Property owners will now have to pay more tax as Budget 2024 plugs loophole

Income arising from any kind of rentals from house property shall be taxed under the chapter "income from House Property" which allows specified deductions.

The Union Budget 2024 has introduced an important change in the taxation of rental income from residential property. To curb tax evasion, Finance Minister Nirmala Sitharaman has mandated that such income can only be declared under the 'Income from House Property' (IHP) head and not under the 'Profits and Gains  from Business or Profession' (PGBP) category.

The deductions available under "Income from House Property" are different from those under "Profits and Gains from Business or Profession."   Under IFHP, you can claim a standard deduction of 30 percent of rental income, property tax and interest on a home loan. Under PGBP, you can claim all expenses related to renting and managing the property, such as maintenance, electricity bills, employee costs and upkeep, without any limit

Previously, some taxpayers were exploiting a loophole by declaring their rental income as business income, which allowed them to claim additional deductions like repairs and depreciation, thereby reducing their taxable income. This practice has now been explicitly prohibited.

Understanding rental income taxation in India:

•  If you own a property and rent it out, the rental income is generally taxed under the head "Income from House Property". This means there are specific rules and deductions applicable to this type of income.
•  You can claim deductions like standard deduction (30% of gross rental income), municipal taxes, and interest on home loan against this income.
• If you run a business from your property (like a hostel), the income from the business is taxed under "Profits and Gains from Business or Profession." However, any residential portion of the property would still be taxed under "Income from House Property."

"Earlier, few taxpayers reported their income from residential property as business income instead of income from house property. Key difference being, tax regime for income from house property provides for fixed set of deductions as against business income, wherein one can claim any amount of expenses as deductions (so long as it can be justified). This leads to revenue loss for the government on account of higher deductions available to taxpayer offering such income as business income," said Kunal Savani, Partner, Cyril Amarchand Mangaldas.

"When a tax payer has income from house property, then he is subject to some specific fewer deductions such as municipal taxes , a fixed percentage of standard deduction and interest  on borrowed capital. However, for such rental income if the taxpayer uses the business income schedule, he could even benefit by taking some other additional deduction from this income such as repairs undertaken or even depreciation on furniture , fixtures etc, thereby reducing their taxable income," said Ritika Nayyar, Partner, Singhania & Co.

The amendment is effective from April 1, 2025, and will apply to the assessment year 2025-26 and subsequent years. Such income will only be allowed to be taxed only under the head of income from house property. As a consequence, taxpayers would be eligible for lesser deductions such as municipal taxes, standard deduction and eligible interest payment of loans.  

This step, similar to an anti-avoidance measure, aims at reducing tax disputes arising from complexities and brings more clarity for individuals in adopting simplified tax treatments.

While this move aims to ensure fair taxation, it could lead to higher tax outgo for property owners as deductions under 'Income from House Property' are limited compared to those available under 'Profits and Gains from Business or Profession'.