Budget 2024 plugs rental income loophole, property owners cannot declare house rental income as business income
The new rule in Budget 2024 may increase the tax liability of property owners. Sale of property of ₹50 lakh involving multiple sellers, buyers to attract TDS
If you are planning to save tax on the rental income that you receive from another property you may have invested in, you cannot declare it as business income. With the government now plugging the loophole, the tax that you would now have to pay on the property let out by you would be much more, especially if you had not declared it under rental income.
This, say tax experts, is expected to reduce litigation and also ensure that owners earning a consolidated rental for providing services such as cleaning and lodging will now be unable to claim all the expenses and may have to incur higher taxes.
FM Nirmala Sitharaman said on July 23 that some taxpayers were reporting their rental income under the wrong income tax head, profits and gains of business or profession, thereby reducing their tax liability.
"It has been observed that some taxpayers are reporting their rental income generated by letting out of the house property, under the head ‘Profits and gains of business or profession’ in place of the head ‘Income from house property’. Accordingly, they are reducing their tax liability substantially by showing house property income under the wrong head of income," she said.
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She added that the amendment will take effect from the next financial year.
Tax experts have welcomed the move saying that it provides certainty and consistency as earlier tax payers were adopting varied tax treatments.
“Such clarity is expected to reduce litigation and foster a more stable and predictable tax environment,” said Gaurav Karnik, Partner and Real Estate National Leader, EY India.
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Hemal Mehta, Partner, Deloitte India is of the view that income arising from lease of a residential house now is proposed to be taxed under the head ‘House Property’ and not under ‘Profit from Business’ even though the lease includes other services such as breakfast, laundry among others.
Why was this necessary?
According to the Memorandum to Union Budget 2024, it was observed that some taxpayers were reporting their rental income generated by letting out of the house property, under the head ‘Profits and gains of business or profession’ in place of the head ‘Income from house property’. Accordingly, they are reducing their tax liability substantially by showing house property income under the wrong head of income.
“The amendment will take effect from the 1st day of April, 2025 and will, accordingly, apply in relation to assessment year 2025-26 and subsequent assessment years," as per the Memorandum to Union Budget 2024.
Vivek Jalan, Partner, Tax Connect Advisory points out that people who have been earning income from renting properties will now have to state that this is their income from renting properties under Income from House Property and not under Profits and Gains of Business. “This would impact their taxability and they would now be able to take advantage of only a few deductions like standard deductions, deductions of taxes paid and not all expenses for business,” he said.
“While this provision has been inserted to dissuade unscrupulous elements, it may also hit genuine businesses,” he added.
Prabhakar K S, founder and CEO, Shree Tax Chambers, points out that the finance minister has proposed an anti-avoidance measure that income earned from letting out of a house or part thereof by the landowner, the income shall be charged to tax under the head ‘Income from House Property’ only rather than the prevailing practice of under the head ‘Profits and Gains of Business or Profession’.
“Those taxpayers who used to declare their rental income under the head Business are likely to see additional tax outgo,” he said.
"An amendment to Section 28 aims to correct the misclassification of rental income from residential properties as business income. This misclassification allowed taxpayers to take advantage of deductions and benefits meant for businesses, reducing their tax liability," said Mumbai-based chartered accountant Aditya Zantye.
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"The amendment will clarify that income from letting out residential property should be classified as ‘Income from house property,’ reducing ambiguity and potential disputes. This change is expected to increase tax revenue by closing a loophole exploited by some taxpayers," Zantye added.
Sale of property of ₹50 lakh or more involving multiple sellers, buyers to attract TDS
Budget 2024 has also clarified that Tax Deduction at Source of one per cent will apply on sale of an immovable property valued at ₹50 lakh and more, even if there are multiple buyers and sellers involved in the transaction.
The government said that one percent TDS will be applicable for transfer of immovable property involving multiple sellers or buyers wherein the aggregate consideration is ₹50 lakh or more.
In the budget document, the government said that Section 194-IA of the Act provides for deduction of tax on payment of consideration for transfer of certain immovable property other than agricultural land. An amendment will be made in the section to clarify this.
"It has been observed that some taxpayers are interpreting that the consideration being paid or credited refers to each individual buyer's payment rather than the total consideration paid for the immovable property.
"Hence if the buyer is paying less than ₹50 lakh, no tax is being deducted, even if the value of the immovable property and stamp duty value exceeds ₹50 lakh. This is against the intention of the legislature," the document said.
The amendments will take effect from October 1, 2024.