Income Tax on rent: Key things tenants and home owners should keep in mind

If you are thinking of investing in real estate, there are some things you need to know. One of them is taxation. Income from renting out property is taxable under Indian law. The owner will be taxed under the Income Tax Act 1961 for any rental income. If the property is a house or building, it will be taxed as Income from House and Property. If the owner gets rent from vacant land or any such property, it will come under Income from Other Sources. However, owners can avail of certain deductions. The tax on rental income is calculated on the Gross Annual Value (GAV) of the property after subtracting municipal taxes, home loan interest (if any) and standard deductions. Some things owners need to know about rental incomes:

• If the GAV of the property is less than Rs 2.5 lakh, then the owner will not have to pay any tax. But if the rental income is the prime source of income, then the owner will have to pay taxes.
• A standard deduction of 30 per cent is applicable on the net annual value of the property. Net annual value means GAV minus municipal taxes.
• If the building/flat is co-owned, the co-owners would be responsible for the tax on rent in proportion of their ownership shares.
• Deduction can also be claimed for interest paid on a home loan under Section 24 (b) of the Income Tax Act.

Some things tenants need to know about rental incomes:

• You can get a deduction of House Rent Allowance (HRA) only if it forms a part of your salary. You can claim HRA only if you are living in a rented accommodation. Tenants do not have to pay income tax on rent.
• For people other than employees, rent deduction of 25 percent of total income or Rs 5000 per month, whichever is lower, can be claimed under Section 80GG.

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