Tax Deductions on Rental Income – All You Need to Know
Letting out of a house property is a great way of having a steady and secure source of income. However, it is important to be aware of the tax on rental income. As per the Income Tax Act, 1961 (“IT Act”), the income earned by an individual can be categorised into five heads of income. “Income from House Property” is one of the heads of income under which the Rental income is taxable.
However, the entire rental income earned by an individual is not taxable. There are deductions that can be availed subject to certain limits and conditions. Let us know more about these deductions.
Tax Deductions on Rental Income
The owner of a house property is liable to pay income tax on rental income. The calculation of taxable rental income begins with the determination of the Gross Annual Value (GAV) of the property. GAV is an estimation of the amount of rent for which a house property can be let-out. GAV is generally the higher of the actual rent received from the property or the expected rent receivable from the property.
The determination of GAV is followed by the determination of the Net Annual Value (NAV) of the house property. NAV is calculated after deducting the municipal taxes paid by the owner from the GAV.
Section 24 of the IT Act contains provisions which provide deductions from the NAV of the house property. These deductions are discussed in detail below:
- Standard Deduction
Standard deduction is a fixed deduction of 30% of the NAV of the house property. For example, let us assume that you are the owner of a let-out house property from which you are earning rental income. The NAV of the property is ₹ 5,00,000. After applying the standard deduction of 30%, your taxable base will reduce to ₹ 3,50,000.
- Interest Paid on Home Loan
Taking a home loan can help you reduce the tax on rental income. Interest paid on loans taken for the acquisition, construction, repairs, renewal or reconstruction of a house property is available as a deduction from the NAV.
There is no restriction on the amount of interest that can be claimed as a deduction for let-out house property. In the case of self-occupied house property, interest on loan taken for acquisition or construction is capped at ₹ 2 lakh and interest on loan taken for repairs or renewal is capped at ₹ 30,000 per year. Note that the principal amount of the loan paid can also be claimed as a deduction under 80C of the IT Act subject to a cap of ₹ 1,50,000 per year.
As proof of payment of interest, you should obtain a certificate from the lender certifying the total amount of interest that has been paid by you during the financial year.
- Tax Benefit for Co-owners
Owning a property with a partner or a family member has its advantages when it comes to reducing the tax on rental income. Rental income earned from a co-owned property is taxable in the hands of the co-owners in the ratio of their ownership, thereby distributing the income chargeable to tax. The basic exemption limit of each co-owner reduces the overall incidence of tax on the rental income. For example, a taxable rental income of ₹ 5,00,000 will not be subject to tax if the house property is equally owned by two individuals. This is because the rental income will get distributed as ₹ 2,50,000 each in the hands of the owners, which is equal to their basic exemption limit (assuming the co-owners have no other income).
Further, if the co-owned house property is self-occupied, each co-owner is entitled to a deduction of ₹ 2,00,000/ 30,000, as the case may be, on account of interest paid on a home loan. However, the home loan should also be jointly taken and payment of interest must be made by each co-owner to avail a deduction.
Calculation of Tax on Rental Income
At the end of a financial year, you can calculate the tax on rental income by following the steps below:
- Step 1: Calculate the GAV of the property
- Step 2: Calculate the NAV of the property by reducing any municipal taxes paid from the GAV
- Step 3: Apply a standard deduction of 30% on the NAV.
- Step 4: Claim a deduction for any interest paid on home loan
- Step 5: The amount arrived is the taxable rental income
- Step 6: Calculate the tax payable as per the income tax slab applicable to you
Conditions for Taxation of Rental Income as Income from House Property
If any of the following factors are fulfilled, rental income is taxable as business income and not under the head “Income from House Property”:
- The property is used by the owner for any business being carried out by them
- The owner is in the business of letting out house properties
- The property is held as an inventory by the owner
Rental income is a steady source of passive income. You would not want taxes to eat into your share of income. Therefore, a prudent owner of a house property should always plan for saving their tax liability on rental income.
Frequently Asked Questions
I have transferred my house property to my spouse. Do I need to pay tax on the rental income?
If you have transferred the property to your spouse for adequate consideration, your spouse will be the owner of the property and be liable to pay tax on the rental income. However, if the transfer is for inadequate consideration, you will be deemed to be the owner of the transferred property and be liable to pay tax on the rental income.
Note that in case of transfer of property to a spouse in connection with an agreement to live apart, the transferor is not deemed to be the owner and the transferee is the owner of the property.
What amount of rental income is not subject to tax?
Rental income is taxed as per your income tax slab. Therefore, rental income shall not be taxed as long as the total income is less than Rs. 5 lakhs.
I am living abroad and my brother who is living in India receives rental income on my behalf from my house in India.
Yes, non-resident owners are liable to pay tax on the rental income received in India from house property situated in India. It is immaterial that the rent is being received by anyone else.