Rent received refers to rental income received from either a commercial or a residential property. Rent received increases your taxable income and thus increases your tax payable.
As per Income tax laws, the rent for a property is calculated on the basis of the Gross Annual Value (GAV) of the property. GAV is the highest of three amounts listed below.
Example 1: Suppose the municipal value of your property is ₹10,000 per month, and you receive rent of ₹15,000 per month. So, the GAV of your property will be ₹15,000 per month.
Actual rent received is the 'real' rent you receive from any property such as home, office, shop, etc. This means a tenant is occupying the property and paying you a rent in return.
Notional or deemed rent received is the potential rental value of a property, whether you have put it on rent or not. Notional or deemed rent is applicable to additional properties other than the one where you stay. For such properties, you are liable to pay tax on the deemed or potential rental income from the property.
Example 2: Let's say you have two houses, one of which is used for residential purposes, and the other one is an investment. You have not put the other house on rent, but the house can generate a rental income of say ₹10,000 per month. In this scenario, you will have to add this notional rental income of ₹10,000 to your taxable income and pay additional tax on the 'notional' income.
Note that if you have many properties, only one property can be shown as a self-occupied property.
There are certain items, which can be deducted from your rental income, resulting in a lower tax payable. These deductions are applicable to both actual and deemed rental income.
Municipal taxes: You can deduct any municipal taxes paid on your property from the rental income.
Standard deductions: After deducting municipal taxes, you can deduct 30% from rental income as standard deductions. These deductions are to cover any expenses on repairs and collection of rent, irrespective of whether you actually incur the expenses or not.
Example 3: Continuing with the above example, after deducting property tax, you can deduct 30% or ₹43,500 from ₹145,000. You will have to pay tax only on ₹101,500.
Use our tax calculator to calculate your tax liability after including rent received.
iCalculator Tip: If you have two properties, you can show the property with higher rent as self-occupied. You can do this irrespective of whether you stay in that property or not, and thus save tax by reducing your notional rental income.