Rent can be an additional source of income for salaried individuals who have invested in property. While real estate as an investment may have its challenges in terms of liquidity and high capital requirement, rental income can complement one’s salary.
However, rental income is taxed at the individual’s slab rate. But there are deductions available on rental income for individuals who choose to stick with the old tax regime.
Claiming deductions
If you are in receipt of rental income, you can first get a deduction on municipal taxes. Then on the balance, there is a standard deduction of 30%, which accounts for repairs, maintenance and all other expenses.
Apart from this, you can deduct interest payment if there is an outstanding home loan on the let-out property before arriving at your net rental income for taxation. The entire interest paid can be claimed as a deduction against rental income in the old tax regime. However, the total loss that can be claimed is restricted.
“You can claim full interest paid, but the maximum loss in a financial year can be ₹2 lakh for a let-out property in the old tax regime. If there is any balance loss, you can either set it off against other income or carry it forward to set off against rental income in subsequent years,” explained Balwant Jain, a Mumbai-based investment and tax expert.
Assume you get a monthly rent of ₹20,000 on a property, which works out to ₹2.4 lakh a year. After deducting ₹20,000 as municipal tax, you are left with ₹2.2 lakh. After 30% standard deduction ( ₹66,000), you are left with ₹1.54 lakh.
Now, assuming you have also paid ₹4 lakh as interest on a housing loan during the same financial year. You can set off this interest against the rental income to derive your net rental income. This works out to a loss of ₹2.46 lakh. But the maximum loss you can claim in any financial year is ₹2 lakh.
The balance ₹46,000 loss can either be set off against other income heads in the same financial year or carried forward to be set off against rental income in subsequent years.
Multiple properties
If you have multiple properties, the maximum loss you can claim in a financial year remains ₹2 lakh. But you can either set off the balance loss against other income in the same year or set it off against net rental income from other properties.
For example, if you have ₹2 lakh net loss each from two let-out properties and ₹4 lakh net gain in a third property, you can use the ₹4 lakh loss in the first two properties to entirely set off the rental income in the third property.
However, if the loss needs to be set off against other heads of income, only a maximum of ₹2 lakh can be utilised. The balance loss can be carried forward and set off against other rental income. As seen in the example abive, you can set off losses on income from house property up to the rental income level in the same financial year.
Any loss that needs to be carried forward can only be set off against other rental income in subsequent years, for a maximum of eight financial years.
