Taxation on Renting out Your Property

Tax treatment of rented property is different from that of self-occupied property or property not let out on rent. This relates to property tax and income tax deduction available for rented property on which home loan EMIs are being paid.

Income tax treatment of rented property

A house considered which is not used for self occupation is considered an income source and you need need to pay income tax for it. This is calculated on the annual value of property. Annual value of a property that is let out is actual annual rent received less municipal taxes (provided you yourself pay the taxes and not your tenants). In case rent received is less than the property's actual earning capacity a notional annual value is taken. If rent received is higher than property's normal earning capacity you would be taxed on the higher value.

On the net annual value certain deductions are allowed. Firstly 30% of it can be deducted flat under section 24a. This is to accommodate annual maintenance and repair expenses. Secondly if you are paying loan EMIs for the property the entire interest paid in a year can be deducted for computing its value under section 24b. So the computation of property tax for rented property looks like this:

Taxable Value = Annual Value -  Municipal taxes - 30% of annual value - Interest on property loan

Income tax benefit for rented property

Any income you earn from property or might have been earned has to be declared under the head 'Income from House Property'.

However if you are shelling out EMIs for the house or property, the government offers some compensation. Interest paid is considered negative income and the entire interest portion paid in a financial year can be deducted from income from the house (through rent) for computing 'Income from House Property' in the ITR form. There is no restriction on the number of properties on which you can apply this benefit provided you are paying EMIs on them.

If you began paying EMIs before you got possession of the house you cannot deduct interest component in that year. But you can do so after you get possession of the house. This should be done in five equal installments. This means you can divide that interest and add it to each year's interest for five years.

Under section 80C you can further claim deduction on principal component of your home loan. For this the loan should have been taken from a bank or financial institution for constructing or buying the house.


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