How is Rental income taxed in India (2024-25)

What is Rental Income?

• Leasing out property that you possess or have access to generates rental income.
• You can solely own it yourself or jointly own it. A rental income example would be renting an apartment or office space.
• The renters would then have to pay you money at the end of the month. This is rental income. 
• Rental income includes rent, furniture usage, and pricing for any other services. It is not earned income.
• But, rental income is passive income. Rental income depends on the landlord plus the property rented.

Must read Residential Vs. Commercial Properties: The Rental Income battle.

Different Types of Rental Income In India

Now let us explore the different types of rental income: 

1. Income from House Property

When a person earns rental income from buildings, apartments or land, it is referred to as ‘income from house property.‘ It also includes any advance payment made as a security deposit.

2. Rental income from a partly self-occupied house property 

If the owner partially occupies the property and partly lets it out for rent, its parts become independent units. Rental income from these units is considered under separate heads:

• Part of an owner’s property will be taxed as per taxation rules for income from a self-occupied property. 
• The income gained from the portions put on rent will be taxed as ‘income from house property.’ 
• Rental income earned by tenants from sub-letting their portion will not be considered under ‘income from house property.’ Sub-letting means leasing a portion of a self-occupied property for a specific duration.
•  It is challenging to differentiate between letting out a building and its assets (such as equipped theatres).  The entire amount will be treated as ‘income from other sources or business profits.’ 

3. Rental income from Composite Rent

In some cases, letting out a building could be separate from letting out its assets, for example, refrigerators and washing machines, along with the house. Then, the following rules will be applicable:

• Rental income from only the house will be treated as ‘income from house property.‘ 
• Rental income from other assets will be taxed under ‘income from other sources or ‘profits or gains made from businesses.’ 

4. Rental income from a Shop 

Suppose a taxpayer has let out his/her land and building, and a shop has been situated there. The rental income that the owner earns falls under ‘income from house property.’

How to Save tax on rental income india

Don’t we all dislike paying taxes on rental income? We sure do.

“How to not pay taxes on rental income” or “How to save tax on rental income in India” are some of the most frequently asked questions. Well, you can not pay taxes. You have to. But did you know that you can follow strategies and save tax on rental income? 

So, when looking for ways to tax income tax for rental income, following these:

• Maintenance fees: Can maintenance charges be deducted from rental income? Yes. One of the simplest methods to reduce tax is to deduct maintenance payments from rent. For example, if you charge Rs 30,000 in rent and include Rs 5000 in maintenance expenses, you would pay tax on Rs 30,000. But, by deducting such payments from maintenance rates, you can save Rs 5000 in tax. You must include one sentence in the lease that states, “Tenants can pay maintenance directly to society association.”
• Joint property: If you buy a property with a family member you know (parents/wife/husband), you can save on rental income taxes. The rental income gets divided in half. You can avoid tax on the amount of the rental income allocated to the other family member.
• Municipal taxes: Municipal taxes like sewage or property tax can be deducted from rental income tax. But, all municipal taxes must be payable by the property owner, not the renter. These payments diminish your rental revenue and hence your tax burden.
• Semi-furnished or completely furnished property: If you are leasing your property with amenities like Wifi, DTH, and pipeline connection, you can ask the renter to pay such expenses individually and not include them in the rent. This reduces your rental revenue and requires you to pay less tax.

Also, read How To Predict the Next Big Location for Profitable Rental Income?

How to Calculate Rental Income Tax?

Do you know how to calculate tax on rental income? Follow the steps below to do rental income tax calculations for your property.

Step 1: Determine the property’s reasonable expected rent. It would surpass the property’s municipal value or fair rent. In case a property is subject to the Rent Control Act, the standard rent will be more than the reasonable expected rent.

Step 2: Determine the property’s actual rent.

Step 3: Determine the GAV or gross annual value.

Step 4: Deduct the municipal taxes amount paid by the taxpayer during the year to obtain the NAV. Only municipal taxes paid by the owner during the year can be deducted. Hence, municipal taxes owed but not paid during the year or taxes incurred by the occupant cannot be deducted.

Step 5: The individual can claim a deduction of 30% of the Net Annual Value.

Step 6: In addition, a deduction can be claimed for interest on money borrowed for purchasing, constructing, repairing, renewing, or reconstructing the property. There is no limit to the amount of interest that can be claimed as a deduction for a rented property. Nevertheless, the maximum for a self-occupied property is Rs. 2,00,000 or Rs. 30,000, depending on conditions.

Step 7: The amount determined following Step 6 is taxable under the heading “House property.”

Want to know more about rental income tax calculators in India? 

Read The Updated Rental Income Tax Calculator

GST on Rental Income

Is there GST for rental income?  Yes, there is rental income GST. Besides GST rental income, there is also TDS for rental income.

But what is the rate of GST on rental income?

Renting out property qualifies as service-providing under the GST Act and is so taxed. The criteria for drawing the GST on rental income are as follows.

• The property should get rented, leased, eased, or allowed to be occupied in some form.

• For GST to get collected, industrial, residential, or commercial must get leased out in part or whole for business reasons.

• The GST tax rate on rental income in India’s threshold limit has been increased from Rs. 10 lacs to Rs. 20 lacs.
• So, the GST limit on rental income is Rs. 20 lacs. This has assisted landlords who paid service tax before GST in the region of Rs.10 lacs – 20 lacs.
• Did you also know that commercial real estate property with rental income also attracts taxes like GST? Well, yes of course. So, what is the GST rate on commercial rental income?
• What is the GST on rental income from commercial property? The GST on commercial rental income is now levied at 18 percent. This gets taxed on rental earnings crossing Rs.20 lacs collected by leasing commercial premises.
• Read more The 18% GST on rent gets anticipated to harm the rental housing industry.

TDS on Rental Income

Apart from rental income GST, there is also rental income TDS. 

What is TDS on rental income? IT Act Section 194I now compels renters to deduct  10 percent from the rent on a building or land. This should apply if the overall rent paid or expected to be paid in a given year surpasses Rs 2.40 lacs. So, the TDS threshold on rental income is Rs. 2.40 lacs.

IT Act 1961 requires a person (except HUF) in charge of paying rent to deduct 10 percent of the monthly rent as TDS or tax deducted at source. This should apply if the yearly rent surpasses Rs. 2.4 lacs. 

The Rs. 2.40 lacs limit applies to every payee. But, it does not apply to every single property. Let us take this instance. If P, a landlord has leased out many properties to Q, the same tenant, and the yearly fee for every property is below Rs 2.40 lacs, the total rent for entire properties leased from P will likely surpass Rs 2.40 lakhs. Q must do the tax deducting at the source.

Also, read TDS on Rental Income: What is the Limit & How Much Is Refundable?

Tax on Rental Income: How is the Gross Annual Value (GAV) of Rental Income Calculated? 

The Gross Annual Value (GAV) of a property is calculated as follows:

Step 1: Calculate the expected rent from the property.

Step 2: Actual rent received 

Step 3: Determine which amount is bigger, step 1 or step 2.

Step 4: Loss sustained because of vacancy

Step 5: Deduct the amount from Step 3 from the amount from Step 4. This is the yearly gross value of a property.

Taxation on NRI Rental Income

• Does an NRI who earns rental income have to pay taxes? Yes! NRI must additionally pay taxes per Section 24. 
• The restrictions and deductions for NRIs are the same as for Indian residents. The tenant is liable to pay property taxes. The renter will deduct a 31.2% TDS on rental income. This will get done at the source before making the payment to the NRI account.
• The TDS form must be filed with the tax authorities. They will also be required to complete Form 15CA and submit it to the IT authorities.
• Under Section 24, NRIs are subject to double taxation. In addition, they must pay taxes in the nation (where he resides) for the same property leased in India.
• NRIs must determine whether India and other countries have a Double Taxation Avoidance Agreement (DTAA). This should get done to avoid double taxes. 
• If the nations do not have a DTAA, NRIs must pay for a rental property to India. But, if DTAA exists, you must determine if India can tax rental revenue. When the DTAA applies, both nations are permitted to impose the tax.
• But, if you reside in Bangladesh, Greece, or the United Arab Emirates (UAE), only the source nation (India in this example) can levy taxes.
• Also, read How to Earn NRI Rental Income? – NRI Income Tax Slab Rates.

How can NRIs File Income Tax on Rental Income?

Below is a step-by-step instruction for NRIs to file for income tax rental income:

Step 1: You must get a TAN or tax account number. Get it via a portal of the IT Department’s Tax Information Network.

Step 2: After you receive the TAN number, the renter must subtract 31.2 percent tax at the point of sale and submit that amount to the tax authorities. This sum must be paid every seven months during the calendar year. The remainder is paid to the property owner by the occupant.

Step 3: To make the payment, complete Form 15CA and return it to the IT department. Taxation on rental income gets required regardless of the amount.

Rental Income Tax: When is the Property Not Taxable?

If you get income under the following scenarios, you will not be required to pay taxes:

• Getting farmhouse rent
• An income from the local government
• Income from a scientific research organization that has been approved
• An income from an educational institution
• An income from a trade union
• Property rented for charity purposes 
• Property income of a political party
• If you use real estate for your own business,
• Self-contained property

What is the Deduction on Rental Income Tax Allowed Under Section 24? 

Section 24 of the IT Act provides two rental income deductions. The two rental income deductions are as follows:  

• Standard deduction: You can also avail of the rebate on rental income via standard deduction. The standard deduction on rental income for repairs and maintenance is 30% of the gross value of the property. This figure is arrived at after deducting municipal taxes. If your real spend is more or lower, you can subtract 30%. Municipal taxes, on the other hand, can be reduced if paid within a fiscal year.

• Deduction on Actual interest paid on a house loan: This deduction is available for rent, considered to be rented, or self-occupied properties. Interest on money borrowed for construction/acquisition/repair/renovation is 100% tax-deductible on an accrual basis. If the net income exceeds net annual value (NAV), it can be used for other income categories or carried forward for up to 8 years to offset taxable income.

Also, read 7 Tips to keep rental income consistent year-round.

Which are India’s Finest Rental Income Properties?

India’s real estate sector offers investors several investment opportunities. Yet, to generate rental income, investors must select the investment option. The options listed below provide the best rental income properties in India.

• Affordable Rental Housing: It is in high demand among the country’s low-income demographics. Migratory employees and daily wage earners from the unorganized sector depend on rental accommodation. The government estimates 26 to 37 million families in urban India reside in informal housing. Thus, investment in India’s low-cost housing market delivers a greater rate of return.

• Airbnb Rental Houses: These can range from a rustic hut in the countryside to a sprawling 6-bedroom mansion in the city. These have become increasingly popular in recent years. It offers some advantages over traditional rentals. But it also has certain disadvantages. One benefit is that you may charge a higher nightly rate. If you have a hot property booked for most of the month, you may expect to make significantly more money than if you only have one renter.

• Co-living Spaces: The latent demand for co-living houses among millennials in India is immense. It consists of students and migrant working professionals between 18 and 35. Millennials account for more than 30% of India’s population. So, co-living provides demand and opportunity. Per experts, students and young employees choose co-living. This is because the rent of the room decreases when more share it. The bedroom takes up 40 percent of the overall area, so co-living is the ideal option for tenants. So, co-living places are more likely to collect rental income.

Also, read How Much Is The Average Rental Income in Top Indian Metropolitan Cities.

Is There a Tax On Rental Income?

• As Per IT Act, you have to pay tax on rental income. Rental Income gets chargeable under the head ‘Income from House Property.’ If you leased a property and earned rent, it constitutes rental income. Thus, it will be evaluated as income from other sources. 
• Plus, there are instances where you get money from unoccupied land. It also will attract tax under the heading “ Income from Other Sources”.
• So, rental income from commercial property taxable under which head? The tax on rental income from commercial property is taxable under “Income From House Property”.

Rental Income Tax Rate in India

• The collected gross rent is exempt from taxes.
• Municipal taxes on real estate property get deductions from rental earnings. On an accrual basis, your rent is taxed. So, the law allows you to deduct the rent you could not recover per certain conditions.
• You can obtain the annual value post subtracting the two aspects. Then, you can deduct 30% to pay for maintenance from this, etc.
• Whether you spend money on home renovations or repairs for the tax year, the 30% deduction is the standard deduction.

Is there a Rental Income Tax on Vacant Houses?

• If a person owns two or more properties in his name, it is Self Occupied Property. You might treat any of them as SOP or Self Occupied Property.
• Under Section 24, the remaining property is considered a DLOP or Deemed Let Out Property. It gets taxed in the same way as a rented-out property.
• So, the rental income of a vacant house is taxable under the heading similar to a rented-out property. So, the rental income value is the taxable gross rent for that property.
• Also, read What Type Of Properties Generate The Most Rental Income?

Bottom Line

Rental income is the best way to invest in the evergreen real estate market because it is many people’s primary source of income. But, there is a tax on rental income in India. One must know the rental income tax rate and commercial rental income tax in India. 

If you’re seeking a great real estate investing partner, go to Assetmonk. We provide our investors with varied investment options, with IRRs ranging from 14 to 21%. Visit Assetmonk and learn more. 

Related Articles

1. What are the Tax Rules for Rental Income from Commercial Property?
2. 5 GOOD AND BAD PRACTICES THAT AFFECT THE RENTAL INCOME OF YOUR PROPERTY.

FAQs

Q1. Is rental income a good income?

A. Because you get rent every month, the rental property will give you financial security. The rental revenue grows and delivers a decent yield over time.

Q2. How can I avoid TDS on rental income?

A. HUF or individual occupants whose turnover, gross earnings, or sales, from the profession or business in a preceding fiscal year do not surpass Rs 1 crore for business. And for individuals with professions, it should not surpass Rs 50 lacs. Such is free from TDS rules.

Q3. How much rental income is tax-free?

A. If the Gross Annual Value (GAV) of a property is less than Rs 2.5 lakh, a person does not have to pay tax on rental income. But, if a person’s primary source of income is rent, he may be required to pay taxes.

Q4. What are the tax deductions available on rental income?

A. A property owner can deduct municipal taxes on the property, unrealized rent, a 30% standard deduction on the yearly value of the property, and interest on money borrowed to renovate the property from rental revenue.

Q5. Under what head is rental income taxed?

A. Rental income from your property gets taxed under ‘Income from house property’. Head. 

Q6. Is Rental income earned income?

A. No. Rental income is not considered earned income. Instead, it is passive income under the current Indian tax laws.

Q7. How to avoid tax on rental income in India?

A. You cannot avoid tax on rental income. Paying tax is a must. But, there are ways you can save tax on rental income via  deducting Maintenance fees from rent, buying a joint property with a family member, avail municipal taxes, etc

Q8. How is rental income taxed?

A. The tax on rental income is calculated after subtracting municipal taxes, the standard deduction, and any interest paid on a property loan.

Q9. How do you treat rental income from temporary hutment?

A. Temporary hutments on un-occupied ground are not considered structures. But,  any rental income from such hutments is taxed under “Income from other sources.

Q10. Is GST applicable on rental income from residential property?

A. When you lease out a residential property for personal use, you are free from GST.