How Taxation Works For Rental Properties

Income tax payments, with respect to rent, whether earned or paid, are always surrounded with confusion. In this article we will clearly show how tax is computed and what you can do to minimize your tax liability.

If you are receiving rent from your property every month, don’t forget that it is a taxable income under Income Tax Act of India. The tax treatment will depend upon how you rent it out, i.e., as a guest house, fully furnished, unfurnished, service apartment, etc.

Tips to reduce your tax outflow:

1. The rent you receive shall fall under income from house property. But be advised that the entire rent will not be taxable. Only 70% of the rent is taxed. The rest is deducted from taxable income to accommodate repairs and expenses for the property notwithstanding the actual expense.

2. In addition to the above you are also eligible to deduct the municipal tax paid every year to the State Government.

3. If you haven’t rented out your property, you are still liable to be taxed by calculating rent based on a reasonable amount decided by the State Government. This is also eligible for the same deductions mentioned above.

4. If you have a home loan against the let-out property, the entire interest amount deductable from taxable income in addition to the deductions mentioned above. The principal amount is still taxable.

5. In case the property is tax free, the interest deduction is restricted to Rs1.5 lakh. In other words, irrespective of the amount of interest paid, if you do not pay any tax on the property, the deduction on account of the interest paid has a ceiling of Rs1.5 lakh.

6. Over the years, as the loan gets paid off, the interest component that is getting set-off against the rental income each year will keep on reducing. On the other hand,
typically, the rent would tend to increase (increment) each year.

7. If the property is question is under construction, you can still gain the deductions applicable by claiming them once the possession is complete. Such interest can be claimed for tax deduction in five equal instalments starting from the year in which the possession is obtained.

8. If you hold the let-out property jointly with another person, it will be taxed according to the ratio of the joint ownership.

9. If you let out your property as a guest house and are only receiving rent, the income from rent is taxable as stated above.

10. Unless you have a very specific reason not to rent out your property, it is advisable that you do so. By not renting it out, you are paying an unnecessary tax to the
government when there is no real income.

A Chartered Accountant will very ably handle all the tax filings and returns for you. The world of income tax is complicated for the common man. Hence it is better to entrust it to someone whose job is exactly this. This will save you a lot of unnecessary back and forth and over payment of taxes.

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