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All about tax on Renting a House or Commercial Building in India?

 

The advantage is for the urban rich people. The increased urbanization has opened a steady source of income for building owners. In metro and A1 cities, to rent a small one BHK (Bedroom Hall Kitchen) house, one has to pay Rs.10000 per month. The rentals of commercial building are in the range of Rs.25 to Rs.200 per square feet. So, it is party time for landowners and our government is not behind in taking its share! This article is about the taxes collected by various Governments from land owners.

 

Renting of a house/flat

Suppose, Mr. Ramesh, owner of 2 BHK flat/house rents it out to Mr. Bheemesh (the transaction between two individuals), the applicability of taxes are as under –

 

  • Municipal Taxes – payable annually at commercial rates. Remember, the municipal taxes for self-occupied house/flat is much lower than let-out property
  • Stamp duty – in case the rental agreement is entered beyond 11 months, the agreement has to be registered at Sub-registrar’s office, after paying applicable stamp duty.
  • Service Tax – Not applicable in the case of renting out a house by an Individual to another individual
  • Tax Deducted at Source (TDS) – TDS rules are not applicable when the transaction is between two individuals
  • Income Tax – the land owner has to declare the annual rental value as his income and pay appropriate income tax and file income tax return before the due date (presently, the due date is 31st July)
  • Advance Tax – the applicable income tax to be paid as Advance tax during the financial year (the year in which the rental income is being received) based on the estimated rental income, in 3 installments (15th Sept, 15th Dec and 15th March)

 

Rental of an Office space/commercial/industrial land/building

Suppose, Mr. Ramesh, owner of 10,000 sft of commercial building rents it to M/s XAY Infra Private Limited for a monthly rent of Rs.2,00,000, the applicability of taxes are as under –

 

  • Service Tax – Applicable. In the above example, Mr. Ramesh has to collect Service Tax at the rate of 12.36% on Rs.2,00,000 and remit to Service Tax department, Government of India. (Please note that if the annual rental income of Mr. Ramesh from all the let-out commercial properties is less than Rs.10 lakhs per year, then service tax is not applicable. Service tax is exempt if the annual rental income is less than Rs.10 lakhs)
  • TDS – The Tenant is obliged to deduct tax (TDS) at the rate of 10% and make the balance payment to the land lord. In the above case, XAY Infra Private Limited will deduct 10% of Rs.2,00,000 and remit to Income Tax department. The company has to file eTDS return and issue form 16A to the landlord on quarterly basis.
  • Income Tax – the land owner has to declare the annual rental income and pay appropriate taxes (after adjusting TDS done by the tenant)
  • Advance Tax – the land owner has to compute estimated income and the taxes payable on the rental income, adjust TDS done by the tenant and the balance tax, if any is to be paid as Advance Tax in 3 instalments. 

 

Other noteworthy points are –

  • Try to collect the rental income through bank transfers/ account payee cheque
  • If the annual rental income is over Rs.1 Lakh, the landlord is obliged to furnish a copy of the PAN card to the tenant
  • Renew rental agreement on expiry of the term. Usually, people will make agreements for 11 months and thereafter, the tenant will continue to stay in the house, by paying an increased rent (say, 5% annual increase). However, both the parties fail to renew the contract! 
  • Municipal taxes paid on the property can be reduced from the taxable income.
  • Joint Owners – I have observed in many cases that the property is owned by either husband or wife but the rental agreement is done in the Joint name. This is not allowed as per the law.

 

Thought for the day

Don’t let negative people rent space in your head. Raise the rent and make it unaffordable for them!

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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]
  • Roy Varghese

    I have a 10000 Sq building in Kerala Cochin and rent out 2000Sq. for Rs.50000l- for a month. could you please let me know how much I have to pay rental Tax?

  • Nagraj

    As an owner do we collect and pay ST right from the 1st month itself or from when the rent reaches 10Lakhs?

  • raji

    Very useful ,educative article