“I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund.”–Oprah Winfrey
Some people buy real estate with the intention of flipping it, while others do so to generate passive income by renting out extra homes or apartments apart from investing in shares & securities.
In India, the idea of rental income has been well-established for many years and is now one of the main sources of income for many people. Yet, in India, rental income is considered taxable income. Nonetheless, the government has made a number of deductions under the Income Tax Act of 1961 available for taxpayers to keep investing in this industry.
Is rent income taxable?
Well, yes, it is taxable. A person renting his property in return for money is considered to be making a rental income. And hence, such a person should pay a certain amount of the earnings as tax. According to the IT Act, rental income is taxable under the “Income from House Property” head.
An NRI is liable to pay tax for the rental income accrued or received in India. The deductions and tax calculation remain the same for NRIs and residents.
Note: In case of NRIs, there could be chances of double taxation. In India, an NRI is required to pay tax on the rental income. The NRI might also be required to pay tax in the country he is living in as global income is taxable. So, to avoid this double taxation, one should know the concept of DTAA.
How is the tax on rent income calculated?
A person receiving rent income is taxable. The property is taxable on its GAV (Gross Annual Value).
GAV = Higher of the “expected rent” or “actual rent received”
The tax on rental income is calculated on the GAV after deducting municipal taxes, standard deductions & home loan interest taken (if any). The tax is payable as per the slab rates depending on the regime chosen.
Let’s understand with an example. For example, Mr. Patel is receiving rent of ₹50,000 per month. He pays the municipal tax of ₹30,000 annually. He also has an active loan on this apartment for which he pays an interest of ₹50,000 annually. The apartment is fully furnished with wifi and electricity charges of ₹8,000 a month. Assuming this is the only income he has, what is the tax liability as per the old regime?
Calculation of Income from House Property
|Particulars||Amount (in ₹)|
|Gross Annual Value (GAV)||6,00,000 [50,000*12]|
|Less: Municipal charges||30,000|
|Net Annual Value (A)||5,70,000|
|Less: 30% standard deduction (B)||1,71,000 [5,70,000*30%]|
|Less: Home Loan Interest (C)||50,000|
|Income From House Property (A-B-C)||3,49,000|
|Add 4% cess||198|
|Total Tax Liability||5,148|
|Rebate u/s 87A||5,148|
|Total Tax Payable||Nil|
Since this is the only source of income, and the income is below ₹5,00,000, he will get a rebate u/s 87A and hence no tax is payable by him.
What are the tax benefits on rental income?
- Standard Deduction: There is a standard deduction of 30% on the NAV available for both residents and NRIs.
- Deduction of home loan interest: If a person has rented a residential house property that has an active home loan, then the interest on a home loan can be taken as a deduction against the rental income.
- Co-ownership benefit: If one owns a rented property jointly, it can help to reduce tax on the rental income as the income is proportionately split.
- Deductions under section 80EE & 80EEA respectively.
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