How is income tax on residential rental income calculated?

As per the Income-tax Act, the income received as rent from the building or house is taxed under the head, ‘Income from House Property.’ 

The tax on rental income is determined after deducting municipal taxes, standard deduction, and interest paid towards any home loan availed. As per Section 24A of the Income Tax Act, a taxpayer is entitled to a 30 percent standard deduction from the rental income to cover expenses like renovation/repairs. The individual earning rental income must be the legal owner of the property to avail of the deductions permissible under the Income Tax.

Calculation of Income Tax on Residential Property

• Calculate the Gross Annual Value (GAV) of the rented property. Gross annual value is the annual rent received from the tenant.
• Subtract the amount of Property Tax paid from the Gross Annual Value to arrive at the Net Annual Value (NAV). Property Tax or House Tax is a municipal tax paid once a year to the respective municipal authority.
• From the Net Annual Value (NAV), deduct 30 percent of the NAV, which is a standard deduction permissible under Section 24A of the Income Tax Act.
• If the owner has availed a housing loan of a rented property, then the entire amount of interest paid on the housing loan during the financial year is allowed to be deducted from the rental income after allowing for the standard deduction. This rebate is permissible under Section 24B of the Income Tax Act.
• The remaining amount is the taxable rental income of an individual on which income tax shall be paid as per the corresponding tax slab.

For example, if the monthly rent of an apartment is Rs. 25,000, then:

Gross Annual Value (GAV)= 12 (months) x 25000 = Rs. 3,00,000/-

Property tax paid: Rs 20,000

Net Annual Value= Rs 3,00,000- Rs 20,000 = Rs 2,80,000

Standard deduction: 30% of NAV= 84,000

Interest paid on home loan: Rs 80,000

Taxable Income: 2,80,000-84,000-80,000= Rs 1,16,000

Here, if the GAV would have been less than Rs 2.5 lakh, there would have been zero tax on rental income.

When property is not taxable  

You will not have to pay tax if you are receiving income in following scenario: –

• Receiving rent from farm house 
• Income from local authority 
• Income from an approved scientific research association
• Income from educational institute 
• Income from trade union 
• Property rented for charitable purpose 
• Property income of a political party 
• If you use property for your own business 
• Self-occupied property