ITR Filing for Rental Income: Tax Deductions & Exemptions

Rental income is a significant source of earnings for many individuals in India. However, it is taxable under the Income Tax Act, and property owners must declare it while filing their Income Tax Returns (ITR). Understanding the tax treatment, available deductions, and exemptions can help landlords reduce their tax burden while ensuring compliance.

Understanding the Taxability of Rental Income

Income earned from renting out a house property falls under the "Income from House Property" category in the ITR. Whether a property is self-occupied, rented, or deemed let-out, it affects how the tax is calculated.

Self-Occupied Property: If a person owns and resides in a property, no rental income is considered, and hence, no tax is payable on it.

Let-Out Property: When a property is rented out, the rental income received is fully taxable, but deductions are available to reduce taxable income.

Deemed Let-Out Property: If a person owns more than two houses, the third and additional properties are considered "deemed let-out," meaning they are taxed as if they are generating rental income, even if they are vacant.

How to Calculate Taxable Rental Income?

Rental income is not taxed on the full amount received; certain deductions and expenses can be subtracted to arrive at the taxable income. The calculation follows these steps:

1. Determine the Gross Annual Value (GAV)

The Gross Annual Value (GAV) is the higher of:

• Actual rent received in a financial year.
• Expected rental value, which is based on municipal valuation or similar properties in the area.

For let-out properties, GAV is simply the total rent received. If a property is deemed let-out, its GAV is determined based on its fair rental value.

2. Deduct Municipal Taxes Paid

Municipal taxes, such as property tax, are deductible from GAV. However, they must be paid by the owner (not the tenant) and must be paid during the financial year to be claimed as a deduction.

3. Arrive at the Net Annual Value (NAV)

The Net Annual Value (NAV) is calculated as:
NAV = GAV – Municipal Taxes Paid

4. Apply Deductions Under Section 24

The Income Tax Act allows two primary deductions under Section 24:

Standard Deduction (30% of NAV): A fixed 30% deduction on NAV is allowed to cover maintenance and repair costs, regardless of actual expenses incurred.

Home Loan Interest Deduction: If a home loan was taken to buy, construct, or renovate the property, the interest paid can be deducted. For self-occupied properties, the maximum deduction is ₹2 lakh per year, while for let-out properties, there is no upper limit, meaning the full amount of interest paid can be deducted.

5. Calculate the Final Taxable Rental Income

The taxable rental income is:

Taxable Rental Income = NAV - 30% Standard Deduction - Home Loan Interest Deduction

Key Deductions & Exemptions on Rental Income

Standard Deduction Under Section 24(a)

This flat 30% deduction is available to all property owners and covers property maintenance, repairs, and other expenses, even if no actual spending has occurred.

Home Loan Interest Deduction Under Section 24(b)

Interest paid on a home loan is fully deductible for let-out properties. For self-occupied properties, the maximum deduction allowed is ₹2 lakh per year.

Principal Repayment Deduction Under Section 80C

The principal repayment of a home loan is eligible for a deduction of up to ₹1.5 lakh per year under Section 80C. However, to claim this, the property must not be sold within five years of purchase.

Joint Ownership Benefits

If a property is owned jointly, each owner can claim deductions individually based on their ownership share. This can significantly help in reducing taxable income.

Tax Deducted at Source (TDS) on Rental Income

If the monthly rent exceeds ₹50,000, tenants must deduct 5% TDS before paying rent to the landlord under Section 194IB. Businesses paying annual rent above ₹2.4 lakh must deduct 10% TDS under Section 194I.

Common Mistakes to Avoid While Filing ITR for Rental Income

Many taxpayers either under-report rental income or miss claiming deductions, leading to incorrect tax calculations. Some common mistakes include:

• Not reporting deemed rental income for multiple properties.
• Forgetting to deduct municipal taxes while computing NAV.
• Failing to claim the 30% standard deduction under Section 24(a).
• Incorrectly claiming home loan interest deductions (e.g., claiming more than ₹2 lakh for self-occupied properties).
• Not claiming TDS credit for tax deducted by tenants.

Conclusion

Filing ITR for rental income requires careful reporting of earnings and deductions to optimize tax savings. By leveraging deductions under Section 24, Section 80C, and Section 194IB, landlords can legally reduce their tax burden while remaining compliant with tax laws. Proper record-keeping, choosing the right ITR form, and claiming all eligible exemptions can make the tax filing process seamless.

1. Is rental income taxable even if I don’t receive rent?

Yes, rental income is taxable annually. If rent is due but unpaid, it is still considered taxable unless the tenant defaults.

2. Can I claim deductions for property maintenance?

Yes, a 30% standard deduction under Section 24(a) covers maintenance, repairs, and other expenses, even if not actually incurred.

3. What if I own more than two properties?

Only two houses can be self-occupied. Others are deemed let-out, and you must pay tax on their notional rent even if vacant.

4. Can I claim a home loan interest deduction on rental income?

Yes, under Section 24(b), you can claim full interest on a let-out property. For self-occupied property, the limit is ₹2 lakh per year.

5. Is TDS applicable on rental income?

Yes, if rent exceeds ₹50,000/month, tenants must deduct 5% TDS under Section 194IB and provide Form 16C.