Rental Income Is Not Fully Taxable: Tax Deductions Homeowners Should Know

Rental income is taxable in India, but homeowners do not have to pay tax on the entire rent they receive. The Income Tax rules allow certain deductions while calculating income from a let-out property. This becomes particularly important for homeowners who have purchased a property with a home loan and rented out that said property.

For instance, in a viral social media post shared on Instagram, a homeowner who earns Rs 25,000 a month as rent while paying a Rs 50,000 monthly home loan EMI, out of which Rs 42,000 is interest, asks how this condition is favourable to him. Taking this instance ahead, there are some deductions that can help homeowners.

30 per cent standard deduction

Under Section 24(a), homeowners can claim a standard deduction of 30 per cent of the annual value of a let-out property. This deduction is available irrespective of the actual amount spent on repairs or maintenance. Hence, a landlord does not need to prove that they actually spent 30 per cent of the rental income on repairs to claim this deduction.

“As per Section 24(a) of the Income-tax Act, the 30 per cent standard deduction is available on the Net Annual Value of any let-out or deemed let-out property assessed under 'Income from House Property." This is applied uniformly to residential apartments, independent houses, and commercial spaces like offices or retail shops. But if one lets out a commercial property as a fully serviced business centre or part of an operational trade, then the rental receipts may be classified as business income, thus making this specific statutory deduction inapplicable,” says Abhishek Kumar, SEBI RIA and Founder at SahajMoney.

Municipal taxes

Municipal or local taxes paid by the owner can be deducted while calculating the property’s net annual value; however, it is subject to applicable conditions. This means that eligible property taxes paid during the year can reduce the amount which is considered for calculating the rental income. It is important for owners to keep track of and keep proof of things they paid for, which can be deducted later on.

Home-loan interest

Home loan interest is particularly important for landlords. Under Section 24 (b), the payable interest on borrowed capital for a let-out property can be deducted while calculating income from house property, which is subject to the applicable conditions. The commonly noted Rs 2 lakh limit should not be confused with the interest deduction itself. For a let-out property, the actual eligible interest can be considered without any upper limit. Under the old tax regime, the amount of house-property loss that can be set off against other income in a year is generally capped at Rs 2 lakh.

The tax regime chosen by the homeowner can greatly affect the final benefit. Under the old regime, house-property loss can generally be set off against other income up to Rs 2 lakh in a year. For landlords, it is important to calculate rental income after the eligible property tax, standard deduction and home loan interest provisions.