An important announcement regarding rental income has been made in the Union Budget presented two days ago. It says that rental income from residential property to individual taxpayers will now come under ‘Income from House Property’. This means that rental income will no longer be considered as income from business and profession. Finance Minister Nirmala Sitharaman told in the budget speech that for this there is a proposal to amend the Income Tax Act.
What do taxpayers do now?
Currently, taxpayers deduct various business-related expenses under the head ‘Profits and Gains of Business or Profession’, which reduces their taxable income. Under this provision, property owners show rental income as business income. Then, claim deductions on maintenance costs, repairs and even depreciation. This reduces their taxable income. This also reduces their tax.
Why is the government changing the rules?
For example, if a taxpayer shows rental income as business income, then he can deduct from that income the expenses incurred on property maintenance etc. This reduces his taxable income significantly. If the income from house rent is shown under the head ‘Income from house property’ then the deduction is limited. Under this category, 30 percent standard deduction is allowed on rental income for repairs and maintenance. No allowance is allowed for any other expenditure.
New rule will be implemented from April 1 next year
The Finance Minister had said in his budget speech, “It is proposed that the income of the landlord from renting out the house or part of the house will not come under ‘Profits and Gains of Business or Profession’. For tax purposes, it will be covered only as ‘Income from Will come under ‘house property’. This amendment will come into effect from April 1, 2025. With this, this assessment will be applicable from year 2025-26.
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Section 28 will be amended
For this, the government will amend Section 28 of the Income Tax Act. It will be mentioned in this that the income from rented house will come only under ‘Income from House Property’. After this, taxpayers will not be able to show rental income under business income to reduce their tax liability.