How to Report Lease Rental from Commercial Property
- Farheen Mukadam
- Sep 11
- 9 min read
Lease rental income is a common source of income for many property owners. Understanding how to properly calculate and report rental income for tax purposes is crucial to ensure compliance with the Income Tax Act. While rental income can be an excellent way to generate passive income, it comes with its own set of tax implications. Whether you're a first-time landlord or an experienced investor, it’s important to understand how rental income is classified, how to calculate it, and what deductions are available to minimize your tax liability. Let us understand the process of calculating rental income, including understanding Gross Annual Value (GAV), applying deductions like municipal taxes and home loan interest, and understanding special considerations for NRIs.
Table of Contents
Understanding Lease Rental Income Classification
Rental income is classified as income from “house property” under Section 22 of the Income Tax Act. This classification applies to income derived from property that is let out for residential or commercial purposes. For tax purposes, lease rental income is considered as income earned from owning and leasing property and is subject to taxation based on specific rules.
There are two main types of rental income:
Residential rental income: Income earned from leasing out a residential property.
Commercial rental income: Income earned from leasing out property used for business or commercial purposes.
Both types of rental income are taxable, but they are handled differently when it comes to deductions and exemptions.
How to Calculate Gross Annual Value (GAV)
The calculation of Gross Annual Value (GAV) is the starting point for determining the taxable rental income. GAV is the potential annual income that a property can generate if it were rented out. To calculate GAV, the following steps are typically used:
Actual Rent Received: If the property is rented out, the actual rent received during the year is considered.
Fair Market Rent (FMV): If the property is not rented out, the GAV is determined by the FMV, which is the rent a similar property in the same area would generate.
Self-Occupied Property: If the property is self-occupied (i.e., not rented out), its GAV is considered zero for tax purposes.
Once the GAV is determined, it forms the basis for calculating taxable rental income. GAV is used to calculate the deductions you can apply, which ultimately reduces your tax liability.
Deducting Municipal Taxes from Rental Income
Municipal taxes are the local taxes paid to the municipal corporation or local authority. These taxes are deductible from your rental income under Section 23(1) of the Income Tax Act. The deduction is allowed to ensure that only the net income from the property is taxable, not the gross income.
The deduction for municipal taxes is allowed for the period during which the property was rented out or was available for rent. If a property is self-occupied, this deduction is not applicable. To claim this deduction, you must ensure that the taxes are actually paid during the year.
Applying the 30% Standard Deduction
Once you have calculated the Gross Annual Value (GAV) and deducted municipal taxes, you are allowed a standard deduction of 30% of the net annual value (NAV) of the property. This deduction is applied to cover the expenses related to the maintenance of the property, including repairs, insurance, and depreciation, even though these expenses do not need to be individually documented.
For example, if the NAV of your property is ₹10,00,000, you can claim a deduction of ₹3,00,000 (30% of ₹10,00,000), irrespective of the actual expenses incurred for maintenance.
This 30% standard deduction reduces your taxable income, allowing you to lower the tax liability on rental income.
How to Deduct Interest on Home Loan
If you have taken a home loan to purchase, construct, or renovate the property that is generating rental income, you can claim a deduction on the interest paid on the home loan under Section 24(b) of the Income Tax Act. This deduction is available for both self-occupied and let-out properties.
For a property that is rented out, you can deduct the entire interest amount on the home loan. The deduction is capped at ₹2,00,000 for self-occupied property and there is no such cap for let-out properties. The interest deduction reduces the taxable income from the property, thereby lowering your overall tax liability.
GST on Commercial Property Rental
If you are leasing out a commercial property, you may be liable to pay Goods and Services Tax (GST) on the rental income, provided your annual turnover from rental income exceeds the threshold limit specified by the GST Act. As of now, the threshold limit for GST on commercial property rental is ₹20 lakhs for most states in India.
If you are liable to pay GST, you must register for GST and file returns. The tax rate for commercial property rental is generally 18%. However, GST is not applicable to residential rental income, making it an important distinction for landlords who lease commercial properties.
Reporting Rental Income in Income Tax Return
Rental income must be reported under “Income from House Property” in your Income Tax Return (ITR). To do so, you will need to fill out the appropriate sections in the ITR form. Here’s a step-by-step guide for reporting rental income:
Determine the Gross Annual Value (GAV): As discussed earlier, this is the starting point for reporting rental income.
Calculate the Net Annual Value (NAV): Subtract municipal taxes from GAV to calculate NAV.
Apply 30% Deduction: Deduct 30% of the NAV as a standard deduction.
Deduct Home Loan Interest: If applicable, deduct the interest paid on a home loan from your rental income.
Declare GST: If renting out a commercial property, ensure you report GST, if applicable.
Once you have calculated your net taxable rental income, it will be included in your total income, and taxes will be computed accordingly.
Special Considerations for NRIs Receiving Rental Income
Non-Resident Indians (NRIs) who receive rental income from property located in India must report this income and pay taxes in India. NRIs are subject to the same tax rules as resident individuals when it comes to rental income. However, there are a few special considerations for NRIs:
TDS on Rental Income: When an NRI receives rental income, the tenant is required to deduct Tax at Source (TDS) at the rate of 30% on the rent paid. The NRI can claim this TDS as a credit while filing their income tax return in India.
Double Taxation Avoidance Agreement (DTAA): If the NRI resides in a country that has a DTAA with India, they may be eligible to claim tax relief in India to avoid double taxation on the same income.
Filing of ITR: NRIs mustfile their ITR to report rental income and claim TDS credits. They may also need to file additional forms based on their residential status and tax treaty benefits.
Conclusion
Understanding the intricacies of lease rental income, including the calculation of Gross Annual Value (GAV), allowable deductions, and the proper reporting of rental income in your Income Tax Return (ITR), is essential for landlords to remain compliant with tax laws and minimise their tax liability. By claiming eligible deductions such as municipal taxes, the 30% standard deduction for repairs and maintenance, and home loan interest, you can significantly reduce the amount of rental income that is subject to taxation. For Non-Resident Indians (NRIs), special considerations must be made to ensure that taxes are correctly reported and double taxation is avoided through proper treaty benefits. Accurately reporting rental income not only helps in reducing the taxable amount but also avoids penalties. Staying on top of these tax regulations and using platforms like theTaxBuddy mobile app can ensure that you file your returns with ease and avoid any issues with the Income Tax Department.
FAQs
Q1: How do I calculate rental income from multiple properties?
To calculate rental income from multiple properties, you need to treat each property as a separate entity. For each property, calculate the Gross Annual Value (GAV), deduct the standard 30% for repairs and maintenance, and apply any eligible interest deductions on home loans. Then, total the income from all properties to determine the overall rental income. Ensure to keep separate records for each property’s income, expenses, and any adjustments for a clear and accurate calculation.
Q2: Can I deduct repair costs from my rental income?
Repair costs related to the maintenance of the property can be accounted for under the standard 30% deduction for repairs and maintenance under Section 24(a) of the Income Tax Act. However, major repairs or capital improvements (like renovation or structural changes) cannot be deducted directly as part of your rental income. These expenses may be considered when calculating capital gains if the property is sold in the future, as they can add to the cost of acquisition.
Q3: Is GST applicable on residential property rental income?
GST does not apply to rental income from residential properties, whether rented out for residential purposes or not. However, if a commercial property is leased, GST may apply, particularly if the annual rental turnover exceeds the prescribed threshold. In such cases, the landlord must register for GST and charge the applicable GST rate on the rental payments.
Q4: Can I claim a home loan interest deduction on a property rented out?
Yes, under Section 24(b)of the Income Tax Act, interest paid on home loans for properties that are rented out is eligible for deduction. This deduction is allowed without any cap, which means you can claim the full amount of interest paid during the year. However, if the property is not rented out or is under self-occupation, only up to ₹2 lakh per year is allowed as a deduction for interest paid.
Q5: How is TDS calculated on rental income for NRIs?
For Non-Resident Indians (NRIs), TDS (Tax Deducted at Source) is deducted at the rate of 30% on rental income received from property in India. The tenant is responsible for deducting this tax at source and remitting it to the Income Tax Department. It is important for NRIs to verify that the TDS has been properly deducted and reflected in Form 26ASto claim any refunds or adjustments if necessary.
Q6: Do I need to file an income tax return for rental income?
Yes, if you are earning rental income, you must file an income tax return, even if your rental income is below the taxable threshold. Rental income is classified under the head "Income from House Property", and it must be declared in your tax return. Filing ensures you are compliant with tax regulations and also allows you to claim deductions and tax credits like TDS.
Q7: What if my rental income is below the taxable limit?
Even if your rental income falls below the taxable threshold, you are still required to file an income tax return if you have other sources of income or if TDS has been deducted from your rental income. Filing a return ensures that you are complying with tax laws, and if applicable, allows you to claim refunds for any TDS deducted in excess of your actual liability.
Q8: Can I claim a deduction for property maintenance expenses?
You can claim a 30% standard deduction on the Net Annual Value (NAV) of the property for maintenance expenses, which covers general repair, insurance, and other regular expenses related to upkeep. However, expenses for major repairs or improvements, such as renovation or adding new structures, cannot be claimed as deductions in the income tax return. These expenses may be considered during the calculation of capital gains if you sell the property.
Q9: Is rental income from foreign property taxable in India?
Yes, if you are a resident Indian, rental income from foreign properties is taxable in India. You need to report this income in your income tax return, and you may also be eligible for a Foreign Tax Credit (FTC) if taxes have already been paid on the rental income in the foreign country. For Non-Resident Indians (NRIs), rental income from foreign properties is generally taxed in the country where the property is located.
Q10: Can I claim deductions for utilities like water and electricity on rental income?
Utility payments such as water, electricity, and gas are generally not eligible for separate deductions. However, these expenses are indirectly covered under the standard 30% maintenance deduction, which applies to the overall upkeep of the property. If these utilities are part of the maintenance costs, they are considered within the 30% deduction on the Net Annual Value (NAV) of the property.
Q11: Can I claim a deduction for my property's municipal taxes?
Yes, municipal taxes paid for a rental property are deductible under Section 23 of the Income Tax Act. These taxes are subtracted from the Gross Annual Value (GAV) to arrive at the Net Annual Value (NAV), which is used to calculate the taxable rental income. It’s important to ensure these taxes are paid on time and properly documented for accurate filing.
Q12: How do I report rental income if I have a home loan on the rented property?
When you rent out a property on which you have a home loan, you can deduct the interest paid on the home loan under Section 24(b), in addition to claiming the standard 30% deduction for repairs and maintenance. The home loan principal repayment is not eligible for deduction under rental income, but can be considered for deductions under other sections, like Section 80C (if applicable). Ensure to include both rental income and deductions for accurate reporting in your ITR.
Comments