Tax Implications You Should Know While Renting Out Your Property

Investing in a property can be for personal use or renting it out. Personal use doesn't generate income, but renting it out does, which is taxable under the Income Tax Act of 1961. Rental income is an important source of earnings, so property owners need to know the tax rates and exemptions. To pay the right taxes on rental income, it's vital to understand the tax rates and pay on time. Unfortunately, many property owners don't know about deductions and exemptions. So, it's essential to plan and learn about tax responsibilities before renting out a property to make the most of possible exemptions.  

Let's delve into the tax implications of rental income:  

What Rental Income Tax Means

"Rental income" refers to the money received for leasing or renting a property, including advance payments like security deposits. The tax calculated on this income is called "Tax on Rental Income." This tax is calculated after deducting municipal taxes. In India, there is no distinction between residential and commercial properties when taxing rental income. Even a parking area attached to a home or office is considered part of the property. Tax is imposed on every rented building, and the rental income is taxed under section 24 of the Income Tax Act. In India, rental income is taxed at a rate of 30 per cent under the income category from house property. To qualify for tax exemptions and standard deductions under the Income Tax Act, the individual must be the legal owner of the property.  

What Are The Tax Implications On Rental Income?

"In the realm of Indian taxation, renting out residential properties carries its own set of financial considerations. Under the provisions of the Income Tax Act, 1961, rental income derived from a leased residential house property falls under the category of 'income from house property.' The tax liability hinges upon the Net Annual Value (NAV) of the property, which is computed as follows: NAV = Gross Annual Value (GAV) - Municipal Taxes," explains Rajiv Bajaj, Chairman & MD, Bajaj Capital.  

"The Gross Annual Value (GAV) represents the expected yearly rental income if the property were leased in an unfurnished condition. Typically, this value is determined by multiplying the monthly rent by 12. Municipal taxes encompass various levies remitted by the property owner to the local municipal authority, including property tax, water tax, and drainage tax," adds Bajaj.  
Once the NAV is ascertained, taxpayers can make the following deductions:

Standard Deduction: A standard deduction of 30 per cent of the NAV.

Interest on Housing Loan (if applicable): Any interest payments on housing loans can be claimed as a deduction.

Municipal Taxes: Municipal taxes are already deducted while calculating NAV.

The remaining amount, post-deductions, constitutes the taxable income categorized as 'income from house property.' This income is then subject to taxation at the applicable tax slab rate, including any surcharges and cess.  

Income Tax Exemption for Rental Income up to Rs 2.5 Lakh

Starting from the fiscal year 2021-22, individual taxpayers enjoy an exemption from paying taxes on rental income up to Rs 2.5 lakh. This exemption is applicable for both self-occupied and leased properties.

Taxation Of Subletting

Income derived from subletting a property is also subject to taxation; however, it is classified under 'Other Sources' rather than 'Income from House Property.' Consequently, the standard deduction of 30 per cent does not apply to rental income from subletting.

Additional Tax Deductions

Beyond the standard deduction and housing loan interest, taxpayers who lease out their properties can avail themselves of further tax deductions, including those for expenses related to repairs and maintenance, insurance premiums, and depreciation.

Renting out properties in India triggers taxation under the 'Income from House Property' category. Nevertheless, various tax deductions exist to mitigate the taxable income burden. Additionally, individual taxpayers are granted an exemption from tax liability on rental income up to Rs 2.5 lakh. It is essential to recognize that the tax implications of renting out properties can fluctuate based on the unique circumstances of each taxpayer. Hence, seeking professional advice may prove invaluable in optimizing one's tax position in this context.

Suppose someone has a monthly rental income of Rs 40,000 per month and Rs 10,000/year taxes (municipal and others). His tax liability will be here as follows:  

Calculate The Gross Annual Value (GAV):

GAV = Monthly Rental Income × 12

GAV = Rs 40,000 × 12 = Rs 4,80,000

Calculate The Net Annual Value (NAV):

NAV = GAV - Municipal Taxes

NAV = Rs 4,80,000 - Rs 10,000 = Rs 4,70,000

Apply The Standard Deduction:

Standard Deduction = 30 per cent of NAV

Standard Deduction = 0.30 × Rs 4,70,000 = Rs 1,41,000

Calculate the taxable income from house property:

Taxable Income = NAV - Standard Deduction

Taxable Income = Rs 4,70,000 - Rs 1,41,000 = Rs. 3,29,000

Check For Income Tax Exemption:

Starting from the fiscal year 2021-22, there is an exemption from paying taxes on rental income up to Rs 2.5 lakh. In this case, the taxable income of Rs 3,29,000 is below this threshold.  

Therefore, for someone with a monthly rental income of Rs 40,000 and annual municipal taxes of Rs 10,000, there would be no tax liability on the rental income because it falls below the exempted limit of Rs 2.5 lakh for the fiscal year 2021-22.