Budget 2024: Property Owners to Face Higher Taxes as Loophole is Plugged

In the Union Budget 2024, Finance Minister Nirmala Sitharaman announced a significant change in the taxation of rental income from residential properties. To curb tax evasion, it has been mandated that such income can only be declared under the 'Income from House Property' (IHP) head and not under the 'Profits and Gains from Business or Profession' (PGBP) category.

Key Points

1. Mandate on Rental Income Declaration: Rental income from residential properties must now be declared under 'Income from House Property' (IHP) instead of 'Profits and Gains from Business or Profession' (PGBP).

2. Differences in Deductions:

   • Under IHP:
     • Standard deduction of 30% of rental income.
     • Deductions for property tax and interest on a home loan.
   • Under PGBP:
     • Previously, taxpayers could claim all expenses related to renting and managing the property, such as maintenance, electricity bills, employee costs, and upkeep, without any limit.

3. Closing Tax Loopholes: Some taxpayers exploited a loophole by declaring their rental income as business income, allowing them to claim additional deductions like repairs and depreciation. This practice has now been explicitly prohibited to prevent tax evasion.

4. Understanding Rental Income Taxation:

   • Income from House Property: Specific rules and deductions apply, including standard deduction, municipal taxes, and interest on a home loan.
   • Profits and Gains from Business or Profession: Previously allowed for more extensive deductions, leading to reduced taxable income for those declaring rental income as business income.

5. Expert Opinions:

   • Experts highlight that the previous practice of declaring rental income as business income led to revenue loss for the government due to higher available deductions.
   • The new amendment ensures rental income from residential property is subject to specific, fewer deductions, promoting fair taxation and reducing tax disputes.

6. Implementation and Impact:

   • The amendment is effective from April 1, 2025, and will apply to the assessment year 2025-26 and subsequent years.
   • Taxpayers will now be eligible for lesser deductions, potentially leading to higher tax outgo for property owners.

Analysis

This amendment aims to simplify tax treatments, reduce disputes, and ensure fair taxation. By mandating that rental income from residential properties be declared under 'Income from House Property,' the government intends to close loopholes and prevent tax evasion. However, property owners might face a higher tax burden due to limited deductions available under IHP compared to PGBP.

Conclusion

The Union Budget 2024's new mandate on rental income taxation is a significant step towards ensuring fair taxation and reducing tax evasion. While it simplifies the tax regime and reduces complexities, it also means property owners must adjust to the new rules and may experience higher tax liabilities.