Home / Salary / Tax Saving Tips / 11 points to know about tax on property income (Tax on Rental Income)

11 points to know about tax on property income (Tax on Rental Income)

Any income from letting property is taxable as income in the hands of the owner of the property. I have listed out a couple of points which may give you a fair idea about taxation of such income.

 

A Self-occupied property:

  • When property is occupied by the owner for his living and not let-out during any part of the previous year, the Annual Value will be taken as NIL.
  • However, interest paid on capital borrowed for acquisition/construction subject to a maximum of Rs. 2,00,000 p.a. can be deducted from the annual value while computing Income Tax liability. (obtain an interest certificate from the lender to claim deduction for Interest on the Loan)
  • No deduction is available towards repairs and maintenance, property taxes paid, etc.
  • Upto Rs.150000 principal repayment towards the housing loan can be deducted u/s 80C of Income Tax Act while computing the income tax liability.

 

Two or more self-occupied property:

  • When more than one house is held by the owner and is in the occupation of the Owner for his residential purpose, then only one residence value, at Owner’s choice, will be taken as Nil. For other House/s, the tax is computed as though the Property is Let-Out.
  • Entire interest paid on housing loan can be deducted from the Notional Rental value of the ‘deemed let-out’ property.
  • Property tax paid (not payable) can be reduced from the rental value. It is immaterial whether the taxes paid are pertaining to the previous year or the next year. As long as taxes are paid during the year it is eligible for deduction.
  • Principal repayment towards housing loan upto Rs.150000 is eligible under section 80C of IT Act while computing tax liability.

 

Property owned by Co-owners

  • A co-owner is entitled to income or loss of the property in the ratio of his ownership in the property. Suppose, a flat is jointly owned by husband and wife, both of them can avail the tax benefit.
  • If co-owners borrows housing loan, both of them can claim tax exemption towards payment of principal and interest. 

 

Property includes land and building:

House property includes building- residential or commercial, office space or a shop or some land attached to the building such as car parking space, garage, etc.

Vacant or open land/plot: Income from vacant plot is classified under Income from other sources. For example: Mr. Suresh has let out a vacant site measuring 4000 sft to a multinational company for Rs.40000 per month. This amount is taxable as Income from other sources and not as house property income.

 

Composite rent (building plus other assets)

Composite rent includes rent of building and rent towards other assets or facilities. In a case where letting out of building and letting out of other assets are inseparable (i.e., both the lettings are composite and not separable, e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. Nothing is charged to tax under the head “Income from house property”..

In a case where, letting out of building and letting out of other assets are separable (i.e., both the lettings are separable, e.g., letting out of refrigerator along with residential bungalow), rent of building will be charged to tax under the head “Income from house property” and rent of other assets will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be.

 

Composite Rent (building plus service)

In such a case, composite rent includes rent of building and charges for different services (like lift, watchman, water supply, etc.): In this situation, the composite rent is to be bifurcated and the sum attributable to the use of property will be charged to tax under the head “Income from house property” and charges for various services will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources” (as the case may be).​

 

Interest paid on mortgage loan

Interest and principal paid on housing loan is eligible for deduction u/s 80C and u/s 24 of Income Tax Act. Repayment towards mortgage loan is not treated as ‘housing loan’

 

Rental income from sub-letting the property

Rental income in the hands of owner is charged to tax under the head “Income from house property”. Hence, rental income received by a tenant from sub-letting is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be

 

Rent Arrears

The amount of arrears of rent received during the year will be taxable in the year of receipt if it has not been charged to tax earlier.

 

Service tax on rental income

  • If the property is let-out for residential purpose, even to a company (for the residence of the director/employee), no service tax is applicable
  • If the property is let-out for commercial purpose, even if a residential house or a vacant plot, service tax is applicable. If the total rent received by the owner from one or more tenants (cumulatively) is less than Rs.10 lakhs per year, no service tax is applicable. 

 

READ ALSO: 

 

Thought for the day

Forgive people in your life, even those who are not sorry for their actions. Holding on to anger only hurts you, not them.

 

 

Contact us now

About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]