Renting a House – Know Tax Implications

A couple of days back, Rakesh had a talk with Aditya about buying out his rented flat, as his landlord was shifting to Australia to stay with his son now. Since the deal was a total steal, Rakesh was all excited to close it as soon as possible and hence, had already talked with his bank for a housing loan. Read the conversation here where they also talk about how housing loan helps you save tax. Having got educated with respect to the tax benefits given by his housing loan for personal use, Rakesh was now all curious to know what difference did it make it the house was going to be let out. Unable to hide this curiosity, he went to Aditya’s office right after getting back from bank.

“Hi, Rakesh. Good to see you here. So, when are you getting the deal executed? I am so excited to have a cup of tea in your own house.” Aditya was equally excited about the deal.

“Housing loan formalities are all done with. The purchase should close next week. We are equally excited to host you in our new house.” Rakesh informed him about the current status of the transaction.

“By the way, I was just wondering if the tax benefits will get higher if I opt to rent my house, instead of using it for self-occupation. Not that I am planning to execute such a thing, but just the curious me wanted to know.” Rakesh added.

“Well, I know how hard it gets sometimes to put down the curiosity quotient within us. Let me try my best to answer your question. Until the year 2016-17, the deduction towards home loan interest was given on the basis of actual interest charged by the bank during the year, if the house was rented out. However, from the year 2017-18, the loss from house property due to interest has been limited to Rs. 2 lakh, be it towards a self-occupied house property or a rented one.” Aditya tried to cover all the points in one go.

He further added, “While this limit is for all the house properties taken together, you can save t, as well as the loan,s well as the loan is taken in joint name, as the ceiling limit of Rs. 2 lakh will be on individual basis.”

Aditya thought that Rakesh’s queries were all sorted now, but this wasn’t the case to be.

“And what about the rental income so received? Is it fully taxable?” Rakesh was still on learning mode.

“While the rental income is indeed taxable, there are certain deductions allowed for that as well. Recognising the fact that property tax is paid by the owners, 100% deduction is allowed from the rental income in respect of property tax actually paid by the owner. Further, Govt. has also a maintenance standard deduction towards repairs and maintainence of the house property. So, you deduct this 30% from the net amount i.e. rent minus property tax so paid and then offer the balance 70% for tax. In a nutshell, your taxable income from house property shall be your rental income minus property tax paid minus 30% standard deduction less interest on home loan.” Aditya summarised the tax provisions in a nutshell beautifully.

The smile on Rakesh’s face was the true indicator of the simplicity Aditya used to explain the provisions.

“Even while a cup of tea at your place will be possible next week only, let’s have one now.” Aditya smiled.

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