Homeowners can no longer offset rent as a business expense to cut taxable income

Loophole plugged

Previously, householders might offset rental income towards numerous bills, thereby decreasing their taxable income.

“Some people were putting rental income from houses as income from business. They could then offset that with business expenses, including fake repair or maintenance bills, or salaries to employees who managed the property,” mentioned Karan Batra, founding father of charteredclub.com.

This apply led to appreciable tax arbitrage as taxpayers might considerably scale back their liabilities by inflated or non-legitimate expense claims. The modification goals to curb such practices and enhance tax income.

Fewer deductions

With the modification, rental income from residential property should be reported as ‘Income from House Property.’ This change restricts the deductions accessible to taxpayers. Instead of offsetting rental income towards bills, taxpayers can now solely declare normal deduction of 30% and municipal taxes paid.

According to specialists, the first motivation for this modification was to scale back tax evasion and streamline the reporting of rental income. By limiting the deductions accessible, the federal government goals to minimise bogus claims and guarantee extra correct tax assortment.

“There was quite a lot of litigation because many individuals or companies with multiple house properties were offering this as business income,” mentioned chartered accountant Prakash Hegde. “This allowed them to offset the rental income towards bills like depreciation, restore, and many others. The new rule reduces the scope for such bogus claims.”

Previously, underneath business income, property homeowners might set off losses towards different incomes (besides wage) and carry ahead these losses for up to eight years, Hegde added.

Experts mentioned that in real circumstances the place property homeowners incur bills associated to their rental property, the usual deduction of 30% will sufficiently cowl most of those bills. This signifies that typical prices such as upkeep, repairs, and property administration are seemingly to fall inside this 30% allowance, making the usual deduction enough for many landlords who don’t inflate or fabricate bills.

Impact on Airbnb and related platforms

One space of ambiguity is the remedy of rental income from properties listed on platforms such as Airbnb, which regularly function in residential areas. The price range memorandum specifies that the proposed change is on rent from residential property. So, income earned on any residential home listed as a mattress and breakfast (B&B) must be declared as rent.

Batra identified that because the tax division can’t inform if the property on which business income is reported is residential or business simply by trying on the income tax return, the taxpayers shouldn’t see it as a possibility to wrongly declare such income as business.

“If a scrutiny is raised, the taxpayer will want to furnish paperwork to show the property is business in nature. It is strongly suggested that taxpayers with residential homes declare the income as rent solely,” mentioned Batra.

Property homeowners who’ve registered their property as a lodge, guesthouse or B&B with a GST quantity won’t be impacted.

Implications for taxpayers

For those that have been reporting rental income as business income, this modification necessitates a important shift in tax planning. Taxpayers should now adapt to the brand new reporting necessities and the restricted deductions accessible.