Renting out a house property or planning to do it? Here's a step-by-step guide to calculate the taxable rental income.
Step 1: Calculate Net Annual Value
Net Annual Value (NAV) = Annual rental income - Municipal charges (e.g. property tax, water tax)
Step 2: Make deductions to calculate Taxable Rental Income
Deduct the following from NAV to get Taxable Rental Income:
- Standard Deduction: 30% of the NAV
- Interest on Housing Loan (if applicable)*
Step 3: Check if the Taxable Rental Income falls within the exemption limit
If your total income including the Taxable Rental Income is less than ₹2.5 Lakhs then no taxes are applicable. Else taxes will be required to be paid on the Taxable Rental Income.
Let’s consider an example:
Suppose, you are earning an annual rental income of ₹4,80,000 per year.
The municipal charges are ₹12,000 and the interest on the home loan is ₹1,00,000 for the year.
In this case, the Taxable Rental Income will be calculated as follows:
- NAV = 480000 - 12000 = ₹4,68,000
- Standard deduction of 30% = 30% x 468000 = ₹1,40,400
- Taxable Rental Income = NAV - standard deduction - interest charges on home loan = 468000 - 140400 - 100000 = ₹2,27,600
Since the Taxable Rental Income is less than ₹2.5 Lakhs, it is exempt provided you have no other income.
*The deduction for interest for the Home Loan is subject to a maximum limit of ₹2 lakh for self-occupied properties, while there is no upper limit for let-out or deemed let-out properties.
Note that this is a simplified overview. For comprehensive guidance, consult a tax expert.