What are the Tax Rules for Rental Income from Commercial Property?

What taxes apply to commercial properties that are utilized for the owner's company, as well as those that are rented or sold? In each scenario, we look at the ramifications.

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What are the Tax Rules for Rental Income from Commercial Property?

Property is one of India’s oldest investment opportunities, predating the introduction of other financial instruments such as direct equity and mutual funds. People who invest in commercial buildings do so for a variety of reasons, including personal usage or rental income. 

Rental income from any property you own is normally taxed under the heading of ‘income from dwelling property’. This is affirmative irrespective of your property being residential and commercial properties. The foundation for taxing rental income is the higher the rent that is obtained or the rent that is reasonably expected to be fetched by such a property in the market. If you don’t own the property and sublet it, the revenue from the subletting of commercial property will be taxed under the heading “other sources of income.”

If you manage a business center on your land and provide other services, the revenue can be classified as business income if the other services, as well as the leasing out of the space, make up a major amount of the total. Except in such situations, any income derived from property owned by you is taxed under the head particularly designated for property income, regardless of the name given to the revenue. Because the revenue from renting out such property is taxed under the heading “income from home property,” no deductions may be claimed against the rental income unless the legislation explicitly allows it. It’s best not to claim additional costs and instead present your true rental income under the heading ‘earnings and gains of business of profession.’

Also Read: Tax on Rental Income: How To File & Claim To Save Rental Income Tax

Deductions from the rental income from a rented property

The income tax regulations enable specific deductions against the rent you get while computing income under the heading “income from housing property.” The first deduction offered is a standard deduction of 30% of the rent collected or due for such property. This standard deduction is applicable regardless of the amount spent on a commercial or residential property that is rented out, or a self-occupied residential property that is considered as rented out.

In addition to the above statutory deduction for repairs and other expenses, the tax rules permit a deduction for interest paid on any money borrowed for the acquisition, building, repair, or reconstruction of your commercial property. The interest deduction is accessible for all sorts of properties, whether residential or commercial, under Section 24(b) of the Income Tax Act. Processing and prepayment costs paid to any financial institution to get a loan can be claimed as interest. You can deduct interest not just on money borrowed from banks, but also on money borrowed from friends and family.

Although you can claim the full interest against the rental income after standard deduction for commercial property that is let out, there is a limit of Rs two lakhs for the amount of loss computed under the head ‘income from house property for all the properties combined, which can be set off against your other incomes during the year.

Also Read: The Updated Rental Income Tax Calculator For India In 2021-2022

For the next eight years, any loss computed under this heading can be carried forward and set against income computed under the same heading. Only once possession is acquired and in five equal yearly installments, commencing with the year in which you take possession, may you claim a deduction for interest paid during the building period for an under-construction property.

Taxation of commercial property used for own business or profession

Commercial properties that are partially or entirely employed for your business or profession are not taxed in your hands if the proportional share of such property is used in the business. As a result, you cannot deduct any notional rent paid on such commercial property from your company revenue. However, you can deduct the costs of repairing and maintaining such property from your business profits. You can also claim the entire amount of interest as a business expense, with no limit. Please note that no deduction is possible under Section 80C for repayment of the principal amount of a house loan acquired for such commercial property, as this is only applicable for residential property.

Also Read: Still, thinking of ways to get an exception in your rental income tax? Here are some efficient tips to avoid tax on your rental income!

Taxation of profits on the sale of commercial property

Profits from the sale of any commercial property you own and use for your own business are taxed as short-term capital gains if no other property falls into the same asset type, regardless of how long you possess it. However, according to certain court declarations, you can claim an exemption under Section 54F by investing the net consideration in a residential housing property that has been held for more than 24 months. Alternatively, you can invest your indexed capital gains in capital gain bonds issued by certain organizations and claim Section 54EC exemption.

The profit on the sale of a business property that has been rented out will be considered capital gains. If the property is kept for more than 24 months, it will be considered long-term and will be taxed at a fixed rate of 20%, regardless of the amount. You can reduce your tax liability by investing in a residential property under Section 54F of capital gains bonds under Section 54EC, as discussed above. If the property is sold before the 24 months, the profits are taxed as ordinary income and are taxable as short-term capital gains.

Rent is an excellent option to invest in the evergreen real estate business because it is the major source of income for many people. However, one must be aware of India’s rental income tax rate and pay all necessary rental income taxes on time. Most property owners in India are unaware of the reductions and exemptions available to them while paying rental income tax.

Assetmonk is the place to go if you’re looking for a superb investment companion. We offer our investors a variety of investment opportunities across India, with IRRs ranging from 14 to 21%. Visit our website, Assetmonk to explore. 

What are the Tax Rules for Rental Income from Commercial Property? FAQ'S:

In India, rental income is regarded the same as any other kind of income and is included in the taxable income bands. If the amount received as rental income exceeds Rs. 2,50,000 per year, the property owner will be required to pay rental income tax.

On the standard deduction that a landlord might take on his or her rental income. On gross rental income, the Internal Revenue Service provides for a standard deduction of up to 30%. The property owner can use this standard deduction to deduct the cost of renovations or upkeep.

If you’re merely planning to be a (very) part-time landlord, on the other hand, you can avoid paying taxes on your rental income if you rent out your home for 14 or fewer days every year. The 14 days don’t have to be consecutive; all you have to do is stick to it to avoid paying taxes on the money you earn.

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