How Tax on Rental Income in India Is Calculated
Navigate India's tax laws on income from house property. This guide covers the core principles for calculating taxable rent and managing your final obligations.
In India, income from renting out a residential or commercial property is taxable under the “Income from House Property” category of the Income Tax Act. The tax is not levied on the actual rent received but on the property’s potential to earn income. This net income from the property is added to the owner’s other sources of income, such as salary or business profits. The total income is then taxed according to the individual’s applicable income tax slab rates.
Calculating Taxable Rental Income
The basis for taxing rental income is the property’s Gross Annual Value (GAV), which represents its potential rental income. To determine the GAV, you must first calculate the “Expected Rent.” This is done by comparing the Municipal Value and the Fair Rent, with the higher of the two being selected. This figure is then compared to the Standard Rent (if applicable), and the lower of these two values is the Expected Rent.
Finally, the GAV is established as the higher of this Expected Rent and the actual rent received for the year. For example, if the Municipal Value is ₹1,20,000, Fair Rent is ₹1,50,000, and Standard Rent is ₹1,40,000, the Expected Rent would be ₹1,40,000. If the actual annual rent received was ₹1,80,000, the GAV would be ₹1,80,000, as it is higher than the Expected Rent.
Once the GAV is determined, the Net Annual Value (NAV) is calculated. The NAV is found by deducting the municipal taxes, such as property tax, that were paid by the owner during the financial year. It is important to note that this deduction is only available for taxes that were actually paid, not just those that were due.
Allowable Deductions from Rental Income
The Income Tax Act permits specific deductions from the Net Annual Value (NAV) under Section 24. The first is a standard deduction of a flat 30% on the NAV. This is allowed irrespective of the actual amount spent on expenses like repairs, painting, or insurance.
Another deduction is for the interest paid on a home loan. For a rented property, the entire amount of interest paid on the loan during the financial year can be claimed as a deduction without an upper limit. This is a notable benefit compared to self-occupied properties, where the interest deduction is capped.
Interest paid during the pre-construction period is also deductible. This interest can be claimed in five equal annual installments, starting from the financial year in which the property’s construction is finished and it is ready to be occupied or rented out.
Tax Treatment for Specific Scenarios
Jointly Owned Property
If a property is jointly owned, the rental income and tax liabilities are divided among the co-owners based on their ownership share. Allowable deductions, like the standard deduction and home loan interest, are also split proportionally. Each co-owner is then taxed individually on their portion of the net income.
Non-Resident Indian (NRI) Landlords
When a landlord is a Non-Resident Indian (NRI), the tenant must deduct Tax Deducted at Source (TDS) before paying rent, as required by Section 195 of the Income Tax Act. This rule applies regardless of the rental amount. The tenant must deduct TDS at an effective rate of 31.2% (30% base rate plus 4% cess), which can be higher if a surcharge applies. The tenant is also responsible for depositing the tax with the government, obtaining a Tax Deduction Account Number (TAN), and issuing a TDS certificate to the NRI landlord.
Treatment of Rental Arrears and Unrealised Rent
When a landlord receives rent from previous years (arrears) or recovers previously uncollected rent, this income is taxed in the year it is received. A standard deduction of 30% is allowed on the amount received, with the remaining 70% being taxable.
Reporting Rental Income and Losses
All income from house property must be declared in the owner’s annual Income Tax Return (ITR), using forms such as ITR-1 or ITR-2. A “loss from house property” can occur if the allowable deductions, particularly the interest on a home loan, are greater than the Net Annual Value (NAV). The tax treatment of this loss depends on the tax regime chosen by the taxpayer.
For taxpayers under the old tax regime, a loss can be set off against other income sources, like salary, up to a limit of ₹2 lakh in the same year. Any unadjusted loss can be carried forward for up to eight years but can only be set off against future income from house property. To carry forward losses, the ITR must be filed by the due date.
Under the new tax regime, which is the default option, the rules are more restrictive. A loss from house property cannot be set off against any other type of income. Additionally, these losses cannot be carried forward to subsequent years.