By Having a rental property potentially creates passive income opportunities; however, understanding the tax implications regarding rental income is crucial. Under the Income Tax Act, property income is taxed under the heading “Income from House Property” in a person’s Income Tax Return in India. This blog post will assist you in this calculation.
Key Categories of Calculations
Gross Annual Value (GAV): The potential rental income from your property. It is the maximum of the following:
Actual Rent Received: The rent actually received from your tenant(s).
Fair Rent: The value the rent would receive for a similar property in that locality.
Municipal Valuation: Value assessed by the municipal body to levy the property taxes.
Municipal Tax: Municipal taxes paid on the property will be deductible from GAV.
Net Annual Value (NAV): NAV is calculated from the GAV, taking away the municipal taxes.
Standard Deduction: It is a standard deduction of 30 percent of NAV, which is allowed for expenses such as repairs and maintenance.
Interest on Home Loan: The interest paid on a home loan, if taken out for the property, can be deducted.
Step-by-Step Calculation
Determine the GAV: the higher one of the actual rent received or fair rent or municipal valuation.
Deduct Municipal Taxes: The municipal taxes paid would be deducted from GAV to arrive at the NAV.
Apply Standard Deduction: 30 percent of NAV will be deducted as a standard deduction.
Deduct Interest on Home Loan: Thus, the interest paid on your home loan is deducted from income.
Calculate Income from House Property: Total above is taxable income from house property.
Assume the property you rent out for ₹30,000 to a tenant. Municipal taxes for the year are ₹10,000, and home loan interest amounts to ₹2,00,000.
GAV = ₹30,000/month * 12 months = ₹3,60,000
NAV = ₹3,60,000 – ₹10,000 = ₹3,50,000
Standard Deduction = 30% of ₹3,50,000 = ₹1,05,000
Income from House Property = ₹3,50,000 – ₹1,05,000 – ₹2,00,000 = ₹45,000
So in this case, the amount of taxable income from house property would be ₹45,000.
Miscellaneous Considerations
In case of multiple properties, you shall arrive at the income generated by each property separately.
Loss in a house property can be set-off against any other income up to a specified limit.
One should always seek the advice of an expert tax consultant in these matters.
As far as paying tax for rental income goes, the knowledge of the calculation process and maintenance of accurate records will keep you assured of the correct payment of tax.