Tax laws explained: How rent payments and receipts affect your tax liability

Many investors are comfortable with equity and channel their surplus funds into real estate to gain the twin benefits of appreciation and rental income on such property.

On the other hand, some people do not prefer to invest in a house for personal use and instead opt to pay rent for their accommodation.

I discuss income tax laws around rent paid and rent received in this article.

How is rent received from a house property taxed?

The higher of either the rent received, or the amount the property could reasonably be rented for is treated as annual value.

The municipal taxes you've paid are first deducted from this annual value to determine the property's taxable value. A flat deduction of 30 percent of the annual value (after municipal taxes), is allowed in respect of all rented properties.

Under the old tax regime, you could claim a deduction for full interest paid on loans used for the property's purchase, construction, repair, or reconstruction under Section 24 (b) for rented property.

Please note that you can only set off a loss under the ‘house property’ head upto ₹2 lakh against other income. Any remaining unabsorbed loss during the current year can be carried forward against house property income for eight subsequent years.

Under the new tax regime, you can claim interest paid on loans up to the taxable amount of rental income. No losses can be removed under the ‘house property’ head.

As per the recent budget, rental income from house property can only be taxed under the “income from house property” head. If you sublet the property, the income becomes taxable under “Income from other sources.”

How can interest paid during the construction of a property be claimed?

Regarding loans taken on the under-construction property, interest deductions are allowed starting from the year in which the possession of the house is taken, with the deduction covering the full year even if possession is taken on the last day of the financial year.

Interest paid during the construction period can be claimed in five equal annual instalments beginning from the year construction was completed and possession taken. So, if you transfer the house within five years from the end of the year in which possession was taken, you lose your right to claim interest for that period.

How is rental income from joint property taxed?

For jointly owned property, the rental income is taxed based on each owner's share of contribution towards the property's purchase. This doesn't have to be an equal split.

So, if your spouse’s name is added as a joint holder for smooth succession purposes without contributing to the property, no rental income can be taxed in her name.

Many taxpayers incorrectly attribute rental income to their wife because she is listed as a joint holder of the property without any contribution—this is patently wrong.

What are the tax benefits for rent paid by salaried individuals?

All salaried persons who receive House Rent Allowance (HRA) from their employer can claim deductions on rent paid for accommodation they occupy but do not own.

The deduction is restricted to the lowest of the following three:

1. HRAreceived

2. 50 percent of the basic salary for metro city residents, 40 percent for non-metro

3. Excess of rent paid over 10 percent of basic salary. This deduction is also available only under the old tax regime.

Can someone claim both HRA and home deductions?

As per the tax laws, there is no restriction on a person claiming both benefits, provided they satisfy the conditions prescribed in the respective sections.

For example, if you stay in a house far away from your workplace and pay both EMI on your own house and rent for a separate residence, you can claim both deductions, even if your own house is not rented out.

Can a self-employed person claim rent-paid deductions?

Like salaried people, self-employed individuals can claim a rent deduction under Section 80GG for rent paid that exceeds 10 percent of their total income, subject to a limit of Rs. 5,000 per month or 25% of total income, whichever is lower.

This deduction is not available if the taxpayer owns any self-occupied property anywhere or if he, his spouse, his HUF, or dependent members own a house in the same place where he is staying.

What are the TDS provisions on rent?

For individuals and HUF engaged in business or profession, with an annual turnover exceeding ₹1 crore (for business) or ₹50 lakh (for professionals), they must deduct tax at 10 per cent on rent payments during the year if the total rent paid exceeds ₹2.40 lakh annually.

Other individuals must deduct tax at 2 percent if the monthly rent exceeds ₹50,000. A TAN number is not required, but the landlord's PAN must be used to file the TDS return online.

For rent paid to non-residents, there is no minimum threshold limit for rent, and tax must be deducted from the first rupee of rent paid. Tax is deducted at 30 percent on 70 percent of the rent paid to a non-resident.

Please note that if you are paying rent to a non-resident, you must obtain a TAN number and deduct tax at source even if the monthly rent payable is below ₹50,000, as there is no threshold limit for payment to a non-resident.

Read all our personal finance stories here

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant at his X handle.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.