Rental income is taxable from the point of view of income tax and service tax. Many times tax payers forget to include or consider rental income while showing income. I have discussed rental income treatment as per income tax and service tax view in this article. You will also get insights about TDS on rent.
Tax on rent income under various tax laws:
Income tax on rent income:
For income tax purpose, we can divide rent income from two sources:
- Rent income from building or land appurtenant to it.
- Rent income from land ( no building attached) and other property like vehicle, machinery, furniture etc.
Income tax on rent income from building:
As per income tax act, rent income should be included in the head income from house property. No matter whether assessee is doing business of giving building on rent or not.
As per definition of income from house property,
Income from building or land appurtenant thereto is taxable under the head income from house property.
Rent income is taxable as per inherent capacity of income generation of property. So whether you have let out or not let out the property, tax will be levied as per notional basis.
However, first property is exempt from tax if it is self occupied. In this case, you can consider net annual value of property as NIL.
Other property will be considered as let out and tax will be levied on them. You need to consider actual rent received or receivable also while making calculation of tax on rent income. So it is always better to rent out the property as per income tax view.
Deduction available for house property income u/s 24:
To save income tax on rent income, you can avail deduction u/s 24.
Standard deduction : standard deduction at the rate of 30% is available to rent income.
Deduction for interest on purchase or construction of property : There is no limit for availing this deduction for let out property. You can get deduction for interest accrued.
When property is self occupied, deduction limit is Rs. 2,00,000 p.a. (from f.y. 2015-16).
Detailed article with example of computation of income from house property can be read here.
Income tax on rent income from property other than building:
If you have given property other than building ( Plot, machinery, vehicle, furniture etc.) on rent, the income from rent should be taxable under the head ‘ income from other sources.’
TDS on rent income u/s 194I:
In following situation, tenant is required to deduct TDS u/s 194I from rent income:
- If rent income is more than Rs. 180000.
- Rent income can be any sources. It means tds u/s 194I is applicable for rent income from building or property other than building.
- Tenant is company, AOP, BOI, any person other than individual or HUF, individual or HUF who is covered under 44AB in immediate preceding financial year. ( means whose turnover is more than Rs. 1 crore or 40 Lakh in previous F.Y.).
So when your Tenant has deduct TDS, please cross check whether he is liable to deduct TDS.
Please note that while deducting TDS, service tax component should not be included. Suppose your rent bill is Rs. 228000 including 14% service tax. You need to deduct 20000 ( 228000/11410010%) from bill without touching service tax component. Net payment will be Rs. 208000 ( 228000-2000).
You can get TDS back in your bank account if your tax liability is less than TDS deducted. For it, you need to file income tax return.
Service tax on rent income:
Service tax is indirect tax which is levied on your rent income. But you are not required to pay it from your pocket. You need to charge service tax on bill of rent income, collect it from tenant and deposit to government.
However, service tax is not applicable to each landlord. In following situation, service tax will be applicable to rent income:
- Rent income can be from any property or asset.
- Landlord is not eligible to get small service provider exemption means his taxable service turnover of previous year is more than Rs. 10 Lakhs. You can read detailed post about small service provider here.
The rate for service tax for rent income will be 14% . Also note that there is no reverse charge mechanism applicable for rent income.
Sometimes due to lack of proper understanding taxpayer skips rent income in income tax return. Which is not right practice. Get help of our experts to file your return and proper disclosure of income. contact here to start.