What is a Tax on Rental Income in India?

The Income Tax Act of 1961 governs the amount of tax on rental income, considering factors like total rental earnings and a property's Gross Annual Value (GAV). Whether you are a commercial or residential landlord, optimising tax benefits and claiming deductions can lower your tax liability. 

This comprehensive guide will walk you through the essentials of rental income taxation, including calculation methods, deductions, and tax-saving strategies to help you optimise your tax liability effectively.

Quick Summary 

• The rental income is classified under "Income from House Property" (Section 22) tax head in India.
• Tax is applicable on the Net Annual Value, not on the received gross rent.
• Rent from the property for residential use is GST exempt. 
• An 18% GST applies as tax on rental income from commercial property in India, given that the landlord's annual rental income > ₹20 lakh.

Definition of Tax on Rental Income

Rental income in India serves as a steady income source and therefore is taxable under the IT Act of 1961. It is classified under ‘income from house property’ and failing to pay applicable taxes can lead to penalties and even legal consequences.  

Rental income comes under another tax category known as 'Business Profits' and such classifications depend on the rental activities. Income from house property' covers most rental situations. Landlords use the 'Business Profits' category when properties are used for business purposes.  

If you rent out your property, understanding how to maximise tax savings through deductions and exemptions is crucial. From permissible deductions to home loan tax benefits, there are several strategies to reduce your tax liability on rental income.

How Taxes on Income From House Property is Determined?

It is important to note, that you cannot file all residential income under 'income from house property'. Take a look at how tax on rental income works on specific types of rents:

1. Rental Earning From House Property: 

An owner who lets out his or her house property for an entire year or a part of a year is considered a let-out house property. 

The Indian government imposes tax under ‘income from house property’ in this scenario. Individuals renting out a building, land or an apartment are obligated to pay rental income taxes. 

1. Earning From Composite Rentals

When you rent out a property along with assets such as air conditioners, refrigerators, or washing machines, the earnings are classified as composite rent. 

In such cases, the Income Tax Act of India treats the rental income from the property itself as "Income from House Property," while the rent received for the additional assets is taxed separately under "Income from Other Sources." 

1. Tax on Rental Income From a Partially Self-Occupied Property

Suppose a property owner occupies a part of his or her property. He or she rents out the rest, and then the income from the rented part becomes taxable. 

In this case, all the parts of the property are treated as independent units. The rent is thus taxed under ‘income from house property’.  

What are Excluded From Income From House Property?

Below are the categories where you do not need to pay taxes on rental earnings:

• Sub-Let Properties: Rentals received by tenants from sub-letting properties are tax-exempt.
• Assets as a Part of Property: If a rented property includes inseparable assets (e.g., fixtures, furniture, or appliances forming an integral part of the property), the income is still taxed under "Income from House Property."

Applicability of Tax on Rental Income from Vacant Properties

Below are the conditions of taxation on vacant rental properties:

• As per the Union Budget 2025-26, if a taxpayer owns up to two residential properties, both are treated as self-occupied and are tax-exempt.
• f the taxpayer owns a third vacant property, it is considered a "Deemed to be Let Out Property" (DLOP) and is subject to taxation.
• The tax is levied on the Gross Annual Value (GAV) or the market rental value of the third property, even if it remains unoccupied.
• The taxation of "Deemed to be Let Out Property" falls under Section 23(4) of the Income Tax Act, 1961.

Tax Treatment on Rented Commercial Properties

The tax on rental income for commercial properties works in the following manner:

• Standard Deduction: Under the Income Tax Act, landlords can claim a 30% deduction on rental income for property maintenance.
• GST Implication: If rental income from a commercial property is more than ₹20 lakh annually, the landlord needs to pay 18% GST on such an income.
• Depreciation: If a company rents out a commercial property, it can claim depreciation on the asset to reduce its taxable income.

Available Tax Benefits From Rental Income

Below are the different tax benefits you can get for your rented-out properties:

How to Calculate Tax on Rental Income in India?

Below is the standard process for calculating rental income taxes in India:

Step 1: Calculate the Gross Annual Value (GAV) of the rented property which is the annual rent received from the tenant.

Step 2: Subtract the property taxes from GAV to derive the property’s Net Annual Value of NAV.

Step 3: From NAV, deduct a 30% standard deduction due to maintenance or repair.

Step 4: Deduct the paid home loan interest on the rented property as per section 24(b) of the IT Act.

Step 5: You will get your taxable amount on your rental income.

Note: You can use this formula to derive your tax on rental income: Taxable Rental Income = [(GAV - Municipal Taxes) - 30% (standard deduction) - Interest on Home Loan].

Calculation of Rental Tax with an Example

Suppose the monthly rent of an apartment is ₹30000. The property tax is ₹20000 and the home loan interest is ₹80000. Take a look at the below table for rental tax calculation for this:

How to Save Tax on Rental Income? 

1. Get the Owed Standard Deduction of 30%

The Income Tax Act Section 24(a) allows a flat 30% deduction from the net rental income associated with maintenance, regardless of the actual resulting expenses. Even if the maintenance costs are low, you will be able to claim this fixed deduction.

2. Separate your Maintenance Costs from the Actual Rent

The Income Tax Act exclusion of maintenance fees from the taxable rental income is allowed if it is explicitly specified in the agreement. In case your rental agreement includes maintenance costs, make sure to propose separate billing. 

3. Claim the Interest Deduction Applicable to your Home Loan

As per Section 24(b), in the context of rented properties, landlords shall be able to claim an unlimited deduction on home loan interest. Contrary to the case of self-occupied properties (deduction capped at ₹2 lakh in a year), rental properties get the full interest deduction benefit, which reduces tax liability to a great degree.

4. Minus the Municipal Taxes

Municipal taxes include sewage fees, property and service taxes. These are deductible from Gross Annual Value prior to applying the standard deduction of 30%. Note that these are not to be paid by the tenant, but by the owner.

5. Go for Joint Ownership

In case your property is co-owned by you in partnership with a spouse/member of the family, the rental income shall be divided up. The division will occur between the co-owners. This minimises tax liability on the individual level. Co-owners can further optimise the tax savings by claiming the deductions separately.

6. Leverage Advantages Offered to HUF (Hindu Undivided Family) 

Purchase your property in the HUF’s name if the entity is registered. This will allow for the distribution of rental income among various family members. As a result, every member will be owed individual tax exemption benefits.

7. Structure the Rent Requirement Smartly for Furnished Properties

In case you rent out a fully or semi-furnished property, charge rent separately from the additional amenities (may include internet, appliances, furniture, etc.). The rent part is solely taxable. 

8. Invest in the Various Tax-Saving Instruments

Invest the rental income in tax-saving tools like the ELSS, National Pension Scheme (NPS) or PPF. This will help minimise the overall taxable income under Section 80C.

9. Take Advantage of the Applicable Senior Citizen Tax Exemptions

If you are 60+ years old, rental income is tax-free up to ₹3 lakh. Go for property ownership under a senior family member’s name to optimise your tax savings.

10. Use Rental Agreement Optimisation to Your Advantage

Do not consider renting a property to a business you own. This might inevitably be a cause for tax scrutiny. Instead, go for long-term rental agreements (over 12 months) to forego tax implications.

Final Word

If you are planning to rent out your property, understanding tax on rental income is important for you. Rental income is taxable under the IT Act of 1961 and landlords must pay such taxes to avoid penalties or legal consequences. However, there are options to save from such taxes by leveraging provisions like property taxes, home loan interest, etc.