Will Renting of Residential Flat Be Charged Only Under House Property Post the Amendment in Finance Act 2024?

 The Finance Act 2024 has introduced a significant amendment that impacts the taxation of rental income from residential properties. This amendment has effectively reclassified the income from letting out residential houses, ensuring that it is taxed under 'Income from House Property' rather than 'Profits and Gains of Business & Profession.'

Relevant Income Tax Provisions

1. Section 28 of the Income Tax Act

Section 28 outlines the range of income categorized under "Profits and Gains of Business & Profession." The section specifies the conditions that must be met for income to be computed under this head.

2. Finance Act 2024 Amendment to Section 28

The Finance Act 2024 has added to Explanation 3 of Section 28, explicitly stating that any income derived from letting out a residential house or part of a house by the owner shall not be chargeable under 'Profits and Gains of Business & Profession.' Instead, it shall be chargeable under 'Income from House Property.'

3. Section 22 of the Income Tax Act

Under Section 22, any rental income derived from land and buildings is taxed as "Income from House Property." However, if the property is used for the owner's own business or profession, that portion is excluded from 'Income from House Property' and instead taxed under business income.

Amendment Details

1. The amendment to Section 28 clarifies that income from the letting out of a residential house, or a part thereof, shall only be taxed under 'Income from House Property.'

2. This applies even if the owner is engaged in the business of renting out residential flats.

Impact of the Amendment

1. Restricted Deductions: Previously, rental income reported as business income allowed taxpayers to offset it with expenses related to property upkeep, improvements, and maintenance, significantly lowering taxable income. Now, with this amendment, only a standard deduction of 30% of rental income is available for repairs and maintenance, with no other expense allowances.

2. Uniform Tax Treatment: The amendment ensures that all rental income from residential properties is uniformly taxed under 'Income from House Property,' eliminating the possibility of declaring it under business income for tax benefits.

Exception to the Rule

While rental income from residential properties must be classified under 'Income from House Property,' the renting of commercial properties may still be regarded as business income if the owner is engaged in the business of renting out commercial properties.

Conclusion

The amendment introduced in the Finance Act 2024 aims to create a clearer tax treatment for rental income from residential properties. By mandating that such income be taxed under 'Income from House Property,' it removes ambiguities and restricts the benefits previously available under business income classification. However, commercial property rentals may still be taxed as business income under specific circumstances.