Wondering how your rental income will be taxed this year? You’re not alone!
Earning income from renting out property has become increasingly popular in India, but understanding the tax implications can be quite confusing. The Income Tax Department considers rental income as a significant source of revenue, and it falls under the specific head “Income from House Property” in your tax return. With the new Income-tax Bill 2025 being tabled in Parliament, several changes are on the horizon that will affect how rental income is taxed starting from April 2026.
The taxation of rental income involves various aspects including calculation of annual value, permissible deductions, and reporting requirements. Whether you own a residential property, commercial space, or even a vacant land that generates rent, understanding these tax provisions is essential to ensure compliance and optimize your tax liability. This comprehensive guide will walk you through everything you need to know about taxation of rental income in India as per the latest tax regulations.
Understanding Rental Income Under Indian Tax Laws
Under the Indian taxation system, rental income is primarily taxed under the head “Income from House Property.” This classification remains unchanged in the new Income Tax Bill 2025, which will replace the Income-Tax Act 1961 when it comes into effect from April 1, 2026.
The Income Tax Bill 2025 covers rental income taxation in Clauses 20-24, which define the scope, computation method, and deductions available for income from house property. These provisions apply to all types of properties including residential, commercial, and even vacant land that generates rental income.
It’s important to note that rental income is taxable on an accrual basis, not on a receipt basis. This means that even if you haven’t actually received the rent, but it has become due, you’re liable to pay tax on it. However, the bill provides for certain deductions and exemptions that can help reduce your overall tax liability on rental income.
Computation of Taxable Rental Income
The computation of taxable rental income starts with determining the “Annual Value” of the property. Clause 21 of the Income Tax Bill 2025 provides guidelines for determining this value. Here’s how it’s calculated:
- Actual Rent Received/Receivable: This is the actual amount of rent you receive or are entitled to receive during the tax year.
- Municipal Value: This is the value of your property as determined by the local municipal authorities for the purpose of levying property tax.
- Fair Rental Value: This is the rent that similar properties in the same locality would fetch in the open market.
The Annual Value is generally the highest of these values, subject to certain conditions. For self-occupied properties or properties that couldn’t be occupied due to employment conditions, the Annual Value can be taken as nil, a provision that continues in the new tax bill.
From the Annual Value, the following deductions are allowed under Clauses 22-23:
- Standard Deduction: 30% of the Annual Value is allowed as a standard deduction to cover repair and maintenance expenses, regardless of the actual expenditure incurred.
- Interest on Borrowed Capital: Interest paid on loans taken for the purchase, construction, repair, or renovation of the property can be claimed as a deduction. For let-out properties, the entire interest amount is deductible, while for self-occupied properties, the deduction is capped.
- Property Tax: Municipal taxes paid during the tax year are fully deductible from the gross annual value.
Example Calculation:
Actual Rent Received: ₹3,00,000 per annum
Municipal Value: ₹2,50,000 per annum
Fair Rental Value: ₹2,80,000 per annum
Gross Annual Value (highest of above): ₹3,00,000
Less: Municipal Taxes Paid: ₹20,000
Net Annual Value: ₹2,80,000
Less: Standard Deduction (30% of NAV): ₹84,000
Less: Interest on Home Loan: ₹1,50,000
Taxable Income from House Property: ₹46,000
Tax Treatment of Multiple Properties
The tax treatment of multiple properties has specific provisions in the Indian tax system. If you own more than one house property, the Income Tax Bill 2025 continues with the approach that only two properties can be claimed as self-occupied at a time.
Self-Occupied Properties
Under the new provisions, you can choose any two houses as self-occupied, and their Annual Value will be considered as nil. This is beneficial if you maintain two households, perhaps one in your hometown and another in your city of employment. However, if you own more than two house properties and all are used for self-occupation, only two can be treated as self-occupied for tax purposes, and the others must be deemed as let out.
Deemed Let-Out Properties
Properties beyond the two self-occupied ones are treated as “deemed let-out” even if they are actually not rented out. For such properties, you need to calculate a notional rent based on the municipal value, fair rental value, or standard rent, whichever is higher, and pay tax on this notional income after the standard deductions.
Co-Owned Properties
Clause 24 of the Income Tax Bill 2025 addresses the taxation of co-owned properties. When a property is co-owned, the income from that property is taxed in the hands of the co-owners in proportion to their ownership share. Each co-owner can independently claim the standard deduction and interest deduction on their share of the Annual Value.
For example, if a property generating a net annual value of ₹6,00,000 is co-owned equally by two individuals, each would include ₹3,00,000 in their respective tax computations and can claim deductions accordingly.
Special Cases and Exemptions
The taxation of rental income has several special cases and exemptions that taxpayers should be aware of:
Vacant Properties
If a property was vacant for a part of the year and no other benefit was derived from it, the actual rent received or receivable should be considered only for the period the property was rented out. This can significantly reduce your tax liability on properties that remain vacant for substantial periods.
Unrealized Rent
If you couldn’t recover some part of the rent due to genuine reasons, this “unrealized rent” can be excluded from your taxable rental income. However, you need to satisfy certain conditions to claim this benefit, such as proving that you have taken all reasonable steps to recover the rent.
House Property Loss Set-Off
Losses from house property (often arising due to large interest payments) can be set off against income from other heads up to a limit of ₹2,00,000 per annum. Any excess loss can be carried forward for up to eight assessment years and set off against future income from house property.
TDS on Rental Income
If you’re receiving rental income from a tenant who is a business entity or an individual subject to tax audit, they are required to deduct TDS (Tax Deducted at Source) at a rate of 10% if the monthly rent exceeds ₹50,000. This TDS can be claimed as a credit when filing your income tax return.
Exemption for Specific Properties
Rental income from certain types of properties may be exempt from tax under specific circumstances:
- Properties used for own business or profession
- Agricultural properties used for agricultural purposes
- Properties of religious or charitable institutions used for their objectives
Tax Planning Strategies for Rental Income
Effective tax planning can help minimize your tax liability on rental income legally. Here are some strategies to consider:
Maximize Deductions
Ensure you claim all eligible deductions, particularly:
- The standard 30% deduction from the Annual Value
- Full deduction of municipal taxes paid
- Complete interest on borrowed capital for let-out properties
Home Loan Principal Repayment
While the interest component of your home loan is deductible under “Income from House Property,” the principal repayment qualifies for a deduction under Section 80C (up to ₹1,50,000 along with other eligible investments).
Joint Ownership with Family Members
Consider having the property jointly owned with family members in higher tax brackets. This can distribute the rental income among multiple taxpayers, potentially reducing the overall tax liability if some co-owners fall into lower tax slabs.
Timing of Expenses
Plan the timing of your deductible expenses, such as repairs and maintenance, to maximize their tax benefit. Since standard deduction is fixed at 30%, major repairs should ideally be planned in years when they can be capitalized or claimed separately.
Investment in REITs
Consider investing in Real Estate Investment Trusts (REITs) which offer certain tax advantages for rental income. The Income Tax Bill 2025 continues to provide special taxation regimes for REITs under Clauses 221-224.
FAQs on Taxation of Rental Income
Is GST applicable on residential rental income?
No, GST is not applicable on rent received from residential properties. However, for commercial properties, GST is applicable if your rental income exceeds ₹20 lakhs per annum.
Can I claim a deduction for brokerage or commission paid to find tenants?
Yes, brokerage or commission paid to property agents can be claimed as an expense, but it falls within the standard 30% deduction and cannot be claimed separately.
How is rental income from a property located outside India taxed?
For residents, rental income from properties located outside India is taxable in India. For resident but not ordinarily resident (RNOR) and non-residents, such income is taxable only if it is received or deemed to be received in India.
What happens if I receive a security deposit from my tenant?
A security deposit is generally not considered as income as long as it is refundable. However, if you adjust it against rent or forfeit it, the adjusted/forfeited amount becomes taxable in that year.
Can I claim a deduction for renovation expenses?
Expenses for minor repairs are covered under the standard 30% deduction. Major renovation expenses that enhance the capital value of the property are considered capital expenditure and can be added to the cost of acquisition, which will help reduce capital gains tax when you sell the property.
Is rental income exempt under any threshold?
No, there is no minimum threshold for exemption of rental income. All rental income, regardless of the amount, is taxable. However, if your total income (including rental income) is below the basic exemption limit, you won’t have to pay any tax.
How do I report rental income in my tax return?
Rental income should be reported under the head “Income from House Property” in your income tax return. You need to provide details of each property, including the address, type (self-occupied or let out), and various values (municipal value, fair rental value, actual rent received).
Also read: Capital Gains Tax: Types, Tax Rate, Calculation & Tax Savings
Conclusion
The taxation of rental income in India follows specific rules and provisions that have been maintained in the new Income Tax Bill 2025, which will be effective from April 1, 2026 1. Understanding these provisions is crucial for property owners to ensure compliance and optimize their tax liability.
The computation starts with determining the Annual Value, from which standard deduction, municipal taxes, and interest on borrowed capital can be deducted. Special provisions apply for multiple properties, co-owned properties, and specific cases like vacant properties and unrealized rent.
Effective tax planning strategies, including maximizing deductions, joint ownership, and timing of expenses, can help reduce your overall tax burden legally. As rental income taxation can be complex with various nuances, consulting with a tax professional is advisable, especially if you own multiple properties or have significant rental income.
Manish Sharma
https://financex.inI'm tech-savvy, loves to write about saving, investing and proper financial planning. Also, I am a blogger, share everything with 100% transparency and the best of my knowledge.