With the rise in property investments and a growing rental market in India, understanding tax on rental income is important for property owners. Whether you rent out a residential flat, a commercial space, or even a portion of your home, rental income is taxable under Indian law. However, several deductions and exemptions can help you save taxes legally.
This blog explains the rules governing tax on rental income, the types of rental income, applicable deductions, how to file it in your ITR, and legal ways to reduce your tax liability.
What Qualifies as Rental Income in India?
Under Indian tax law, rental income refers to any payment received by a property owner from tenants for the use of their property. This includes:
1. Rent from residential property (apartments, houses, villas)
2. Rent from commercial property (shops, offices, warehouses)
3. Subletting income (in specific cases)
4. Advance rent or arrears received
Rental income is taxable under the head ‘Income from House Property’ as per the Income Tax Act, 1961. Even if you own just one property and rent it out, the income generated must be declared and taxed appropriately.
Types of Rental Income in India
There are several categories of rental income:
1. Residential Rental Income
Income earned from renting out residential properties like apartments or independent houses.
2. Commercial Rental Income
Earnings from leasing commercial spaces such as shops, offices, showrooms, or industrial units.
3. Composite Rent
When you receive rent that includes charges for services like electricity, water, furniture, or maintenance, you treat it as composite rent. In such cases, you may split the income into “Income from House Property” and “Income from Other Sources.”
4. Subletting Income
While the original owner pays the property tax, the tenant who sublets a portion of the premises must report the income as income from other sources, since the tax liability falls on the tenant, not the owner.
How Rental Income is Taxed
1. Income Head and Slab
All rental earnings are taxed under the head “Income from House Property.” The final taxable amount is then added to your gross total income and taxed according to your applicable income tax slab.
2. Annual Value vs Actual Rent
Tax is calculated based on the Annual Value of the property, which is the higher of:
- Actual rent received
- Reasonable expected rent (as per municipal valuation or fair market rent)
3. Rental Income Tax Exemption and Deductions
The Indian government offers multiple deductions to reduce your tax burden on rental income:
- Standard Deduction (30%)
You can claim a flat 30% deduction on the net annual value to cover repair and maintenance costs (whether or not you spend anything).
- Interest on Home Loan (Section 24b)
You can claim a deduction of up to ₹2 lakh annually if you occupy the property yourself. If you rent out the property, you can claim the full interest paid on the home loan without any upper limit.
- Municipal Taxes Paid
Any municipal or property tax paid during the year is deductible from the gross rent received.
Allowable Deductions on Rental Income
Here’s a breakdown of common deductions under rental income and income tax rules:
| Deduction Type | Description |
|---|---|
| Standard Deduction | 30% of Net Annual Value (NAV) |
| Interest on Housing Loan | Full deduction for let-out properties, up to ₹2L for self-occupied (Section 24) |
| Municipal Taxes | Deductible if paid by the owner |
| Pre-construction Interest | Spread over 5 years, post-construction |
Note: Expenses like painting, tenant management, and broker commissions aren’t directly deductible but are assumed to be covered in the 30% standard deduction.
Filing Rental Income in ITR
Whether you’re a salaried individual or a business owner, declaring your rental income correctly is key. Here’s how to file it:
- ▪️ Use ITR-1 if you have only one house property and your income is less than ₹50 lakh.
- ▪️ Use ITR-2 or ITR-3 if you have multiple properties or business income.
- ▪️ Keep documents ready:
- Rental agreement
- Municipal tax receipts
- Home loan interest certificate
Declare your rent income tax details in the Income from House Property section, enter deductions, and ensure accuracy.
Tips to Save Tax on Rental Income Legally
Looking to optimize your tax outgo? Here are expert-approved strategies:
1. Split Income Through Joint Ownership
If you co-own a property (e.g., with your spouse), you and the co-owner can each file taxes on your respective shares, which reduces your overall tax liability.
2. Claim Full Deductions
Maximize your home loan interest deductions, especially on let-out properties.
3. Use Family Members in Lower Tax Brackets
Rent your property to a family member who formally pays rent. This creates an HRA benefit for them and rental income for you.
4. Professional Property Management
Agencies can help maintain documentation, ensure rent agreements are tax-compliant, and keep you updated with regulatory changes.
Conclusion
Paying taxes on rental income is not optional, but with the right understanding of rules and deductions, you can keep your liabilities in check. From claiming the 30% standard deduction to maximizing loan interest benefits, there are many ways to reduce your tax burden legally. Stay updated, maintain documentation, and when in doubt, consult a tax advisor or property management expert. By following the law and planning smartly, rental income can become a strong pillar of your financial growth.
Frequently Asked Questions
1. Is rental income taxable for salaried individuals?
You must declare rental income under “Income from House Property,” and the government taxes it separately from your salary.
2. Can I claim HRA and rental income deductions?
Yes, if you’re paying rent and also earning rent. Ensure proper rent agreements and receipts.
3. What if my property is vacant?
If you don’t occupy the property yourself, the tax authorities may treat it as a deemed let-out and tax it accordingly.
4. Can NRI property owners be taxed on rental income in India?
NRIs who earn rent from Indian properties pay tax on that income in India, and the tenant must also deduct TDS before making the payment.
5. How is commercial rental income taxed differently?
If you rent out furnished commercial spaces along with services, the tax authorities may classify the income as business income instead of income from house property.
