How Does Rental Income Affect Your IT Return?

If you own a home and earn money from renting it out, you need to include this rental income in your tax return. Filing your income tax return can be a big responsibility, especially if you’re a landlord. In India, July is a particularly busy time for tax payers as they prepare to file their returns, showing their income and tax liabilities to the government.

What is Rental Income?

Rental income is the money you receive from renting out your property, whether it’s rental income from commercial property rental income from residential property. According to the Income Tax Act of 1961, this income is taxed under the category "income from house property." This includes rent from residential homes, commercial properties, and even factory buildings or land adjacent to buildings.

How to Report Rental Income in Your Tax Return?

When it comes to rental income returns, you need to calculate the "annual value" of your property. This annual value is either the actual rent you receive or the amount you could reasonably expect to get if you rented it out, whichever is higher. This rental income becomes taxable when you earn it, not just when you receive the money. 

Deductions on Rental Income

You don’t have to pay tax on the full amount of rental income you receive. You can claim certain deductions to reduce your taxable income. Here are the main deductions you can claim:

1. Municipal Taxes: You can deduct the amount you pay in municipal taxes from your rental income.
2. Standard Deduction: You are allowed a standard deduction of 30% of the annual value of the property. This deduction covers expenses for repairs and maintenance, even if you didn’t actually spend money on these repairs during the year.

Claiming Interest on Home Loans

If you have borrowed money to purchase, build, or repair your property, you can also claim a deduction for the interest you pay on this loan. However, there is a limit: any loss beyond 2 lakhs can be carried forward and set off against future income for up to eight years. This can be a problem if you have high loan interest compared to low rental income.

Tax Benefits for Salaried Employees with HRA

If you are a salaried employee receiving House Rent Allowance (HRA), you can claim a tax exemption under Section 10(13A) of the Income Tax Act. To qualify for this exemption, you must be paying rent for a residential property where you live, and you should not own that property. The amount of exemption depends on where you live and is the lowest of the following:

       •  The HRA you receive
       •  50% of your salary if you live in a metropolitan city (Mumbai, Kolkata, Delhi, Chennai)
       •  40% of your salary if you live elsewhere

Deductions for Rent Paid Without HRA

If you don’t receive HRA but still pay rent, you can claim a deduction under Section 80GG. This is available for self-employed individuals and employees who do not get HRA. The maximum deduction you can claim is 60,000 per year or 5,000 per month. The deduction amount is the lower of 25% of your total income or the rent paid minus 10% of your total income.

How much rental income is tax free?

In India, if you earn money from renting out a property, you might not have to pay taxes on it if the property's Gross Annual Value (GAV) is less than Rs 2.5 lakh. The GAV is the total value of the property you can get from renting it out in a year. 

If your rental income is below this amount, you don't need to worry about paying taxes. However, if renting out properties is your main source of income and you earn a lot from it, you might still need to pay taxes. In simple terms, if you make a lot of money from renting, the rules for paying taxes might be different.

Tax Implications for Second Homes

If you own more than one house, you can choose one house to be treated as self-occupied, which means its annual value is considered zero for tax purposes. The other properties will be considered as let out, and you will have to pay tax based on a notional rent, even if they are not actually rented out.

Home Loans for Under-Construction Properties

You cannot claim a deduction on the interest of home loans for properties under construction. However, once the construction is completed, you can claim the pre-construction interest in five equal instalments starting from the year the construction is finished. Additionally, you can claim up to 2 lakh on interest payments and 1.5 lakh on principal repayment under Section 80C for self-occupied properties.

Tax on Vacant Properties

If you have more than one self-occupied property, you must choose one to be treated as self-occupied. Any other vacant property will be treated as "Deemed Let Out Property" (DLOP) and taxed as if it were rented out, based on a notional rental value.

Conclusion

Understanding how to handle rental income and related tax benefits can help you manage your tax returns more efficiently. Whether you are earning rental income from a residential or commercial property, or managing multiple properties, knowing these details ensures you comply with tax regulations and make the most of available deductions and exemptions.