Budget 2024 Plugs Property Tax Loophole: Owners Face Increased Tax Burden
By: Admin|July 30, 2024|Categories: Income Tax News|News
The Union Budget 2024 has introduced a significant amendment aimed at tightening the taxation rules concerning rental income from residential properties. Finance Minister Nirmala Sitharaman has mandated that such income must now be declared exclusively under the ‘Income from House Property’ (IHP) head, eliminating the option to categorize it under the ‘Profits and Gains from Business or Profession’ (PGBP) category. This move comes as a measure to curb tax evasion and ensure fair taxation practices across property owners in India.
Understanding the Amendment
Previously, some taxpayers exploited a loophole by declaring their rental income as business income under PGBP. This allowed them to claim extensive deductions such as repairs, maintenance costs, and depreciation, significantly reducing their taxable income. In contrast, income declared under IHP allows for a standard deduction of 30% of rental income, along with deductions for property tax and interest on home loans.
Key Differences in Taxation
Under the revised rules effective from April 1, 2025, rental income from residential properties can only be taxed under IHP. This means taxpayers will have access to fewer deductions compared to those available under PGBP. While IHP allows for standard deductions and specific expenses like municipal taxes and home loan interest, PGBP previously enabled deductions for various operational expenses without stringent limits.
Impact on Property Owners
Property owners, especially those who previously declared rental income under PGBP, may experience a higher tax liability due to reduced deductions under IHP. This change aims to streamline tax reporting and reduce complexities that often lead to disputes between taxpayers and the tax authorities.
Understanding Rental Income Taxation in India
When you own a property and rent it out, the income generated is typically categorized under IHP. This specific classification ensures that income from residential properties follows distinct rules and deductions:
- Standard Deduction: A fixed 30% deduction of the gross rental income.
- Municipal Taxes: Deductions for taxes paid to local authorities.
- Interest on Home Loans: Deductions for interest payments on loans taken against the property.
On the other hand, if the property is used for business purposes (e.g., operating a hostel), income from the business activities is taxed under PGBP. However, any residential portion of the property remains taxable under IHP.
Expert Insights on the Amendment
According to tax experts, the amendment is a crucial step towards preventing revenue loss caused by excessive deductions claimed under PGBP for residential rental income. This change brings clarity and simplification to tax treatments while ensuring fairness in the taxation of rental income across different types of property usage.
“Earlier, taxpayers reported residential rental income as business income to benefit from extensive deductions like repairs and depreciation, leading to potential revenue loss for the government,” noted one expert. “With the new amendment, such practices are now explicitly prohibited, aligning taxation practices with the actual nature of income generated.”
Effective Date and Applicability
The amendment introduced in Budget 2024 will be effective from April 1, 2025, and will apply to the assessment year 2025-26 onwards. Property owners are advised to prepare for these changes to accurately report their rental income under the revised tax guidelines.
Conclusion
The revision in taxation rules for rental income from residential properties signifies a significant shift towards stricter compliance and fair taxation practices. While it aims to simplify tax reporting and reduce disputes, property owners should be mindful of the potential increase in their tax liabilities due to limited deductions under IHP compared to PGBP. Consulting with tax advisors can help navigate these changes effectively and ensure compliance with the updated regulations.
For more information on the Union Budget 2024 amendments and their impact on property taxation, visit our website or seek professional tax advice to stay informed and prepared.
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