under section 24
The maximum deduction that can be claimed under Section 24 of the Income Tax Act is:
For self-occupied property:
The maximum deduction on interest paid on a home loan for a self-occupied property is Rs. 2 lakh
For rented property:
The entire interest paid on a home loan for a rented property is allowed as a deduction, without any limit
Additionally, there is a standard deduction of 30% of the Net Annual Value (NAV) of the property, which is applicable for both self-occupied and rented properties
For properties that are vacant for the entire year, the loss can be carried forward for up to 8 years to be set off against income from other sources. The deduction for pre-construction interest is allowed in 5 equal installments starting from the year of completion of construction or acquisition of the property.
So in summary, the maximum deduction under Section 24 is Rs. 2 lakh for interest on home loans for self-occupied properties, and the entire interest amount for rented properties, along with the 30% standard deduction on the Net Annual Value
No Tax on Unrealised Rent- ITAT
No tax is applicable on unrealised rent
The Income Tax Appellate Tribunal (ITAT) has ruled that no tax is applicable on unrealised rent. This is a significant ruling that provides relief to property owners who have faced challenges in collecting the full rental amount from their tenants.
Previously, the tax authorities had been treating unrealized rent as part of the taxable rental income, leading to a higher tax burden for property owners. However, the ITAT's decision has clarified that only the actual rent received or receivable should be considered for taxation purposes, and not the unrealized portion.
This ruling is particularly beneficial for landlords who have struggled with tenants defaulting on rent payments or vacating properties without clearing outstanding dues. By excluding unrealized rent from the taxable income, property owners can now avoid paying taxes on rental income they never actually received. This ruling helps alleviate the financial strain faced by landlords and ensures a more equitable tax treatment of rental income.
Charitable Trusts are Not Eligible for Standard Deduction on Rental Income
Charitable trusts are not eligible for the standard deduction on rental income. This exemption highlights specific tax implications for charitable organisations renting out properties
Tax on Rental Income from REITs
Rental income from Real Estate Investment Trusts (REITs) is subject to taxation. Investors earning rental income through REITs need to consider the tax implications based on their individual tax slab rates, while dividend income is tax-exempt if the REIT's Special Purpose Vehicle (SPV) has not opted for the lower tax regime.
Short-term capital gains on the sale of REIT units, if held for up to 36 months, are taxed at 15% plus surcharge and cess.
This taxation framework ensures that investors in REITs are aware of the tax implications related to rental income, interest income, and dividends earned from their investments in these real estate assets.
Conclusion
Understanding the nuances of tax on rental income involves understanding how rental income is taxed, the deductions available, and the regulations governing this aspect of property ownership.
Through a thorough know-how of how income tax on rental income is calculated, individuals can strategically leverage deductions to minimise their tax burden. Additionally, being aware of the specific sections of the Income Tax Act under which rental income is taxed, such as Section 24 for income from house property, is crucial for accurate tax planning.
By following these guidelines and remaining up-to-date with tax regulations, individuals can navigate the complexities of rental income taxation and maximise savings in a legally compliant manner.
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