The Union Budget 2024-25 has changed the taxation rules for income from putting a house or a part of a building on rent. This decision is expected to impact scores of house owners, including senior citizens, who depend on rental income to meet their monthly expenses post-retirement.

Finance Minister Nirmala Sitharaman proposed in her Budget speech in parliament last week that income from letting out a house or part of a building will be taxed under the head “income from house property” instead of “profits and gains of business or profession” earlier.

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Taxing house owners under “income from house property” will limit their deductions on certain expenses, unlike income from business or profession, where they may have saved more. While the government may have a strong case for this change, is this a bad deal for taxpayers?

Kunal Savani, partner at Cyril Amarchand Mangaldas, a tax firm, explains, “Business income as a concept is wide in itself, such that few taxpayers had taken a position that they were in the business of renting of properties. Consequently, their income should be taxed under the head of business income on a net basis (income minus expenses, without any cap).

“Further, if such taxpayer had incurred business loss, then the same were allowed to be adjusted against other income of the taxpayer, reducing their overall tax liability. This can be more beneficial as the tax regime for income from house property only allows for specific deductions, i.e. municipal taxes paid for the property, 30 per cent standard deduction (irrespective of the actual expenses incurred) and interest on loan.”

Misrepresentation of Rental Income

While this loophole may have allowed some people to benefit from smart tax planning, it also may have led to revenue loss for the government due to higher deductions available to business income. So, henceforth, rental income will be taxed only under the income from house property. According to Savani, this step is similar to an anti-avoidance measure, which aims to reduce tax disputes arising from complexities and bring more clarity for individuals.

How will this change apply to income from properties listed on Airbnb and other platforms? Savani says the rule will also apply to such properties, i.e., income from them will be taxed only as house property and will be available for uniform deductions.

Rohit Jain, managing partner at Singhania & Co., a tax firm, says, “This amendment leaves no vagueness for such income. However, for the taxpayer, it would mean incurring some additional taxes.” Jain says that taxpayers who declare rental income as business income can currently deduct expenses like maintenance, repairs, and depreciation. In contrast, under ‘income from house property’, deductions are limited to a standard 30 per cent for repairs and maintenance, without allowances for other expenses.

So, the proposal, he says, aims to prevent the misrepresentation of rental income and ensure proper taxation under the appropriate category that was inadvertently not taxed”.

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Will the Change Impact Cash Flow For Retirees?

Amol Joshi, a mutual fund distributor and founder of Plan Rupee Investment Services, says, “Rental income being charged under ‘income from house property’ will increase the tax outgo. It will reduce the net in-hand income and hence a negative for landlords.

“However, there are other points to consider, like rental income being shown under business and profession’ was considered to be a tax loophole. Also, rental yields range from 2 to 3 per cent in most places. This is a poor annual return to start with. While there is property appreciation, that does not help someone who plans to continue to earn rental income over the years to support monthly expenses,” he adds.

Thus, although rental income is an important cash flow for some people post-retirement, this amendment does not have any major impact on taxpayers.