Published Editorial

How to make rental income less taxing

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The Financial Express

by

Venkatesan B
Senior Tax Professional, EY

Rental income is determined based on the rent received after deductions like municipal taxes paid in the year, a standard deduction of 30% from the net annual value after deducting the property's municipal taxes and the interest paid to banks on the borrowed capital to buy the property.
The nature of taxability on the rental income will depend on how you rent the property out. For instance, if the property is let out for residential accommodation, it will be subject to tax as ‘income from house property'. On the other hand, it will be considered as business income if it is used for purposes like home stay or service apartments. Though, a person could claim deductions under both the situations, the type and the quantum of expenses/payments will differ.

One must also ensure that there is neither over-reporting nor under-reporting of rental income. Taxpayers often fail to disclose rental income appropriately or miss out to claim certain benefits available under the Income Tax Act, 1961. For example, if you have two houses and only one is self-occupied and the other kept vacant, even then one has to pay tax as the property will be considered ‘deemed to be let out’. On the other hand, one may miss to claim the additional deduction available for first-time buyers or municipal taxes or pre-EMI payments.

From a cash outflow angle though it may be a burden to make the Equated Monthly Installment (EMI) payments, the benefits of claiming deduction towards interest on loan (in excess of the rent received) will significantly offset the burden at least during the initial years of purchase.
This may not be a burden even at a later point of time due to increase in salary income levels over a period of time and the option to dispose the property in case of need with appreciation in value. In case of individuals, the rental income will be added to other incomes earned such as salary and will be taxed at the prevailing I-T slab rates that one falls under.

If the property is jointly held, then the income and deductions can be availed by each co-owner based on the respective shareholding in proportion mentioned in the purchase deed or agreement. There may be a need to make advance tax payments on a quarterly basis if the total tax liability (after TDS if any) exceeds R10,000. Even vacant house property will be considered for tax as a deemed let out property. One must disclose the rental income as the Income Tax Department has initiated a host of steps to track possible concealment. There is a requirement, at present, to furnish your PAN details if the annual rental value exceeds R1 lakh.

Also, in case of rent received on which taxes are deducted at source by the tenants, one must verify Form 26AS and check the appropriate tax credits and disclose the rental income while filing the tax returns. Reporting such income in the Income Tax returns will be through ITR 1 or ITR 2.

Views expressed are personal.