Things Homeowners Should Note While Giving Out Property On Rent

For homeowners, renting out a property is often seen as a stable and predictable source of income. However, there is a huge gap between what is expected and how things actually roll out while renting out a property. Taxation, additional expenses, legal responsibilities and risk management are some clauses that are strongly attached to renting a property. Homeowners who understand the financial and legal frameworks and how to keep their property protected from unexpected damages and risks.

Rental Income Aspirations

One of the first mistakes new landlords make is assuming that the rent received every month is their true income. In reality, the actual earnings from rental property are the net rental return after accounting for vacancy, maintenance, repairs, property taxes, and income tax. The calculation begins with Gross Annual Rent, which is the total rent received in a year. From this, a realistic vacancy assumption must be deducted. Even well-located properties remain vacant between tenants, and assuming one month of vacancy per year is prudent.

One of the first few mistakes landlords make is to assume that the rent received from the property is their true income. But in reality, the actual income received annually after all the cost cuttings like maintenance, vacancy loss, property tax, and repairs is entirely different from what is initially hoped for. Let’s assume the following calculations;

If a landlord puts up his property for rent at Rs 30,000 per month, the gross annual rent is Rs 3,60,000 (Rs 30,000 × 12). Considering a property is not let out for all 12 months a year, this calculation can vary situationally.

There are maintenance and repair costs, which are also varied situationally. If a property is being let out in a premium housing market, the repairs and maintenance are also huge to cater to it, but so is the rent. The cost of the same in a low or mid-segment setup might be lower than the premium housing setup.

In India, there is a municipal property tax, which is decided by the local municipal authority where the property is located. This is not levied by the central government or the income tax department. Each city or town has its own set of rates and rules. However, under the Income Tax Act, landlords can deduct the actual amount paid during the financial year. There is no fixed percentage, cap or limit to what one can deduct.

Maintenance and repair expenses are the next major deductions. Society charges, upkeep amounts, and wear and tear can easily consume a noticeable amount of the total annual rent.

Tax Deductions Available To Landlords

The income received from rents accumulated is taxed under “Income from House Property”. Deductions are a natural part of this; the law allows certain deductions to calculate the taxable rental income. The standard approach simplifies taxation and ensures consistency in reporting the rental income of the owner. “When homeowners rent out a property, the real return is what remains after taxes, maintenance expenses, vacancy gaps and repair costs, not just the monthly rent on paper. Income from rent is assessed under the head "Income from House Property," but certain deductions like the 30% standard deduction, municipal taxes paid, and interest on the home loan can significantly lower the tax liability,” adds Mohit Mittal, CEO, MORES.

The most significant one is the 30 per cent standard deduction. This deduction is automatic and does not require any proof or bills from the owner. It is designed to cover the repairs, maintenance, and fixation of general wear and tear. Even if the actual expenses are much lower, the full 30 per cent deduction is allowed. This provision reduces the taxable portion of the rental income significantly.

Another powerful deduction is the loan interest deduction. If the rented out property has a housing loan, the entire interest paid during the year can be deducted from the rental income. In certain cases, interest payments are large enough to reduce the taxable income or even outweigh the profit made from the property. This makes real property attractive, especially for those with ongoing home loans.

Ownership Clauses

Properties that are jointly owned add another layer of tax planning. When a property is jointly owned, rental income is taxed according to the ownership share. If two co-owners hold the property in a 50-50 per cent share, each must declare fifty per cent of the rental income in their own tax returns. This principle is beneficial for tax planning, especially when spouses are co-owners falling into different tax slabs. "In joint ownership, the income is taxed solely on the basis of the share, and sharing the rent with the spouse is allowed only if the ownership is legal. On the legal side, landlords must follow due process for eviction, as disputes can stretch from several months to over a year, and tenants cannot be removed forcefully even after an agreement expires,” adds Mittal. If the property is gifted, a different set of rules applies to the taxation process, which is levied upon the donor.

Rights Of The Landlords

While financial planning is important, legal risks still persist. The most common fear among landlords is of tenants who stop paying rent or refuse to evict. In either of the cases, a legal eviction process is followed. The first step is to send a formal legal notice, demanding payment within a specified time, which is fifteen to thirty days. If the tenant does not follow along after this, the landlords must file an eviction suit in court. Court proceedings follow along after this. The court may provide time for payment or settlement. If the tenant continues to default, the court can pass an eviction order. Following this legal route is mandatory because self-help eviction is illegal in India.

Another clause is if the agreed contractual period is over and the tenant refuses to vacate. Under the Indian law, such a tenant is considered a tenant holding over, which is not declared illegal automatically. The landlord cannot change locks, disconnect utilities or use force to remove the tenant. These actions can lead to criminal charges against the landlord. The only legal route is to issue a notice and let the court proceedings follow suit.

In conclusion, renting out a property is not as easy as it seems; it demands responsibility while providing opportunity together. Landlords who focus only on rent collection often overlook taxation, deductions, legal processes, and risk management. Being a diligent landlord helps the owner keep their property safe while also making the most of it.