Tax on Rental Income and the Applicable Deductions

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Tax on Rental Income

The income tax laws propose a certain amount of tax on rental income for an individual who has let out their property. A rent beneficiary is liable to pay taxes on their rental income (provided it falls under the income tax slab) as well as claim tax deductions on their earning. 

Process Of Income Tax On Rental Income

Whenever a property owner receives an amount against their rental property, the amount becomes taxable under the Income Tax Act, India. This tax on rental income is applicable for commercial estate, residential properties, factory let-out or rent against the land. 

Tax on rental income is chargeable based on its annual value. The yearly income against land or property is calculated based on:

– The exact rental income of the property

– The rental amount for which the property can rationally rent.

Between these two, whichever amount is higher, will be used to determine the annual rent of a property. 

Points To Remember:

  • As a proprietor, if you rent a property for a minimal amount, the taxable amount on that property will be the market rent and not the actual rent amount you received. 
  • In the instance of receiving a higher amount of rent against your property compared to the market rent, the higher rental amount received by you will be taxable.
  • Only the property owner is liable for paying tax on rental income received. If a tenant is subletting their apartment, the rental income of the tenant will be taxable under-earning from other sources. Illegal subletting of an apartment is not exempted under the income tax laws.
  • Property ownership is very important because it defines whether you are in part-agreement of a received asset or, you have the entire legal entitlements of the property. (once the rights are transferred). Tax on rental income will be charged accordingly.
  • An individual continues to be the property owner even when they gift a property to their spouse under separation. The individual owner has to pay the taxes as long as it is stated in the agreement.
  • Likewise, if the ownership of a property is transferred to a minor (under eighteen years of age), the donor has to pay the property taxes. 

Calculating The Income Tax On Rental Income:

Income tax is not charged on the entire rental income. As a property owner, one can subtract the municipal taxes against the rent amount received on the property. The income tax laws offer a claim deduction on the rental earning depending upon the fulfillment of certain conditions. The income tax on rental income rises proportionally with the annual rent increment. After comparing the earning and the tax charges, one can get a yearly value on which they can get a rebate of 30% thereby, saving tax money. 

The standard deduction rate on taxable rental income is 30% and it is independent of the refurbishing cost of the property. 

Calculating Tax-Free Rental Income:

Whether you have loaned any money for repair/renovation of the property, new construction on the property, purchasing goods for your property or other miscellaneous reasons; you can always claim a tax deduction on the interest you are supposed the against the loan. You can loan this certain amount from an individual, organization or any bank. Currently, there is no set rule against the interest amount that you can claim as a tax deduction on rental earning.

Points To Remember:

  • There is a limit of Rs. 200000 termed as ‘income from house property’ and going against it can hamper your other earnings such as capital profit, salary and business earning. 
  • If you go through any loss under the ‘income from house property’ beyond Rs. 200000, you can carry it forward up to eight years. 
  • This facility can adversely affect the individuals who loan money to buy a property and rent it out. This is because rental income is at least 3% to 4% of the capital value while interest rate against the loan is 9%. 
  • Home loans take a much longer period to get approved the circumstance of loss under ‘income from house property’ will go on for long. The extra interest that the owner was supposed to get beyond the Rs. 200000 will eventually have no value as they will have no further access to it.