Income from House Property new Tax Rules | How Budget 2024 Affects Your Rental Income from Residential Properties

Changes in House Property Income Treatment in Budget 2024

The Union Budget 2024 has introduced significant amendments to the treatment of income from house property, particularly targeting how residential properties are treated for tax purposes. This change aims to curb the practice of reporting rental income under the head ‘Profits and gains of business or profession’ to benefit from higher deductions available to business income. The new amendment clarifies that income from letting out residential properties must be reported under ‘Income from house property.’

Current Practice and Issues

Misreporting of Rental Income

Section 28 of the Income-tax Act specifies the types of income chargeable under the head ‘Profits and gains of business or profession.’ It has been observed that some taxpayers report rental income from letting out house property under this head instead of ‘Income from house property.’ This misreporting allows them to claim business expenses as deductions, significantly reducing their tax liability compared to the standard 30% deduction and interest on loan available under house property income.

Impact on Tax Revenue

This practice leads to a substantial reduction in tax revenue as taxpayers exploit the more favorable deductions available under business income. The government has decided to address this issue by amending Section 28 of the Income-tax Act.

Also there are changes in Capital Gain Tax calculation of Property, watch below video

Proposed Amendment

Clarification in Section 28

The government proposes to amend Section 28 to explicitly state that any income from letting out a residential house or part of it by the owner shall not be chargeable under the head ‘Profits and gains of business or profession.’ Instead, it shall be chargeable under the head ‘Income from house property.’

Amendment Details

• Insertion of Explanation 3: The following explanation will be added to Section 28, effective from April 1, 2025:
  • ‘Explanation 3.––It is hereby clarified that any income from letting out of a residential house or a part of the house by the owner shall not be chargeable under the head “Profits and gains of business or profession” and shall be chargeable under the head “Income from house property”.’
• Effective Date: This amendment will apply from April 1, 2025, impacting the assessment year 2025-26 and subsequent assessment years.

Implications of the Amendment

Tax Treatment of House Property Income

With this amendment, taxpayers can no longer classify rental income from residential properties as business income. They must report it under ‘Income from house property,’ subjecting it to the standard deductions applicable to house property income. These include:

• Standard Deduction: 30% of the net annual value of the property.
• Interest on Loan: Deduction for interest on loans taken for the property.

Preventing Misuse of Deductions

By ensuring rental income is reported under the correct head, the amendment prevents taxpayers from misusing business expense deductions, thereby aligning tax treatment with the actual nature of the income. This change is expected to increase tax compliance and enhance revenue collection.

The amendment to Section 28 of the Income-tax Act, introduced in the Union Budget 2024, is a significant step towards ensuring accurate reporting and taxation of rental income from residential properties. By mandating that such income be reported under ‘Income from house property,’ the government aims to curb the misuse of business expense deductions and improve tax compliance. This amendment will come into effect from April 1, 2025, impacting the assessment year 2025-26 and subsequent years.

Taxpayers must understand and comply with this new regulation to avoid penalties and ensure proper tax filing. This change highlights the government’s commitment to fair and transparent tax practices, ensuring that all income is taxed appropriately according to its nature.

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