In Budget 2024, finance minister Nirmala Sitharaman announced a significant amendment regarding the treatment of rental income from residential property. Previously, individuals could report their rental income as business income, but this will now change. Rental income from residential property must be reported under the 'Income from House Property' category, as per Section 24 of the Income Tax Act.
Previously, house owners could offset rental income against various expenses, thereby reducing their taxable income.
"Some people were putting rental income from houses as income from business. They could then offset that with business expenses, including fake repair or maintenance bills, or salaries to employees who managed the property," said Karan Batra, founder of charteredclub.com.
This practice led to considerable tax arbitrage as taxpayers could significantly reduce their liabilities through inflated or non-legitimate expense claims. The amendment aims to curb such practices and increase tax revenue.
With the amendment, rental income from residential property must be reported as 'Income from House Property.' This change restricts the deductions available to taxpayers. Instead of offsetting rental income against expenses, taxpayers can now only claim standard deduction of 30% and municipal taxes paid.
According to experts, the primary motivation for this amendment was to reduce tax evasion and streamline the reporting of rental income. By restricting the deductions available, the government aims to minimise bogus claims and ensure more accurate tax collection.
"There was quite a lot of litigation because many individuals or companies with multiple house properties were offering this as business income,” said chartered accountant Prakash Hegde. “This allowed them to offset the rental income against expenses like depreciation, repair, etc. The new rule reduces the scope for such bogus claims."
Previously, under business income, property owners could set off losses against other incomes (except salary) and carry forward these losses for up to eight years, Hegde added.
Experts said that in genuine cases where property owners incur expenses related to their rental property, the standard deduction of 30% will sufficiently cover most of these expenses. This means that typical costs such as maintenance, repairs, and property management are likely to fall within this 30% allowance, making the standard deduction adequate for most landlords who do not inflate or fabricate expenses.
One area of ambiguity is the treatment of rental income from properties listed on platforms such as Airbnb, which often operate in residential areas. The budget memorandum specifies that the proposed change is on rent from residential property. So, income earned on any residential house listed as a bed and breakfast (B&B) should be declared as rent.
Batra pointed out that since the tax department can’t tell if the property on which business income is reported is residential or commercial just by looking at the income tax return, the taxpayers shouldn’t see it as an opportunity to wrongly declare such income as business.
“If a scrutiny is raised, the taxpayer will need to furnish documents to prove the property is commercial in nature. It is strongly advised that taxpayers with residential houses declare the income as rent only," said Batra.
Property owners who have registered their property as a hotel, guesthouse or B&B with a GST number will not be impacted.
For those who have been reporting rental income as business income, this amendment necessitates a significant shift in tax planning. Taxpayers must now adapt to the new reporting requirements and the limited deductions available.
