01 Mar Understanding Rental Income in India
Definition and Taxation:
Rental income refers to the revenue received by a taxpayer through renting out their property to another individual. Under Section 22 of the Income Tax Act, 1956, the annual value of property becomes taxable under the head of income from house property if certain conditions are met:
- The property includes buildings and land associated with it.
- The taxpayer must be the owner of the property (beneficially, not just registered).
- The property should not be used for the taxpayer's own business or profession, which generates taxable profits.
Income Computation:
The computation of income chargeable under the head of income from house property follows a structured process:
- Gross annual value (GAV)
- Less: Municipal taxes paid by the owner
- Net annual value (NAV)
- Less: Deductions under Section 24
- Standard deduction at 30%
- Interest on borrowed capital
The resulting figure represents the income chargeable under the head of house property.
Understanding Municipal Taxes:
Municipal tax refers to the taxes levied on residential or business properties by local authorities. These taxes, which contribute to societal services like water and sewerage, are integral to the calculation of the gross annual value of house property.
Cases regarding municipal taxes and their allowance/disallowance include:
- Paid by tenant: Not allowed
- Paid by owner: Allowed
- Due but not paid (i.e., Municipal Tax payable): Not allowed
- Advance municipal tax paid: Allowed
- Municipal tax related to the previous year paid in the current year: Allowed in the current year
- Municipal tax paid on let-out or deemed to let house property: Allowed
- Municipal tax paid on self-occupied property (SOP): Not allowed
- Municipal tax paid on property outside India, with the property income taxable in India: Allowed
Calculation of Annual Property Value:
In instances where the assesse does not obtain the actual annual value of rent, deemed annual value of any property is calculated based on factors such as fair rent or municipal rent.
Treatment of Arrears and Unrealized Rental Income:
Arrear rent and unrealized rent constitute parts of rental income subject to taxation. Section 25A of the Income Tax Act stipulates the treatment of such income, taxable in the year of receipt or realization and computed after a standard deduction of 30%.
Advantages and Disadvantages:
Advantages:
- Asset for raising funds in emergencies.
- Perceived financial security.
- Flexibility in case of job relocations.
- Reliable source of income.
Disadvantages:
- Risk of sudden tenant vacancies.
- Irregular rent payments by tenants.
- Extended periods of property vacancy.
- Lack of clarity in rental agreements leading to additional expenses.
- Difficulty in regaining possession of property when needed.
- Significant annual property tax burdens in Indian cities.
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