Introduction

Rental income is a common source of income for many property owners. However, it is essential to understand the tax treatment of rental income under the Income Tax Act, 1961. While most rental income is taxed under the head “Income from House Property,” there are situations where rental income is treated differently. This blog explores when rental income from house property is taxable under this head and when it may be classified as business income or income from other sources.

---

What is Income from House Property?

Income from House Property is defined under Section 22 of the Income Tax Act. It includes the income earned by an individual, firm, or company from letting out a residential or commercial property. The key point to note is that the property must be owned by the taxpayer.

Example:

• A person who owns a house and rents it out to earn rental income falls under the “Income from House Property” category.

---

When is Rental Income Taxable Under ‘Income from House Property’?

1. The Property Must Be Owned by the Taxpayer

• The taxpayer must have legal ownership of the property. Rental income from properties owned by others, such as through a lease or subletting, may not fall under this head.

Example:

• A business renting out an office space it owns to another company will report the rental income as “Income from House Property.”

2. The Property Must Be Let Out

• Income is only taxable under this head if the property is rented out. If the property is not let out, but rather occupied by the owner or used for personal purposes, the income is not taxable under this head.

Example:

• A person who owns a residential property and occupies it for personal use will not report any income under “Income from House Property.”

3. Income from Residential or Commercial Property

• Rental income from both residential and commercial properties is taxable under this head. However, for commercial properties, the taxpayer may need to determine if the rental income is truly passive or part of a business activity.

---

When is Rental Income Not Taxable Under ‘Income from House Property’?

1. Rental Income Treated as Business Income

In certain cases, rental income from property is considered business income rather than “Income from House Property.” This usually applies when the taxpayer is in the business of letting out properties, such as a property dealer or real estate business.

• Rental Income from Properties Held as a Business:
  If the primary activity of the taxpayer is buying, selling, or letting out properties, the rental income is treated as business income.

Example:

• A company that buys, develops, and rents out commercial properties as its business will report the rental income as business income, and not under “Income from House Property.”

2. Income from Property Used for Commercial Purpose

If a property is used for business purposes, such as leasing office spaces, the income may be considered business income. The tax treatment depends on the nature of the business activity and the frequency of renting out properties.

Example:

• A property management company that rents out multiple commercial properties may classify the rental income as business income because it is part of the company’s core business.

3. Subletting Income

If the taxpayer is subletting the property to another tenant, the income from subletting may also be taxed as business income.

Example:

• An individual who rents a commercial space, and later sublets it to another business, may be taxed on the rental income from the subletting as business income.

---

How is Income from House Property Taxed?

For rental income under “Income from House Property,” the following deductions are allowed:

1. Standard Deduction:
   • A standard deduction of 30% of the annual value (gross rent minus municipal taxes) is allowed to cover maintenance, repairs, and other related expenses.
2. Interest on Borrowed Capital:
   • Interest paid on loans taken to acquire, construct, or repair the property is deductible. This deduction is allowed irrespective of whether the property is let out or not.
3. Municipal Taxes:
   • Property taxes paid to the municipal authority can be deducted from the rental income.

---

How to Determine the Taxable Income?

To calculate the taxable income from house property, the following formula is used:

Gross Annual Value (GAV) = Rent received/receivable (higher of actual rent or expected rent)
Less: Municipal Taxes
Net Annual Value (NAV) = GAV – Municipal Taxes
Less: 30% Standard Deduction
Less: Interest on Loan (if applicable)
Taxable Income from House Property = NAV – Deductions

---

FAQs

1. Can rental income from property used for personal purposes be taxed under ‘Income from House Property’?
No, rental income is not taxable under this head if the property is used for personal purposes and not rented out.

2. Is rental income from a commercial property taxed differently?
Rental income from commercial properties is taxed under “Income from House Property” unless the income is part of a business activity, in which case it may be treated as business income.

3. What if I sublet a rented property?
Rental income from subletting may be considered business income, depending on the frequency and nature of the subletting.

4. Is there any tax exemption for rental income from a self-occupied property?
No, rental income is not earned from self-occupied properties. However, if you have a loan on the property, you can claim deductions on the interest paid under “Income from House Property.”

5. Can I deduct repairs and maintenance from rental income?
A standard deduction of 30% is available on the net annual value, which covers repairs and maintenance. Specific repairs and maintenance costs cannot be deducted separately.

---

Conclusion

The taxability of rental income depends on the nature of the property and how it is used. Rental income from properties that are not part of the taxpayer’s core business activity is generally taxed under “Income from House Property”. However, if renting out properties is a primary business activity or the property is used for business purposes, the income is taxed as business income. Understanding the tax treatment is essential for accurate filing and minimizing tax liabilities.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

Want to consult a professional? Contact us: 09463224996

For more information and related blogs, click here.