Ambiguity over classification of rental income makes filing returns tricky

If you have been letting out a property on apps like Airbnb or HomeAway, filing income tax returns can be tricky. Would it be a business income if you pay various taxes including goods and service tax or will it be ‘income from house property’ or ‘income from other sources’? The same problem arises if you run a paying guest accommodation or let out a property for short durations.

The income-tax regulations don’t provide a definite answer. "But courts have ruled that the classification of income from rent depends on whether the property is let out to enjoy the rental income or the owner is exploiting it commercially," says Naveen Wadhwa, general manager, Taxmann.com. If you “rent” the property as an individual or as a company, in most cases you need to mention the rent under the section ‘income from house property’ in the ITR. It doesn’t matter whether it’s a house (residential) or an office (commercial). If you have a company through which you rent out properties, its primary business must be renting of properties. The firm’s documents – Article of Association and Memorandum of Associations – should clearly define such activity. “The classification of rental income as Business Income is a subjective matter and shall differ on case to case basis,” says Suresh Surana, founder, RSM Astute Consulting Group

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The classification of rental income has a significant impact on tax outgo. If it’s income from house property, the owner gets a deduction for maintenance on 30 per cent of the total rent received. He can also deduct the property tax he pays. But, many would prefer to show the rent as business income, as there is no cap on the deduction for maintenance, owners get to claim depreciation, and when it’s vacant, they don’t need to pay tax on ‘notional’ rent. If rent is classified as business income, the Income Tax department scrutinises details to check if the property owner’s claim is backed by relevant documents.

For a taxpayer to include rent as income from house property, he needs to be the owner. But, if you are a tenant who sub-lets, the rent would be classified as income from other sources or business income, depending on the situation. “Rental income in the hands of owner is charged under the head income from house property. Rental income of a person other than the owner will be income from house property," says Chetan Chandak, head of tax research, H&R Block India. The taxation of income from other sources is the same as that of business income — the taxpayer can deduct all the expenses incurred.

Get the classification right :

   
Income from house property
  • A house let out
  • Renting through apps, paying guest
  • Commercial property leased out by an individual
Income from other sources
  • When a tenant sublets a property
  • If rent includes assets and services
Business income
  • Only if a company's business is letting out properties


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