How Is Tax on Rental Income Applicable In 2024?

Real estate investing is considered one of the greatest lucrative forms of investment 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. But how much do people know about the tax on rental income? Check out the article to learn about how a tax on rental income is applicable, what is the rate of tax on rental income and the rental receipt format.

What is the Tax on Rental Income?

According to the current Tax Law in India, whenever a property is rented out or leased to someone, the sum received in exchange for the property is referred to as “Rental Income.” The amount paid in advance as a deposit also comes in it. 

The rental income made on the residential or commercial is taxed under the heading “Income from House Property.” 

Also, the garage next to your house, parking space or office is considered a residential property and is taxable if rented out. Any property that resembles a structure qualifies as a “house property” and is taxable.

How is Rental Income Tax Applicable?

Rental Income Tax is applicable on residential property as well as on commercial property. 

The Income Tax Act of India categorises an individual’s income into five sections for tax calculation purposes.

• Income from a home investment
• Earnings from a salary
• Income from Business and Professional Profits and Gains
• Income on Capital Gains Income
• Income from unrelated sources

After subtracting municipal taxes, the standard tax deduction, and interest charged on any home loans taken out, the rental income tax is calculated.

A taxpayer has authorised a 30 % tax deduction from rental income under Section 24A by the Indian Income Tax Act to pay for costs like renovations and repairs.

How to Calculate Tax on Rental Income 

The rental income tax is calculated based on GAV ( Gross Annual Value). GAV is the annual rent received from the tenant of your property. 

For example, if the rent of your apartment is Rs. 15000, the GAV is Rs 15000 x 12 i.e. Rs. 1,80,000/-. This amount is considered under the limit for rental income tax. So owner does not need to pay tax on rental income. 

Whereas the rent received for an apartment is Rs 25000, and the annual rent is Rs 300000 then this rent amount is taxable according to the tax law of India.

To determine the net annual value, deduct the amount of property taxes paid from the GAV. Property taxes, also known as house taxes, are yearly payments made to municipal authorities. 

Subtract 30% of the Net Annual Value (NAV), which is a standard deduction allowed per Section 24A of the Indian Income Tax Law. 

If a rental property’s owner has taken out a mortgage loan, all of the interest paid throughout the annual year may be subtracted from the rental revenue once standard deductions have been taken into account. Section 24B of the Income Tax Act states that this refund is legal.

The remaining sum amount represents a person’s taxable rental income, on which income tax must be paid by the applicable tax slab.

What is the Rental Income tax rate?

The rental income tax rate is decided in the Income Tax Act by the Indian government. 

A taxpayer is allowed a 30% standard tax deduction from rental income per Section 24A of the Indian Income Tax Act to pay for costs like restorations and repairs.

What are the Deductions on Rental Income?

There are deductions on rental income according to section 24A of Income tax law.

The first is a standard 30% deduction of the taxable value of a property for maintenance and restorations. Municipal taxes are subtracted from this amount before being calculated.

If your actual expense is larger or lower than this amount, you may still deduct 30% of it. If you pay your municipal taxes during the current tax year, you can lower them.

The second is a Reduction for true interest paid on a mortgage i.e. this deduction is allowable for self-occupied, rented, or property that is presumed to be rented properties. 

On an accrual basis, interest on borrowed funds used for construction, acquisition, repair, or renovation is entirely deductible from taxes. If the net income exceeds the net annual value, it may be continued for up to 8 years to offset taxable income or adjusted to other income headings.

A tax incentive of up to Rs 50,000 is offered to first-time homeowners who had only one residence on the date the loan was approved under the recently amended Section 80EE of the Income Tax Act.

How Much Rent is Tax-Free in India?

If a property’s Gross Annual Cost of rent is less than Rs 2.5 lakh, an individual will not be required to pay tax on their rental income. However, if a person’s primary source of income is rent, they may be required to pay taxes. 

Rental Receipt Format For Income Tax

For the rental receipt for income tax, you need a few details like the tenant’s name, landlord’s name, rent amount to be paid, date of payment, address, and signature of the landlord. 

Here is the sample rental receipt format for Income tax.

What is the Tax on Rental Income From a Residential Property?

The term “Income from House Property” refers to the taxation of rental income from real estate owned by the taxpayer, including apartments, buildings, and land. 

All components of the property in this instance will be regarded as separate units, and the revenue derived from each unit will be taxed separately:

The owner’s income from the apartment will be taxed as self-occupied property income.

Additionally, the owner’s rental income will be taxable under the Income tax law.

Rental income that is exempt from taxation under the Income from Residential Property section includes:

• The rental income from a property that a tenant receives through subletting is not taxable under the Income from House Property term.
• The total rent will be taxable under Other Sources of Income or Returns and Profits of Business if the leasing out of the property and the renting out of additional assets are interdependent, such as the rental of an equipped theatre.

What is the Rental tax on Rental Income from Commercial Property in India?

Rental income is counted in the tax liability categories in India and is treated the same as other types of income. The commercial property owner must pay rental income tax if the total received as rental revenue reaches Rs. 2,50,000 per year.

Also read: What is Rental Yields And Why It Is Important In Real Estate

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