Rental income is a standard source of income for most people in India, particularly those with residential or commercial properties. All, however, of the received rent is not tax-deductible. There are various exemptions, deductions, and conditions according to which some percentage of rental income is treated as tax-exempt under Indian law.
This blog describes how rental income is taxed, what relief exists, and what percentage can lawfully be exempted from taxation under present laws.
Introduction
For most Indians, having a second property is an investment as well as a source of steady income. Whether it’s a flat rented out in the city or a shop leased to a business firm, rental income can be a source of financial security. But, like other sources of income, rent too is taxable under the Income Tax Act.
All that being said, not all of your rent is taxable in total. There are certain deductions, exemptions, and rebates permitted by the law, so quite a lot of rental income can actually be tax-free if it’s properly reported. Knowing how much rent is taxable and how much is tax-free lets property owners better plan their finances and comply.
How Rental Income is Taxed in India?
Rent received is chargeable to tax under the head “Income from House Property” of the Income Tax Act. It is applied to income that is received for letting out any residential or commercial property (buildings and land). Even when the property is not rented for the entire year, tax is computed on an annual basis depending on notional rent or rental received, whichever is greater.
The good news is that you’re not taxed on the entire rent amount you’re allowed deductions that reduce your taxable amount significantly.
Standard Deduction on Rent Income
The greatest relief takes the shape of the normal deduction of 30% of the Net Annual Value (NAV) of the property.
Net Annual Value = Gross rent received – Municipal taxes borne by the owner
Deduction under Section 24(a) = 30% of Net Annual Value (fixed, irrespective of actual expenditure)
The 30% normal deduction takes care of maintenance, repairs, insurance, and other expenses no bills or receipts needed.
Thus, for instance, if your property earns you Rs 20,000 a month (Rs 2.4 lakh a year), and you paid Rs 10,000 as municipal tax –
- Net Annual Value = Rs 2,40,000 – Rs 10,000 = Rs 2,30,000
- Deduction = Rs 69,000 (30% of Rs 2,30,000)
- Taxable Rent Income = Rs 2,30,000 – Rs 69,000 = Rs 1,61,000
This makes an enormous difference in lessening the burden of taxation.
Interest on Home Loan – Additional Deduction
If you’ve availed a home loan against the rented-out property, you can claim interest paid on the loan as an additional deduction under Section 24(b).
- No maximum limit applies to interest deduction for let-out properties.
- For self-occupied houses, the deduction is limited to Rs 2 lakh annually.
So, if you’re paying Rs 1.5 lakh per year in interest on a home loan for your rented property, that entire amount is deductible from your rental income.
In such cases, your taxable income from rent could be reduced to zero or even become negative, which can offset other income (to a limited extent).
Tax-Free Rent from Self-Occupied Property
If you occupy your own home and don’t rent it out, there’s no rental income, so no tax under “Income from House Property”. But what if you own two houses?
Under existing provisions –
- You can treat two houses as self-occupied, no notional rent is applied.
- Previously, only one house was eligible to be self-occupied and the other was classified as “let-out” for tax (even if it wasn’t rented).
So, if you have two houses and occupy them (or retain one for relatives), both are exempt from notional rent under the revised rule after FY 2019-20. But if you have a third property, notional rent is taxable even though it is unoccupied.
Rent from Agricultural Land and Exempt Properties
Some kinds of rent income are wholly exempt from taxation –
- Rent earned from agricultural land held for the purpose of cultivation is not includible in “Income from House Property” or any other head.
- Income received from a building owned by a charitable trust or a religious establishment is exempt provided it is put to approved uses.
- Property held outside India does not attract taxation if the individual is a non-resident and not earning revenue in India.
Rent Income and Basic Exemption Limit
Although after deducting all possible allowances, the balance taxable rent income is also added to your total income and is taxed under the respective slab applicable.
Whether your overall taxable income (after deductions of all these) is –
- Up to Rs 2.5 lakh (for below 60 years)
- Up to Rs 3 lakh (for senior citizens)
- Up to Rs 5 lakh (for very senior citizens)
Then you don’t pay any tax whatsoever even on the rent you earn. And under Section 87A, if your overall income is Rs 5 lakh or less, you get a tax rebate of Rs 12,500, so your tax bill is zero. So small-time landlords or retired people tend to pay no tax at all on low rental receipts.
What about Joint Ownership?
If a property is owned jointly, for example, between a husband and wife, rental income is shared in accordance with ownership (if specified) or equally in default. Separate deductions under Section 24 and 24(b) are available to each co-owner, and they can utilize their own basic exemption limits. This can sharply cut down overall tax liability.
Conclusion
While rental income is a tax component, much of it can be protected with standard deductions, interest on the loan, and basic exemption levels. In most instances, particularly for small landlords, the actual tax liability is zero.
Comprehension of such tax principles enables landlords to budget more effectively, escape penalties, and gain the most from existing exemptions. Intelligent structuring, such as common ownership and the utilization of home loan interest as deductions, permits even greater rental incomes to be effectively controlled under the law.
Related Services
Income Tax Return Filing Online
References
The Income Tax Rules, 1962
The Income Tax Act of 1961 (Act No. 43 of 1961)
