Will renting of residential flat be charged only under house property post the amendment in Finance Act 2024?

 

Relevant Income Tax Provisions:

1.  Sec 28 of the Income Tax Act outlines the range of income that falls under the purview of “profits and gains of business & profession” and the parameters that must be met in order for it to be calculated.

2.  Finance Act 2024 has added to explanation 3 to Sec 28 to state that Any income from letting out of a residential house or part of the house by the owner shall not be chargeable under Profits from business & profession but shall be chargeable under House Property.

3.  Under Sec 22 of the Income Tax Act, any rental income on a land and building is taxed as “Income from House Property.” However, if the same is used for own business or profession, that portion is not taxed under this head. Instead, it falls under business income, since it is used directly for earning business profits.

Amendment:

1.  Amendment in Section 28 means that income from letting out of a residential house or part of the house by the owner, shall not be charged under the head ‘profits and gains of business or profession’ and will be chargeable to tax under the head ‘income from house property’ only.

2.  This is irrespective of the possibility that the owner might be in the business of renting residential flats.

Impact:

1.  If a taxpayer reports rental income as business income, they can offset their rental income with expenses related to property upkeep and improvements, potentially lowering their taxable income by a substantial margin.

2.  Now with the explicit amendment in Section 28, the only deduction available is a standard deduction of 30% of the rental income is allowed for repairs and maintenance, with no allowance for other expenses.

Exception:

Renting of commercial properties could still be regarded as business income, if the owner is in the business of renting of commercial property.