Tax on Rental Income: Exemptions and Deductions

Tax on Rental Income: Exemptions and Deductions

The Income Tax Act 1961 defines income from house property. You are a resident Indian if you stay in India for 182 days or more per financial year (FY).

  • Rental income is defined as the total aggregate amount of rent received by an assessee in respect of any house property, either in cash or in kind.
  • It includes principal and interest amounts that tenants pay on account of principal and interest due on loans taken from banks, financial institutions, etc., towards purchasing residential houses.

Deduction allowed under section 23 (1A)

Tax on rental income is calculated by deducting the applicable deductions from the gross rent. The applicable deductions are:

  • Depreciation
  • Interest paid
  • Principal repayment of housing loan/EMI
  • Maintenance/repairs

The deduction for interest paid under Section 80EE does not include principal repayment on housing loans taken for the purchase or construction of a residential property, which can be claimed as a separate deduction under Section 80C. 

Similarly, the interest component that you pay towards your home loan EMI (equated monthly instalments) cannot be included in arriving at your adjusted gross total income to calculate your taxable income and tax liability.

Deduction under section 24(b)

You can claim a deduction of up to Rs. 1 lakh for your house property if you are not paying any tax on it. 

The maximum deductible amount if you have paid taxes is Rs. 50,000. This deduction is allowed only if:

  • You meet the conditions required for claiming deduction under section 80C and section 80CCC of the Income Tax Act, 1961 (ITA).
  • The property has been rented out for not less than six months in a year; otherwise, it will be considered self-occupied, and hence no deduction will be allowed under this head.

Deductions allowed under sections 80C to 80U

Deductions under section 80C to 80U are allowed for investments made in any of the following:

  • A medical insurance policy for self, spouse and dependents.
  • For the purchase of an annuity plan or superannuation fund that qualifies as long-term capital gains (LTCG) tax exemption.

An individual can claim the following deductions:

  • Section 80D – Medical treatment expenses above Rs 30,000 per taxable year with receipts.
  • Section 80E – Interest on a home loan with a repayment period of fewer than 15 years and up to Rs 2 lakhs per annuity tax slab. The deduction is available only if the bank interest outgo exceeds 10% of your gross income, i.e., personal allowance received from employer etc., or rental income received from property owned by you while working abroad or during a stay outside India other than the rent paid to any relative living in India including parents/brothers/sister/wife etc.; also called NRI tax saving interest exemption.

Capital gains on the sale of house property

When you sell your own home, you can make a capital gain. The gains (profits) from the sale of your house are known as capital gains.

All properties are taxed differently, depending on how long you owned them and whether or not they're residential or commercial property types.

When calculating your total capital gains, there are some exemptions you should know about:

  • Your main residence exemption - if it was your main residence for 10 years out of the last 15 years before selling; if it was rented out for at least four years during that time period; or if you lived in it temporarily after moving into another house; or if an elderly person moved into supported accommodation because they couldn't live alone anymore but then died less than two years later.

Takeaway:

If you own a house, you may wonder how much tax is due when renting it out. The answer depends on whether or not your rental income is considered earned through employment.

Employed individuals: If you are employed by someone else, then your income from renting out property will be taxable. 

This is the case even if that employment does not involve any work related to the rental property itself—for example, if an employer pays a portion of an employee’s salary as rent for their home.

Independent contractors: On the other hand, independent contractors (those who provide services for more than one client) are treated differently under tax law. 

Rental income earned in this way can be exempt from taxation if all of these conditions are met:

  • You have been self-employed for at least two years prior (any period during which you were unable to work because of illness or injury counts towards this total).
  • You have deducted all expenses associated with running your business over those two years (such as advertising costs).

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Conclusion

The taxable income on rental income is the amount of money you make from renting out your property. 

This includes any interest, dividends or capital gains that you make when selling it. 

However, some exemptions and deductions available can reduce the tax you have to pay on this income.

FAQ's related to Tax on rental income

1. What is the tax on rental income?

Rental income is treated as a capital gain and taxed at the rate of 15% for individuals, trusts and super funds; however, it can be reduced if you use your principal place of residence as your main residence.

2. Is it an income tax or a capital gains tax?

It's an income tax because it's revenue from your earnings through renting out property. In other words, if you make more than $6,000 per year by renting out a property, then that amount will be taxed at 15%. However, if you qualify as an exempt entity (i.e., not making more than $6k in rental profits), then no taxes are due on any profits made through renting out property.

3. How much is the tax on rental income? 

The amount of taxes owed depends upon how much money was earned during each financial year (1 July - 30 June). If less than $6k has been earned, no taxes will be owed; however, once over this threshold, 15% needs to be paid back into government coffers every year until 2021 - 2022, when this cap drops down towards 5%.  * What exemptions or deductions are allowed with regard to rent-related expenses? Rentals include expenses such as paying for water usage, electricity bills etc., but there are no specific rules governing these types of costs aside from stating that they're deductible against gross rental profit before calculating taxable earnings during their financial period ended 30 June 2022 onwards.

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