A Guide to Taxation and Home Renting

If you are a house owner who has rented out his property or is living in the property – this blog post should help you understand the different nuances and applicability of taxes on your property.

Whenever you earn an income, tax is applicable. In relation to property, there are two types of incomes that attract tax – rental income and capital gains. Rental income from flats for rent is determined based on the rent received after deductions like civic taxes paid in the year, a typical deduction of 30% from the net annual value after deducting the property's municipal taxes and the interest paid to banks on the lent capital to buy the property.

The basis for calculating income from house property is the rental value of the property. This is the characteristic capacity of the property to earn income. Property income is maybe the only income that is charged to tax on a notional basis. This charge is not based on the receipt of any income per se, but is on the inherent potential of the residential property to generate income. The nature of tax-ability on the rental income will depend on how you rent out the property. For instance, if the property is let out for residential housing, it will be subject to tax as ‘income from a residential property'.

The first property that one buys is exempt from income tax, but only if it is not let out on rent. A notional rent value based on the market rental value will be accepted as taxable income from additional property onward, even if it’s kept under lock and key. When a property is not let out or is not used by you, only that property is excused from tax. Regardless of the head, under which the income is recognized by the owner, tax contingent on the title of the landlord's slab rate will be charged i.e. 10%, 20% or 30% that excludes cess and service charge. For the corporate guest house, which is let out to employees of some corporate group, income shall be charged under the head income from business.
There are two types of tax deductions available on income from property apart from the actual taxes paid. The first is standard deduction of 30%. The second deduction, which is more than the 30% standard deduction, is to do with interest on hypothecation finance if the property is purchased on loan. However, for properties that are taxable on either actual rent or speculative rent, the entire amount of interest paid without any limit is deductible. Interest deduction on a property can be only after taking possession of it.

As with the other sources of income that need to be accounted for while filing tax returns, rental income accumulated from a rented property has tax implications and the same is taxable as per the Indian Income-Tax law.

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