There are two aspects to find the taxable income from the rental income. The first one is gross rent and the second one is net rent.
Gross rent of the property: Gross rent is the highest of the following three amounts.
Rental value of the property: The local authority such as Municipal Corporation or other local authorities etc. has fixed a rental value. This rental value is considered as the municipal rental value of the property.
Rent received for the property: The actual rent received from the tenant for the particular financial year.
Fair Rental Value (FRV) of the property: Rent of same size of property in the same locality is considered as the rental value of the property.
The highest amount among the abovementioned values is considered as the gross rent of the property.
Net rent of the property: Net rent is the rental value which arrive after deducting property tax actually paid to local authority from the gross rent
Net rent = Gross rent - Property tax
Acceptable deductions from net rent
The following amounts are allowed to deduct from net rent to calculate the taxable rental income.
Maintenance expenditure: 30% of the annual rental value (net rent) can be deducted from rental income for repair & maintenance and other related expenses including expenses for collecting rent etc.
Interest on loan: Interest paid for home loan which is used for the purchase of the same property or renovation of the property also can be reduced from the net rent.
Insurance premium: Any insurance premium paid for the house which is rented out, such as earth quake, fire etc. for the financial year.
Rental income: The rental income or taxable rental income is the amount after deducting interest on housing loan, insurance cost and maintenance expenses (30% of net rent) from net rent.
You should add this taxable rental income with other income such as income from salary or income from business etc. to calculate your total taxable income and the amount of tax payable. You can declare this figure as you rental income to your employee while calculating your income tax liability for TDS (Tax deducted at source) calculation.
Example: Rohan has a house property which has municipal rental value of Rs. 120000 and the rental value of the same type of house property in the same locality is Rs. 144000 (12000 x 12) and he rented out this house property for a monthly rent of Rs. 14000. He has paid property tax Rs. 4500 & Rs. 45678 as interest for housing loan which he has taken for purchase the house and an insurance premium of Rs. 785/- for fire and earth quake protection.
Here actual rent received is the greatest amount among all three items of Rs. 120000, Rs. 144000 & Rs. 168000 (14000 x 12)
So the Gross rent is Rs. 168000
Less Property tax paid for the year Rs. 4500
Net Rent is Rs. 163500
30% as Expenses Rs.- 49050
Interest on Loan Rs. -45678
Insurance premium Rs. -785
Income from house property Rs. 67987
He has to add Rs. 67987 with his other heads of income for calculating his income tax liability. This method is applicable for the calculation of rental income from all immovable property.
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