Tax On Rental Income In India (Complete Information)

You can invest in a property that always shows as a high-value investment. You can either occupy your property on your own or can leave it for rent in need. But be aware of the taxes you should pay in such a case. Tax deduction on rental income is an option to save you some pennies.

Rental income is the amount received for renting out your property. You are liable to pay tax for the income you receive by renting out both residential and commercial property. 

You are also liable to pay tax if your rented property is only one of your income sources, even if you receive a small amount as income from rent.

However, there are tax deductions on rental income under certain circumstances. Let us know more about tax on rental income in india in this article.

How much rental income is tax-free in India?

You should pay tax for the property you have rented out for residential or commercial purposes. However, there are tax deductions on this rental income.

If The Gross Annual Value (GAV) of your possessions is below Rs 2.5 lakh, you are not liable to pay tax on rental income. However, if rental income is your prime source of income, you might have to pay taxes.

The following points may help in calculating the tax on your rental income.

1. You need not pay tax on the amount you already paid as property tax. You can deduct the amount you paid as property tax for that year from the total rental income or the Gross Annual Value (GAV).

2. Under Section 24A of the Income Tax Act, you can avail 30% deduction on the net annual value. You need not pay tax on that amount, and the same will get deducted from your tax amount.

3. You cannot claim any other expense such as painting and repairs under this section as tax relief.

4. If you have availed of a housing loan for your rented property, you can deduct the interest you pay on the housing loan during the financial year. This reimbursement is acceptable under Section 24B of the Income Tax Act.

You should pay tax only for habitable property income under this section.

Your rental income from renting out vacant land will come under income from other sources.

How much income tax do I pay on rental income?

You need to pay tax if you receive income from any of these,

1. Income from Salary
2. Income from House Property
3. Income from Profits and Gains of Business or Profession
4. Income from Capital Gains
5. Income from Other Sources

If you receive any amount from renting a residential property, a shop, a building, or a factory building is taxable under Income from House Property. The final tax on rental income comes after deducting municipal taxes, standard deductions, and interest toward any home loan.

You are also eligible for a 30 percent standard deduction from the rental income to cover expenses like renovation/repairs.

If The Gross Annual Value (GAV) of your possessions is below Rs 2.5 lakh, you are not liable to pay tax on rental income. You are liable to tax for any amount above this after deductions.

How do I avoid tax on rental income?

Your rental income is also a source of income like other ways and is liable for taxation. If you can save tax on your rental income, you will have a huge benefit. Your net rental income will increase further. You can follow these options to hold your taxable income through rent. 

1. Maintenance Charges– You can reduce your rental income by adding maintenance charges. You need to add only one clause for this in your rental agreement. This is one of the easiest ways to save the task.

2. Joint Property– This is another effective way to save tax. You can purchase your property as a joint one or in your spouse’s name. If your spouse is not working, it becomes a huge benefit. The rental income will go under your spouse’s account, which is not taxable anyway. Thus, you could enjoy the full benefit of your rental income. If your spouse is working and in a different tax slab, this becomes an advantage well.

3. Municipal Taxes – You need to pay municipal taxes like water tax, sewage tax, etc for your house. These taxes can be reduced from the rental income, thus reducing the net rental income. This again reduces your tax amount on the rental income. However, you need to pay these municipal taxes to claim the deduction. It is not applicable if your tenant pays these taxes. 

4. Standard Deduction: If you have purchased a home for an asset and put it on rent then you will spend some pennies on the repair and maintenance of your home. You can claim 30% of the net annual value as a Standard Deduction irrespective of actual expenditure on repair and maintenance. 

You may use the above options to reduce your net rental income and deduct tax from your rental income.

How much rent is TDS free?

If your gross rental income is less than Rs.2,50,000, your rent is TDS free, and you need not pay taxes.

However, if your rental income is above Rs.2,50,000 per year, your rental income is taxable and you are liable to pay taxes.

How is tax calculated on rental property?

You need to pay tax on your rental income as it also comes under income from housing property. Follow the below steps to calculate tax on your rental property.

1. Compute the actual rent of the property
2. Compute Gross Annual Value(GAV) (Your reasonable expected rent or actual rent)
3. Find net annual value by deducting the municipal taxes you paid on your home.
4. You can claim a deduction under section 24(a) at the rate of 30% of the net annual value.
5. You can further claim a deduction for interest under section 24(b) if you have availed of a home loan.
6. However, if you occupy your property, the limit is Rs. 2,00,000 or Rs. 30,000 depending on various factors.
7. After reducing all these deductions, you will receive the net annual value.
8. If this net annual value arrived at the end is less than Rs.2.5Lakhs, you need not pay tax.
9. The net value above Rs.2.5Lakhs is taxable.

By these steps, you can calculate the tax on your rental property.

FAQ: Tax on rental income in India

1. Is rental income GST free?

Your rental income is not liable to GST if you rent it out for the residential purpose. If you have rented out your property for commercial purposes, and the income is beyond Rs.20 Lakhs, you are liable to GST.

2. How much rent can be paid in cash in India?

You can pay your rent through any means as there are no restrictions on the mode of payment. However, for the credibility of the transaction, you should pay rent through proper banking channels.

Section 269SS prohibits you from accepting deposits or a sum of more than Rs. 20,000 in cash. All deposits above Rs. 20,000 must be done through a banking channel.

3. What happens if you don’t declare rental income?

If you fail to add your rental income while filing your returns, there is a possibility that the Income Tax Department is not aware of it and nothing happens.

Our taxing system depends on voluntary disclosure of your income and you should show all your income sources. In case, the Government finds out about your past rental income you are liable to serious charges, fines, and even imprisonment.

You can expect special attention from the income tax department every year and they will never forget you. So, pay your taxes and be a good citizen which will be a favor for you.

4. How is rental income calculated?

You can calculate your total rental income by reducing the deductions that you may show while filing your ITR. These deductions include Municipal Taxes, Maintenance charges, Standard deduction, and deduction on interest if you avail of a home loan.

After reducing all these amounts, the balance amount is your rental income.

5. Can I show my mother as the landlord?

Yes, you can show your parents as the landlord. In that case, the income they receive as rent is taxable to them. They need to show proof of that and pay taxes correspondingly. However, if they don’t have another source of income, the taxable income will reduce. This may be a benefit for saving money.

Bottom line

You are liable to pay tax for the income you receive by renting out both residential and commercial property. However, there are tax deductions on rental income under Section 24. You can show deductions under Maintenance charges, Municipal Taxes, Joint Property, etc.

These deductions will help you save your rental income from taxes. You may enjoy your rental income with full benefits using these deduction options.

In conclusion, the tax on rental income in India is an important source of revenue for the government and can have a significant impact on property owners. It is essential for individuals earning rental income to understand the relevant tax laws and regulations to avoid any potential penalties or legal issues.

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