Edward Kennedy, who works as an accountant with a multi-national company in Bahrain, and his wife, Renni Edward Kennedy, recently bought a second home in Navi Mumbai. "We are not going to use this house. So, we have decided to rent it out," said 42-year-old Renni. Another house owner, Manoj Thomas, 40, who works in a private company, recently got transferred from Mumbai to Bangalore. He, too, wants to rent out his Mumbai apartment.
Like the Kennedys and Thomas, if you, too, want to give your house on rent, don't forget that rental income is taxable, and the tax treatment will depend on how you rent out —as a fully furnished apartment, a paying guest accommodation, a corporate guest house, a service apartment, or others.
Reducing the tax outgo
In income tax parlance, the income that you earn from your property comes under two heads — income from house property and income from business. If you own a property and rent it out, the income that you earn will be taxed as income from house property under section 22 of the Income-Tax Act. The Act gives you deduction for taxable income from house property.
"The entire rental income will not be considered for taxation purpose; only 70% will be considered as there is a 30% deduction allowed towards maintenance of property," says Anil Rego, chartered accountant and CEO, Right Horizons, a wealth management firm.
"Municipal taxes paid, and the interest and principal amount repaid on the loan taken to buy the house are also eligible for deduction subject to conditions," said Amarpal Chadha, tax partner, EY.
As standard deduction, 30% of net annual value is deductible (the value is the total annual rent less taxes paid). For example, say, your annual income from house property is Rs 6 lakh. If you have paid a municipal tax of Rs 1 lakh on the property, the net annual income will be Rs 5 lakh. For taxation, only Rs 3.5 lakh will be considered after the standard deduction.
"Where the prime object is to let out property along with additional right of using furniture and fixtures, such income would be chargeable under the head income from house property," said Chadha. The tax treatment remains the same for a fully furnished apartment or a paying guest accommodation.
What if you don't rent out the house at all? If you keep your second home vacant, it will be treated as "deemed to be let out" and show as income from house property. The deemed rent will be calculated based on an amount at which the house may be let out.
Here, too, you can claim deduction towards actual municipal taxes paid and standard deduction of 30%. If you have taken a home loan, the interest paid can be claimed as deduction against the net rental value. The balance rent amount, if any, will be taxable under the head income from house property.
If you have a jointly held property, the rent received from it will be taxable in the hands of each co-owner based on the respective shareholding. It is therefore important to decide the proportion of co-ownership. "If your husband and you have a 70:30 holding in a property, the rental income will also be divided accordingly," said Saroj Maniar, a Mumbai-based chartered accountant.
Income from business
If you use your property for business purposes, say, renting out as a service apartment or as homestay, then the rent amount is income from business. Any expenditure incurred — repairs, salaries of people recruited, groceries bought — can be claimed as deduction.
A third category
There can be instances when the rental income can be considered either under the head income from business or income from property. An example of this is when you let out the property as a guest house.
"If the owner is operating the guest house, the rent will be considered as income from business or profession. If you only receive a rental income and the company manages the guest house, it will be considered as income from house property. But rent received from a corporate guest house (let out to employees) would be taxable," said Rego.
Unless you have a specific reason to leave the house vacant, it is better to rent it out as you will have to pay tax on the deemed rental income anyway. The purpose for which the house will be used depends on your preference.