To curb tax evasion, the finance minister has proposed that income from letting out a house or part of a house by the owner shall not be charged under 'profits and gains of business or profession' but will be taxable under 'income from house property' only. This measure aims to prevent claims of higher expenses to reduce taxable rental income. However, it may impact those genuinely running a business of letting out properties. Let’s read further.
Rental income and tax treatment
Many people invest in real estate for the regular income it provides in the form of monthly rent. Generally, income earned from renting out property is subject to tax under the head "Income from House Property" (IFHP).
However, if you own the property as a business asset, the tax treatment of rental income can differ. For example, if you own a property and run a hostel, the rental income will be taxed under "Profits and Gains of Business or Profession" (PGBP).
The deductions you can claim against rental income vary based on the income head. 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.
Declaring rental income under PGBP can significantly reduce taxable income compared to IFHP. However, many property owners take advantage of this provision and declare rental income as business income to reduce tax outgo, whereas they should have declared it under IFHP. Considering this, the finance ministry has proposed to disallow rental income from property investments to be declared under the head PGBP.
Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm states, “Basically, this loophole is closed now. Homeowners who were previously taking this advantage will no longer be able to utilize deductions meant for businesses.”
Adverse effects on genuine rental businesses
Many tax experts believe that this change will adversely impact those who genuinely run rental businesses.
Vivek Jalan, partner, Tax Connect Advisory, said that there are many individuals as well as builders who invest in properties and earn a rent out of it. Their regular business is to let out properties and sometimes this is their primary business too. They have formal organisational setups like accounting, HR, marketing, etc, too in many cases.
“While this provision has been inserted to dissuade unscrupulous elements, it seems that it would also hit the genuine businesses,” said Jalan.
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