Explained: How Are Rent Payments and Receipts Taxed? All Details Here

Investors often park their surplus funds into the real estate market to gain twin benefits of appreciation and rental income. Whereas those who are not comfortable with investing in a house often choose to pay rent on such accommodations.

Here’s an overview of how rent proceeds and payments are treated under the income tax laws.

Calculation of taxable rent proceeds from house property?

The annual value of a property is determined by taking the higher among - the actual rent received and the potential rent it could generate. From this amount, municipal taxes are deducted to arrive at the property’s taxable value. A standard 30% deduction is then applied to this taxable value, after accounting for municipal taxes.

Taxpayers can claim deduction under Section 24 (b) for the interest paid on loans, which has been used for property’s purchase, construction, repair or reconstruction. Losses under the heading ‘house property’ can be set off against any other income up to ₹2 lakh.

According to the recently presented budget in July, proceeds from rental income can be shown only under the heading ‘income from house property’. However, if someone chooses to sublet the property, the income will be taxed under ‘income from other sources.’

Can taxpayers claim expenses incurred on interest payment of under-construction property?

Yes, interest payments made for the under-construction property can be claimed from the year of possession. Even if the possession took place on the last day of the financial year, it will be taken into consideration.

How can taxpayers claim interest expenses for under-construction property?

Interest expenses for the total construction period can be claimed in five equal installments from the year of possession. However, when someone chooses to transfer the property within five years of possession, they lose the right to claim interest expenses for the concerned period.

Can rental proceeds from joint property be taxed?

Rental income from jointly owned properties will be taxed based on the contributions made by the owners towards the property’s purchase. However, if someone chooses to add the spouse’s name as a joint holder, provided she has not made any contributions to the property, no rental income can be taxed in her name.

Can salaried individuals claim tax benefits for the paid rent?

Yes, salaried individuals who receive House Rent Allowance (HRA) from their employer can claim deductions for the paid rent under various circumstances.

The lowest among the following three is applicable for deduction:

• Actual HRA received
• 50% of the basic salary, in case of metropolitan cities, whereas 40% of the basic salary in case metro cities
• Rent paid - 10% of basic salary

Can taxpayers claim both HRA and interest deductions (EMI) at the same time?

As long as they satisfy the respective conditions, they can claim the aforementioned deductions without any restrictions.

Is it possible for a self-employed person to claim paid rent deductions?

Yes, under section 80GG, salaried as well as self-employed individuals can claim deductions for rental proceeds exceeding 10% of the total income, provided it is subject to a limit of ₹5,000 per month or 25% of the total income, whichever is less.

Notably, this deduction is not available to those taxpayers who own self-occupied property or if he, his spouse, his HUF, or dependent members own a house in the same place where he is staying

Are there any TDS provisions on rent? If there are any, what are they?

Individuals and HUF engaged in business or profession must deduct taxes at 10% if: -

1. Total rent paid exceeds ₹2.40 lakh annually

2. Annual turnover exceeds ₹1 crore (for business) or ₹50 lakh (for professionals)

Other individuals must deduct taxes at the rate of 2%, provided that the monthly rent proceeds exceed ₹50,000. Though a TAN number is not required, a landlord’s PAN must be furnished at the time of TDS return filing.

How are rental payments to non-residents taxed?

Up to 70% of the rent paid to non-residents is taxed at the rate of 30%. It should be noted that a taxpayer must furnish a TAN number and should deduct tax at source even if the payable monthly rent is below ₹50,000, Moreover, the law doesn’t provide any cap on payments made to non-residents.