Filing income tax returns is a huge responsibility for everyone and if you are a landlord you must include the rental income in your ITR.
July is one of the most hectic months for every tax payer in India. You must show your tax liabilities and income to the government and the entire process requires lot of calculations. July end is the time of the year when salaried employees across the country get busy filing their income tax returns.
In case you own a home and earning some rental income from the same you need to include your rental income in your return as well.
Sushila Ram Varma, Founder and Chief Consultant of The Indian Lawyer & Allied Services, says, "Under the Income Tax Act, 1961 (the IT Act), all types of properties are taxed under the head 'income from house property', whether residential or commercial. Rent received with respect to both residential and commercial property is taxable under this head. Even the rent received for letting out a factory building or rent received on land appurtenant to the building, is taxable under this head."
The gross annual value of a self-occupied house is zero. It is the rent collected for a house on rent.
"The property is taxable on the basis of its annual value. The annual value of a property is determined by the rent actually received by the property or the amount of rent for which the property can reasonably be expected to be let out, whichever is higher," Varma adds.
Rental income becomes taxable on accrual basis and not on receipt basis. It is only the owner, who is taxed for rent received.
Deductions from rent received
It is not that the gross rent received becomes taxable. One is allowed deductions on account of municipal taxes. One is also allowed a standard deduction of 30 per cent of the annual value, to cover the expense for repairs, etc. This 30 percent deduction is allowed irrespective of whether one has actually incurred any expenditure for repairs or renovation for the property, during the year under review.
In case one has borrowed any money for purchase, construction, repair/renovation of the property, one is also allowed to claim deduction for the interest payable on money so borrowed.
Carry forward
Any loss under this head, beyond '2 lakhs, shall be allowed to be carried forward for set off, during eight subsequent years. This provision will adversely affect people who borrow money to buy a property and let it out, as rental values are generally around 3 percent-4 percent of the capital value, whereas the rate of interest on such loans is around 9 percent.
Since home loans are usually taken for longer periods, the situation of loss under this head will normally continue for longer periods and the excess interest beyond '2 lakhs will effectively be lost forever.
Budgetary relief
However, the Budget for 2017-18 has proposed a ceiling of '2 lakhs, for loss under the head 'Income from house property', which can be set off against other incomes likes salaries, business income or capital gains.
Benefits/concessions from rental incomes
The tax benefits on rent paid differs, depending on whether one is a salaried person who receives HRA from the employer, or pays rent but does not receive HRA.
Tax benefits to salaried people who receive hra from their employers
One is entitled to tax exemption under Section 10 (13A) of the IT Act, with respect to the HRA received, subject to certain limits and conditions. The first condition, is that he should actually be paying rent for a residential accommodation occupied by him. This means that the accommodation should be in a place where he is employed. Moreover, the person should not be the owner (sole owner or co-owner) of the accommodation for which he is paying rent.
The quantum of deduction, will depend on where the employee is staying. The exempt amount of the HRA would be lowest of the following:
HRA actually received
50% of the salary (for employees staying in metropolitan cities of Mumbai, Kolkata, Delhi or Chennai), or 40% of the salary (for employees living elsewhere).
Rent paid by people who are not in receipt of HRA
Section 80GG of the IT Act also allows deduction on the rent paid by a person. This can be claimed by self-employed people, as well as employees who do not receive any HRA from their employers. The benefit is allowed as a deduction from one's total income. However, the deduction is restricted to 25 percent of the total income, or excess of rent actually paid over 10 percent of the total income. Moreover, the maximum deduction that can be claimed in a year is '60,000 and '5,000 per month.
Excess of the rent paid over 10% of the salary
Salary for the above purpose includes the basic salary, dearness allowance and any fixed commission as percentage of turnover.
Income from second homes in the file
If an individual owns more than one house property for his use, then under the provisions of the IT Act, any one property as per his choice is treated as self-occupied and its annual value is computed to be nil. The other house property is deemed to be let-out and a notional rent as per the provisions of the IT Act is computed as the taxable income under the head 'Income from House Property'.
Home loans for an under-construction or any other homes
Deduction on home loan interest cannot be claimed when the house is under construction. This pre-construction interest can be claimed only after the construction is finished.
A home loan borrower can claim Income Tax exemption on interest payments of up to '2 lakh and another '1.5 lakh under Section 80 C towards the principal repayment for a self-occupied property.
Section 24 of the IT Act states that if a property is still to be constructed, there will not be any tax deduction on the interest payment for all of those years.
However, the interest for the pre-construction period can be availed for deduction in five equal installments from the year the construction is complete.
Even vacant house has tax implications
If one owns more than one Self Occupied Properties (SOP), he has a choice to treat any one of the properties as SOP. The other such property which lies vacant will be treated as Deemed Let Out Property (DLOP) under the Act. If a property is treated as a DLOP, it is effectively put at par with a let out property as far as taxation is concerned. Hence, a notional rental value is considered as the gross taxable rent for such property.
Jadav Kakoti, Times Property, The Times of India
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