Taxation on Renting Immovable Property in India: A Comprehensive Overview

Direct Tax: Income Tax on Rental Income

Rental income from immovable property in India is primarily taxed under the head "Income from House Property" as per the Income Tax Act, 1961. This applies to both residential and commercial properties, unless the property is actively used for the owner's own business or profession.

Here's how it's generally calculated:

1. Gross Annual Value (GAV): This is the higher of the actual rent received or the expected rent (fair market rent) for the property. In cases of vacancy, the actual rent received is considered.

2. Net Annual Value (NAV): From the GAV, municipal taxes paid by the owner during the financial year are deducted.

3. Deductions from NAV: From the NAV, landlords can claim the following deductions to arrive at their taxable rental income:

   • Standard Deduction (Section 24(a)): A flat 30% of the NAV is allowed as a standard deduction, irrespective of the actual expenses incurred on repairs, maintenance, etc. This is a significant benefit for landlords.

   • Interest on Home Loan (Section 24(b)): If the property was acquired or constructed with a home loan, the entire interest paid on this loan can be deducted from the NAV for let-out properties. For self-occupied properties, this deduction is capped at ₹2 lakh per year.

   • Unrealized Rent/Vacancy Loss: If rent is genuinely unrealized or the property was vacant for a part of the year, these losses can also be adjusted from the GAV.

Important Considerations for Direct Tax:

• Basic Exemption Limit: If the total annual income, including rental income, does not exceed the basic exemption limit (currently ₹2.5 lakh under the old regime and ₹3 lakh under the new regime for FY 2024-25), no income tax is payable.

• Composite Rent: If a property is rented along with inseparable assets (like fixtures), the entire income is taxed under "Income from House Property." However, if separate services like furniture, Wi-Fi, etc., are provided, the income from these services might be taxed under "Income from Other Sources."

• Joint Ownership: In case of joint ownership, the rental income and deductions are split among the co-owners, potentially reducing the individual tax burden.

• Tax Deducted at Source (TDS) on Rent:

  • Section 194-I: Applies to individuals/HUFs whose accounts were subject to tax audit in the preceding year, and other entities (companies, firms, etc.). TDS is deducted at 10% for rent on land, building, furniture, or fittings, and 2% for plant and machinery, if the annual rent exceeds ₹2.40 lakh (or ₹6 lakh from FY 2025-26 for persons other than individuals/HUFs).

  • Section 194-IB: Applies to individuals/HUFs not liable for tax audit. TDS at 5% (reduced to 2% from October 1, 2024) is deducted if the monthly rent on land or building (or both) exceeds ₹50,000.

  • For NRIs: Rent paid to Non-Resident Indians (NRIs) is subject to TDS at a higher rate (currently 31.2% including cess), regardless of the amount. The tenant is responsible for deducting and remitting this TDS.

Indirect Tax: Goods and Services Tax (GST) on Rent

The applicability of GST on renting immovable property in India depends primarily on the nature of the property and the purpose of its use:

• Commercial Properties: Renting of commercial properties, such as offices, shops, or warehouses, is considered a taxable supply of services under GST. The standard GST rate for commercial rentals is 18%. Landlords with an aggregate turnover exceeding the specified threshold (currently ₹20 lakh for most states, ₹10 lakh for special category states) are required to register for GST and charge this tax to their tenants.

  • Input Tax Credit (ITC): Landlords providing commercial rental services can claim ITC on GST paid for inputs and services related to the property (e.g., maintenance, repairs), helping to reduce their overall tax liability.

  • Reverse Charge Mechanism (RCM): In certain scenarios, particularly if the landlord is unregistered for GST, the tenant may be liable to pay GST under the RCM.

• Residential Properties: Renting of residential properties for residential purposes is generally exempt from GST. This exemption aims to promote affordable housing and ease the tax burden on individual tenants.

  • Exception: If a residential property is rented out to a business entity (even if for employee housing) or for commercial purposes, it will attract GST at 18%.

  • Short-term Rentals: Short-term rentals, such as those in hotels or serviced apartments, are typically liable for GST.

Key Points for Indirect Tax (GST):

• Threshold Limit: Landlords whose aggregate turnover from providing only services (including commercial rentals) is below the threshold limit are exempt from GST registration.

• Tax Invoices: Registered landlords must issue proper tax invoices to their tenants, clearly stating the GST rate and amount.

• Monthly Returns: Registered landlords are required to file monthly GST returns (GSTR-1 and GSTR-3B).

In conclusion, while rental income provides a steady stream of revenue, it's essential for property owners in India to navigate the complexities of both direct and indirect taxation. Proper understanding of income tax deductions and GST applicability, along with timely compliance, can significantly impact the net returns from renting out immovable property.