IndiaFilings / Learn / Income Tax / How Much Rent Income Is Tax Free In India
How much Rent Income is Tax Free in India? - IndiaFilings

How much Rent Income is Tax Free in India?

Rental income is a common source of earnings for many individuals in India and is generally taxed under the "House Property." However, if the property is part of a business operation, the income is classified as "Business Income." For individual taxpayers, the basic exemption limit plays a crucial role in determining the taxability of rental income. As per the current tax rules, income up to ₹2,50,000 is tax-free. Understanding the tax implications and the deductions available is essential to ensure accurate reporting and optimisation of tax liability. This article details the taxation on rental income in India and its types and deductions.

IndiaFilings makes ITR filing effortless by helping you maximize deductions on rental income and ensuring accurate tax reporting!

Get Started!

Types of Rental Income in India

The Income Tax Act categorises rental income based on the type of property. Below are the main types of rental income and their tax implications:

  • Rental Income from Properties: Rent from residential and commercial buildings, apartments, and land. Taxable income is calculated by determining the Net Annual Value (NAV) after deducting municipal taxes from the Gross Annual Value (GAV). Property owners can also claim a standard 30% deduction and housing loan interest, if applicable.
  • Income from Partially Rented Properties: For partially rented and partially self-occupied properties, rental income from the rented portion is taxable, with applicable deductions allowed.
  • Composite Rent: Composite rent arises when a property is rented along with additional assets, such as equipment or amenities. The rent is fully taxable, but property-related charges must be separated for accurate tax treatment.
  • Rental Income from Commercial Spaces: Rent from commercial properties like stores and offices is taxed similarly to residential properties. The same rules apply for GAV, NAV, and deductions.

Taxation on Rental Income in India

Rental income in India is taxed under Section 22 of the Income Tax Act as income from house property. The taxation of such income is subject to the following conditions:

1. Existence of Physical Property

The property must physically exist and include a building or land attached to it, such as a house, apartment, commercial space, or vacant land used with the building.

2. Ownership of the Property

The person receiving the rental income must legally own the property. Income from properties not owned by the assessee does not fall under this category.

3. Non-Business Use of Property

The property should not be used by the owner for their own business or profession. If the property is used for such purposes, the income may be taxed as business income rather than house property income.

How is Rental income tax calculated in India?

To calculate tax on rental income in India, follow these steps:

  • Calculate the Gross Annual Value (GAV): The Gross Annual Value (GAV) is the total rent received from the tenant during the year. This is the starting point for calculating rental income tax.
  • Determine the Net Annual Value (NAV): Subtract the property tax (or house tax) paid to the municipal authority from the GAV to calculate the Net Annual Value (NAV). Property tax is an annual tax the local government imposes on the property.
  • Apply Standard Deduction: From the NAV, a standard deduction of 30% is allowed under Section 24A of the Income Tax Act to cover maintenance and repair expenses.
  • Deduct Housing Loan Interest (if applicable): If the owner has a housing loan on the property, the entire interest paid during the financial year can be deducted from the NAV after the 30% deduction. This is allowed under Section 24B of the Income Tax Act.
  • Taxable Rental Income: After applying the above deductions, the remaining amount is the taxable rental income. This income is subject to tax according to the individual's applicable income tax slab.

Example

Let’s consider an example to understand how rental income tax is calculated:

Property Details:

  • Annual Rent Received (GAV): ₹5,00,000
  • Property Tax Paid: ₹20,000
  • Housing Loan Interest Paid: ₹1,00,000

Step-by-Step Calculation:

  • Gross Annual Value (GAV): The total annual rent received from the tenant is ₹5,00,000.
  • Net Annual Value (NAV): Subtract the Property Tax of ₹20,000 from the GAV:₹5,00,000 - ₹20,000 = ₹4,80,000 (NAV).
  • Apply Standard Deduction (30%): Deduct 30% of the NAV to account for maintenance expenses:30% of ₹4,80,000 = ₹1,44,000NAV after standard deduction = ₹4,80,000 - ₹1,44,000 = ₹3,36,000
  • Deduct Housing Loan Interest: Deduct the interest paid on the housing loan under Section 24B:₹3,36,000 - ₹1,00,000 = ₹2,36,000
  • Taxable Rental Income: The taxable rental income after deductions is ₹2,36,000. This amount will be taxed as per the applicable income tax slab for the individual.

Tax Deductions for the Rental Income Tax

Below, we have given a detailed overview of tax deductions for the rental income tax:

Standard Deduction for Property Maintenance (Section 24A)

Under Section 24A of the Income Tax Act, taxpayers can claim a standard deduction of 30% on the Net Annual Value (NAV) of rental income from residential properties. This deduction is meant to cover maintenance and repair costs, thus reducing the taxable income. It applies automatically and can be claimed before considering any other expenses related to the property.

Deduction on Home Loan Interest (Section 24B)

Section 24B allows taxpayers to deduct the interest paid on home loans taken for properties used for rental purposes. This deduction has no upper limit when the property is rented out, making it highly beneficial for property owners. For self-occupied properties, the maximum deduction allowed is ₹2 lakh. However, when the property is rented, the entire amount of interest paid is deductible, thereby reducing taxable rental income.

Deductions for First-Time Homebuyers (Sections 80EE and 80EEA)

First-time homebuyers can avail of additional tax benefits under Section 80EE and Section 80EEA. Section 80EE offers an extra deduction of up to ₹50,000 on home loan interest for loans approved between April 1, 2016, and March 31, 2017. Section 80EEA, which applies to loans approved between April 1, 2019, and March 31, 2022, allows a deduction of up to ₹1.5 lakh. To qualify for these deductions, the borrower must meet specific property value and ownership status criteria.

Deductions for Co-Owners of Property

When a property is co-owned, each co-owner is entitled to claim deductions individually. This includes deductions for principal repayment under Section 80C and interest paid on home loans under Section 24B. As long as the total deductions are within the prescribed limits, each co-owner can lower their tax liabilities independently, making joint property ownership a tax-efficient strategy.

How will the rental income of up to Rs.10 Lakhs be tax-free under the new tax regime? 

Under the new tax regime, individuals can enjoy tax-free rental income of up to Rs. 10 lakhs, provided that rental income is their only source of income and they do not claim additional deductions or exemptions. Rental income is subject to taxation, but landlords can reduce their taxable income by claiming deductions such as property tax, home loan interest, and a standard 30% deduction on the net annual value (NAV) of the property for maintenance and repairs.

For example, if a landlord receives Rs. 10 lakh in rental income, the 30% standard deduction reduces the taxable income by Rs. 3 lakh, leaving Rs. 7 lakh. Since non-salaried taxpayers with a taxable income of Rs. 7 lakh are eligible for a full rebate under Section 87A, this income becomes tax-free. As a result, landlords with only rental income can avoid paying taxes on rental earnings up to Rs. 10 lakh, provided they utilise these deductions effectively.

Learn more: Best ways to save income tax

Conclusion

In conclusion, while rental income is generally taxable in India, various provisions under the tax laws allow for deductions that can substantially reduce the taxable amount. By strategically using these deductions, landlords can lower their overall tax liability, potentially making a significant portion of their rental income tax-free. Understanding how these tax benefits work can help landlords manage their finances, reduce their tax burden, and ensure compliance with tax regulations. Proper planning and timely filing are crucial to maximising these advantages.

Let IndiaFilings handle your ITR filing, claim all eligible tax benefits and save on rental income tax!

Get Started!

FAQs

Is rental income taxable in India? 

Yes, rental income is taxable under the "House Property" category, and the tax is calculated after applying various deductions.

How is rental income calculated for tax purposes? 

The tax on rental income is calculated by determining the Gross Annual Value (GAV), deducting property taxes to arrive at the Net Annual Value (NAV), and applying a standard 30% deduction and any housing loan interest deductions.

How much of the rental income is tax-free in India?

Rental income up to ₹2,50,000 is tax-free for individual taxpayers, provided there are no additional taxable income sources.

Can I claim deductions on rental income? 

Yes, deductions such as a 30% standard deduction on NAV, housing loan interest, and deductions for first-time homebuyers are available to reduce taxable rental income.

What deductions can I claim on rental income? 

You can claim deductions for property maintenance (30% of NAV), home loan interest, and additional deductions for first-time homebuyers under Sections 80EE and 80EEA.

Is GST applicable on rental income from properties? 

Rental income from residential properties is exempt from GST, while rental income from commercial properties attracts an 18% GST.

Can I make rental income tax-free under the new tax regime?

Yes, if your rental income is the only source of income and you do not claim additional exemptions, up to ₹10 lakh in rental income can be tax-free under the new tax regime, after applying deductions.

Author: DINESH P
Dinesh Pandiyan is our expert content writer who specialises in business registration, tax regulations, trademark laws, and company compliance. His insightful articles deliver clear and actionable advice, helping businesses easily navigate and overcome complex legal and regulatory challenges.
Updated on: January 10th, 2025