If you own a house/flat and have rented the same to earn rental income, the income so earned is not tax free. However, you do gain 30% deduction on this income while computing the tax. The Government gives this deduction because you spend money from your pocket to maintain the house throughout the year.
Moreover, the amount you have paid as house tax/municipal tax to the Local authorities is not counted in your income from House Property.
By way of the above two the formula to compute the taxable income on House Rent is as follows:
Taxable Rental Income = (Monthly Rent X 12 - House Tax or Municipal tax) X 0.7
The tax on the amount computed as per this formula will be charged as per your tax slab.
Example -
Joy earns rental income of Rs. 10000 per month from his flat in New Delhi
Total Rental Income = Rs. 10000 X 12 = Rs. 1,20,000
House Tax = Rs. 20,000
Net Rental Income = Rs. 1,20,000 - Rs. 20,000 = Rs. 1,00,000
Standard Deduction on Rental Income = 30% of Net Rental Income = Rs. 30,000
Taxable Rental Income = Net Rental Income - Standard Deduction = Rs. 70,000
Considering that Joy's total taxable income computed by adding his taxable income from salary and house property falls under the 20% bracket,
The annual income tax he needs to pay on Rental income will be 20% of Rs. 70,000 = Rs. 14,000
Please note that payment of Income tax honestly is your duty as a responsible citizen of the country. Nonetheless, paying more tax than due on you is foolishness.
Happy Investing !!!
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