The rental income from residential or commercial properties ensures a steady source of earnings for many people. In the real estate sector, many investors also buy houses or commercial units to create a steady stream of additional income by renting out their properties. Many middle-class and upper-middle-class investors turn to property investment, particularly in the residential segment, as a way to boost their income as well as the diversification of the portfolio.

To support property owners, the government provides various tax benefits on let-out properties, which can be used by the individuals to reduce their taxable income significantly.

However, it is important to thoroughly understand these taxation laws to avoid any potential penalties.

Which Taxation Laws And Deductions Apply On Rental Income?

Rental income falls under the purview of “Income from House Property,” as per the income tax laws. These laws come with certain deductions that can be availed to reduce taxable income.

Standard Deduction: Under Section 24A of the Income Tax Act, 1961, a 30% standard deduction on net annual value is allowed by the government for let-out properties. These are aimed at covering repairs and maintenance costs to ease the financial burden on property owners.

Municipal Taxes: Municipal taxes, such as property tax, can be deducted from the annual income of a property under the Income Tax Act. However, this deduction cannot be claimed by the tenant and is allowed if the taxes are paid by the owner.

Vacancy Period: If a property is vacant for part or the entire financial year, and actual rent is lower than expected due to the vacancy, the reduced rent will be considered as the Gross Annual Value, according to taxation rules. 

Owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the reasonable expected rent than the actual rent so received or receivable (as reduced by the vacant allowance) shall be considered to be the Gross Annual Value of the property,” the Income Tax Department explains.

Co-Ownership: When the property is co-owned, each owner can claim a separate deduction based on their share of the property, which can help reduce the overall tax liability. For example, if a couple jointly owns a house and rents it out, they can split the rental income between themselves and each will pay taxes on their individual share of the income.

Section 80C: Home loan repayments up to Rs 1,50,000 are deductible under Section 80C of the I-T Act, regardless of whether the property is owned or rented.

Depreciation: The taxation rules do not provide a direct deduction for depreciation under ‘income from house property.’. However, if the property is part of one’s business assets, a deduction can be claimed for depreciation, particularly in the case of commercial properties.