One of the best ways to earn some passive money is through renting your property. In fact, it is the quickest possible way to capitalize on a property that is not used actively. But do you know that your rent amount is not exempted from taxes? The rental property tax is there to eat up a significant amount of your capital income through rent.
Therefore, to accurately file your rental taxes at the end of this fiscal year, you must first know how to calculate it. Below is a detailed guide for you on the varied dynamics of rental property tax.
How is Rental Property Taxed on Individuals?
Before anything else, you must first know how the rental property taxes are imposed on individual landowners. Understanding this is essential for developing a financial strategy to minimize your tax obligations.
Rental income in India is considered as ordinary income. This income, however, is subjected to both federal and state income taxes. Therefore, you will need to report your rental income in the financial reporting on your tax returns.
However, as the IRS considers rental property income a passive income, you need to report it separately from your ordinary W-2 income. You will have to mention this tax in the Schedule E section of the 1040 form. This form deals with supplemental income and loss, including property rental income.
What Does Budget 2024 Say About It?
The budget 2024-2025 addressed a common loophole where landlords used to declare rental income under the “Profit and Gains from Business and Profession” section. The new regulations advise landlords to declare their rental income under the “Income from House Property” section.
What Comes Under Rental Property Tax?
Thankfully, every rent income does not fall under the rental property tax. The residential rentals that fall under the rental property tax include;
- Rental that you get from the house property: Whether you rent your house, flat, apartment, or land, you will have to pay taxes as per the rental property tax.
- Rentals that you secure from partially occupied property: If you rent one portion of your house, flat, or land, a partial rent tax will be levied on you. Here, each occupied area of your dwellers will be taken as separate units. Therefore, you will have to pay the rent tax for only the place you have left for rent.
- Rental Income from Composites: You will have to pay this type of rental tax when you rent your house along with its furniture, gadgets and commodities. In such a scenario, you will have to pay the house rent tax under the “Income from House Property”. In contrast, the commodities will be taxed under the “Income from Other Sources or Profits and Gains of Business and Profession”.
The rental income that does not fall under the rental property tax includes;
- If the tenant receives the rental tax from sub-letting the property, then it will not be taxed under the rental property tax.
- When the property’s assets are inseparable from it, for instance, if the property has an equipped theatre or gym area, then the entire tax will fall under “Income from Other Sources.”
How to Calculate Income on Rental Property Tax?
The rental property tax falls under Section 22 of the Income Tax Act in India. You can calculate the tax on your rental income under the regulation of this act;
- First, you will have to calculate the gross annual value of the property you are renting. This is nothing but the total yearly rent you receive as a landowner from your tenant.
- Now, you will have to subtract the amount you paid as property tax from the GAV or Gross Annual Value. This will give you the Net Annual Value or NAV.
- You will not deduct 30 per cent from this NAV, as Section 24A of the Income Tax Act permits this deduction.
- Now, if you are under a housing loan for the rented property, you can entirely deduct the interest amount from the rental tax for that financial year. The Section 24B of the Income Tax Act of India grants you this flexibility.
- After all these deductions, the remaining amount will be your taxable rental income. You will have to pay the rental property tax solely on this amount.
- If your Gross Annual Value is less than 2.5 lakh, there is no need for calculations. There would be no rental property tax on you if your annual rent is below 2.5 lakh.
Tips To Save Rental Property Tax
You can save extra on your rental tax by;
- Deducting municipal taxes from the GAV
- Claiming separate tax exemptions in case of joint property ownership
- Deducting maintenance charges from the GAV
- Utilizing available exemptions under 24A and 24B of the Income Tax Act
Conclusion
Understanding the rental property tax is vital if you are renting your residential property. The annual rent amount is subject to taxes, but there are also many redemptories measures available. So, make your tax calculations correct with utmost truth, but also do not miss to take advantage of the legal ways of tax exemptions too.
Also, Read – House Sale Tax: What You Need to Know Before Selling
FAQs
1. Which Properties are not taxable in India?
You will not have to pay the rental property tax if you are using that property for business purposes or office use. Agricultural lands, farmhouses, and rental income from charitable or religious institutes are also free from tax.
2. How much rental income is taxable in India?
The Gross Annual Value, after a 30% deduction and deduction of loan interest charges (if any), is the taxable rental income in India. However, if the GAV is less than 2.5 lakh annually, you are totally exempted from the rented property tax.
3. Are NRIs taxable under the rental property tax here?
NRIs, or Non-Resident Indians, and PIOs, or Persons of Indian Origin, can own land or property in India. When renting that property, they, too, fall under the rental property tax obligations.
4. What will be the consequences of not paying rental property taxes?
If you fail to pay the rental property tax, you will have to pay a penal interest of 1-2%, depending on the property’s location. Failing to pay this penal amount can lead to the seizure of bank accounts and movable properties.
