Are you planning to rent your house to earn rental income? If the answer is yes, then be ready to pay taxes. How is income from rented property taxed? What are the tax deductions you can claim on such income? Property is considered a safe investment, thanks to its capacity to generate regular income by means of rent. However, this rental income is taxed. Such income is categorized under the head of “Income from house property”
According to Income Tax Act, income from house property constitutes not just rent from house or flat, but also rental earnings from commercial properties like shops and more. One who earns from house rent need to understand about their property’s gross annual value, or GAV and net annual value, or NAV
Gross annual value simply means the amount you receive from your house as rent, annually. So, let’s assume that the person earns Rs 20,000 per month as rent. So, he earns Rs 2,40,000 as rent from the house in one financial year. This is the gross annual value of the house. But, one has to pay house tax or municipal tax while residing there.
After deducting this municipal tax from the gross annual value of property, we arrive at its net annual value. He pays Rs 10,000 annually towards this tax. So, the net annual value of the property will be Rs 2,30,000. Just as one gets a standard deduction on salary income, one gets a standard deduction on 30% of the rental income. This deduction is provided for renovating or repairing the house. Irrespective of whether or not you spend it, this deduction is applicable. After deducting this standard deduction from the net annual value of the home, he will arrive at his income from house property, which is Rs 1,61,000.
If you have taken a home loan for the house you have rented, you can claim deduction on interest paid on this loan, under section 24(B). The maximum deduction amount you can claim is of Rs 2,00,000. The repayment of principal amount of home loan is covered in Sec 80C.
Let’s assume that one pays Rs 1,00,000 as annual interest on home loan. So, this amount will be deducted from the net value of the property. So, the income from house property will now stand at Rs 61,000. Now, lets understand how this rental income is taxed. Income from rented property, or house property income is added to your total income, and then will be taxed according to your applicable income slab. So, if that person falls under the 20% income tax slab, the house property income will also be taxed at 20%. You also have to pay surcharge and cess over and above the tax paid. If, like him, you also own a house property, you will have to file ITR-1. Sometimes, you also have to pay maintenance charges along with your house. In such a case, you can charge your tenant separately, or ask them to pay maintenance charges on their own, so that this is not added to your rental income. If you own many properties through which you earn rental income, this income will be treated as you business income
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