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Section 24

Tax on Rental Income

Last Updated 13th May 2021

INCOME TAX CALCULATOR

What is Income from House Property?

You probably know that you can earn income by renting out your property. What you may not know is that the Income Tax Act allows you attractive rebates on income from house property. This results in effective tax rate being significantly lower on rental income than the tax rate on normal income like salary and business.

Under Indian Income Tax Act, income from property is considered as taxable. The tax is levied on any income earned from a commercial, residential or industrial property. A property can include a residential house, office building, shop, factory, hall etc and any land associated with the building (e.g. garden, compound, playground, car parking space etc).

Income from property is one of the few sources of income where the borrower needs to pay tax not only on actual income but also on deemed rental from the property in some cases. The deemed rental is calculated based on an assessment of the potential income that a property is capable of earning.

Income from self-occupied property, rented-out property and deemed income from vacant property (including houses), other than one self occupied house, is taxable under the head of "Income from property".

A taxpayer pays tax on the "annual taxable value" of the property which is calculated after adjusted for following:

Gross annual value (GAV) of the property (rent received or receivable or deemed rent)
Less actual municipal taxes paid for the property
Net annual value (NAV)
Less deductions available u/s 24
  • Repairs and maintenance allowance of 30% of (rent - municipal taxes)
  • Interest on capital borrowed to purchase property
= Annual taxable value of the property

How is the Gross Annual Value of a property calculated?

Gross Annual Value (GAV) of a property is calculated as higher of the two calculations:

  • Rent received or receivable from the property during the year
  • Fair Market Value (FMV): Rent that the property may expect to earn on an annual basis based on rent for similar properties in its vicinity

The only exception to the above calculation in which fair market value even when it is higher is not considered as the GAV is when rent received on a property is lower because the property remained vacant during whole or part of the previous year. Also, fair market value cannot exceed the value that has been fixed by a standard rent agreement

How is the Net Annual Value of a property calculated?

Net Annual Value of a property is calculated after deducting the municipal taxes and the unrealized rent, if any from the Gross Annual Value of a property. However, receipt of any unrealized rent shall be chargeable to tax in the year in which it is received.

What are the deductions available under Section 24?

Section 24 of Income Tax Act allows for two exemptions that can be claimed against the NAV of a property to arrive at its taxable annual value:

(i) Standard deduction for repairs and maintenance of the property equal to 30% of the gross annual value after deducting municipal taxes is allowed as deduction even when your actual expenditure on the property is higher or lower than this amount. For a self occupied property, where the annual value of the property is taken as nil, standard deduction is not allowed.

(ii) Deduction for actual interest paid on home loan on the property for purchase/construction/repairs: This deduction is availed for all categories of properties whether it is rented or deemed to be rented or self occupied, however with differences in the allowable amounts for rented or deemed to be on rent property and self occupied property

Interest Deduction for Rented or Deemed to be on rent property

Interest on money borrowed for acquisition/construction/ repair/renovation of property is 100% tax deductible on accrual basis. If the interest paid is higher than the NAV, the tax payer can adjust the reported loss against other income heads (thus reducing overall tax liability) or can carry forward the loss for up to 8 years for setting off against taxable income of the future years.

Annual interest of up to ₹ 2,00,000/- ( ₹ 3,00,000 for senior citizens ) can be claimed as standard deduction against income, thus allowing the tax payer to report a loss that can be adjusted against other income heads or carried forward for 8 years. However, if the construction of the house does not get completed within three years of availing the loan, the tax deductible amount gets reduced to ₹ 30,000.

How is the Annual Taxable Value of a property calculated?

Annual Value of a property is calculated after deducting any exemptions available under Section 24 from Net Annual Value of a property. This is the value on which the tax payable by the taxpayer is calculated.

What are the situations in which the annual value of a property can be nil?

The annual value of property will be nil if the property is self occupied by the owner and he is not deriving any financial benefit from the same. Apart from this, if the owner has property in some other city and he is living in a rented house in another city for employment purpose, the annual value will be considered as nil.

Illustration: Mr. A owns a house property and earns rental income of ₹ 18,000 per month. He has paid ₹ 1,000 as municipal taxes during the year and also paid ₹ 50,000 as interest on a home loan he has taken to buy the property. The annual taxable value will be calculated as below:

Income from House Property Amounts (in Rs.)
Total Annual Rental Income (Rs.) 18,000 x 12 = 2,16,000
Less: Municipal Taxes Paid (Rs.) 10,000
Net Annual Value (NAV) - Rs. 2,06,000
Deductions under Section 24
Standard deduction (30% of NAV) - Rs. 30% of 2,06,000 = 61,800
Interest on borrowed capital (Rs.) 50,000
Total Deductions under Section 24 (Rs.) 61,800 plus 50,000 = 1,11,800
Annual Taxable Value or Income from House Property (Rs.) 2,06,000 less 1,11,800 = 94,200

What is meant by deemed owner?

Deemed owner is someone who is getting the rental income of a house but is not legally registered as the actual owner. For instance, If a person transfers his or her house property to his/her spouse (not being a transfer in connection to an agreement to live apart) or to his/her minor child (not being married daughter) without monetary consideration, then the person will be considered as the deemed owner.

What is a composite rent?

A property owner may decide to rent out his house along with other assets like sofas, bed, kitchen appliances, air conditioners etc. In this case, the rent received by the owner will also include the cost of assets which he is providing along with the house/building. The rent received will then be considered as a composite rent.

What are the tips to save tax on property income?

  • It is advisable to take the property in a joint name in case your spouse is an earning member and annual interest liability on home loans is estimated to be more than ₹ 2,00,000. Joint property owners can claim standard deduction of up to ₹ 2,00,000 individually.
  • Please remember to claim the interest paid during the construction period after the completion of property construction. The interest paid on under construction property can be claimed in five equal installments in five financial years, post the completion or possession of the property.
  • If you already have a self occupied property and wish to avoid paying tax on the second home, you can easily register the second property in your wife or relative's name. This way you can avoid excessive payments of tax.
  • Even if you own two houses, one self occupied and another vacant house, you will have pay property tax based on the fair rental value of your unused house. Thus, it is better to rent out your second house to keep up the regular income flow and lessen the burden of taxes.
  • In case you own multiple properties, you can claim the property with the highest rental value as self occupied to lessen your tax burden. A tax payer is allowed to choose any house as self occupied irrespective of the actual usage.

Budget Highlights 2021

  • Tax Related Announcements in Budget 2021

    Taxation Related

    • Senior citizens above the age of 75 years who have only pension and interest income are now exempt from filing Income Tax Returns.
    • Tax holiday on affordable housing projects extended for 1 year till March 31, 2022.
    • Tax holiday for start-ups increased by one more year till March 31, 2022.
    • A dividend payment in REIT (Real estate investment trusts) and INVIT (Infrastructure investment trusts) exempt from TDS.

    Tax Assessment and Filing Related

    • Details of capital gains and interest from banks, post offices, etc will be pre-filled to ease filing of IT returns.
    • National faceless income tax appellate tribunal will be set up for individual taxpayers.
    • Dispute resolution committee will be set up for small taxpayers.
    • The time frame for reopening of income-tax assessment cases reduced from 6 years to 3 years.

    Savings Related

    • Late contribution to EPF by the employer for employees will not be allowed as a deduction to the employer.

    Others

    • A budget of Rs. 35,000 crore allotted for Covid-19 vaccines.

FAQs

What is the rebate in income tax?

Income tax rebate is the refund of taxes to the taxpayer when he or she pays more tax than what they are accustomed to. Thereby, if during a fiscal year, one has paid more taxes then the tax is refunded to them by the end of the fiscal year. Section 87A of the income tax act provides a tax rebate of up to ₹ 12,500 if the gross taxable amount after deductions is up to ₹ 5 Lakh. Section 80C also provides income tax rebate on certain investments and expenses like on the principal amount of home loan, on the registration and stamp duty charges and on PPF and tax-saving FDs among others. As per this section, a rebate of ₹ 1.50 Lakh can be availed.

How can I get a tax rebate?

To get a tax rebate, all residents of the country need to fulfil the rebate criteria through any section of the income tax, such as section 87a and section 80C. A rebate is claimed when the taxpayer finds that he or she has paid more tax as per the income tax slab he falls in, for this one is required to fill the income tax return and verify the tax calculations. One can get rebate either by getting it deducted at the source or while filling your ITR.

What do you mean by tax rebate?

An income tax rebate is the refund of taxes to the taxpayer when he or she pays more tax than what they are liable to as per the income tax slabs. Tax rebate reduces the burden of tax on an individual. However, these can be claimed by making eligible expenses and investments.

What are the tax exemptions for 2019?

Income tax exemptions allow taxpayers to save taxes. As per the budget 2019, the income tax exemptions can be availed under many allowances, such as the House rent allowance; allowance on transportation; children education allowance; exemptions on housing loans as per section 80C; exemptions on investment and expenses such as PPF, National savings certificate, tax-saving fixed deposit, sukanya samriddhi account, and PPF. Further, section 80D provides the medical insurance deduction, section 80E allows deduction on loan for higher education, deduction on donations as per section 80G and tax deduction on house rent paid.

What is section 24 in income tax?

Section 24 of the income tax act revolves around deduction from income on house or properties, by providing an exemption on the interest rates paid on the property or home loan. As per section 24C, one can claim a tax exemption of up to ₹ 2 Lakh on the interest paid on home loans. Further, the section allows claiming tax benefit even on loan taken for construction of a property; however, the deduction on construction loan interests can be availed in five instalments.

How does section 24 work?

Section 24 of the income tax act calculates the tax exemptions on the basis of income for house property, on the following basis:

  • If a person rents his or her property, then the rent will be considered as part of his earned income.
  • Secondly, if a person owns more than one house, then the net value asset of the house is considered as part of the income. However, the house one is living in is not counted under this.
  • If a person owns only a single house, then the net value asset of the house is considered Nil.

Based on these income standards, the income earned is applicable for deduction under section 24C of the Income Tax act. The act provides deductions in two forms, the standard deductions and the deduction on interest rates. The standard deduction allows that a sum equal to the 30% of the net annual value does not comply under the tax limit. Further, the deduction on interest rate applies to individuals with home loans for buying, constructing or renovating a house. The act allows exemptions up to ₹ 2 Lakh for self-occupied rented property, and for home construction loans, the exemption on interest can be earned in five instalments after the construction is completed.


Our News - May 2021
  • 2021-04-12 : Faceless tax assessment solved more than 60% of IT cases
    CBDT reported that the faceless tax assessment solved more than 60% of IT cases. It was set up with an aim to impart greater efficiency, transparency and accountability by eliminating the interface between the Assessing Officer and the assesses in the course of proceedings to the extent technologically feasible.
  • 2021-04-01 : New ITR rule for senior citizens above 75 years from 1 April
    With effect from 1 April 2021, senior citizens above 75 years of age will be exempted from filing income tax returns. This facility will be available to only those senior citizens who have no other income other than pension and interest income.
  • 2021-03-02 : CBDT extends dates for penalties and assessments
    CBDT extended the due date for penalties under the Income Tax Act, 1961 to 30th June 2021. Further, it also extended the deadline for assessments under the Income Tax Act and notices under the Benami Property Transaction Act, 1988 to 30th April 2021.
  • 2021-02-02 : Income tax won’t be taxed twice for NRIs
    Union Budget 2021-2022 proposes to provide relief from double taxation for NRIs on money accrued in foreign retirement accounts by claiming relief on tax deducted on such money in India. Currently, there is a mismatch in the year of taxability of such funds in India and the respective foreign country.
  • 2021-02-01 : Dispute resolution committee and National faceless income tax appellate tribunal to be set up
    FM proposed the setting up of the National faceless income tax appellate tribunal for individual taxpayers. Details of capital gains and interest from banks, post offices, etc will be pre-filled to ease filing of IT returns. Further, a Dispute a resolution committee will be set up for small companies.
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