When to consider rental income as business income?

This document covers

1. Background
2. When to consider rent under Business Income ?
3. Tax treatment ?

1. Background

Now a days, increase in real estate market is attracting every person attention. Investment in real estate can be either in land, residential or commercial properties. The income from real estate can be generated in the form of rent, lease, or sale of asset.

2. When to consider rent under Business Income ?

Generally, if the property is let out, the taxpayer will get the rental income every month. Generally, the income generated from house property needs to be shown under the head "1. Income from House Property".

But at times, if the intent of the rental property is for commercial use, one need to be shown under "2. Income from Business".

3. Tax treatment ?

1. Income from House Property

If the rental income is considered under income from house property, the taxpayer will get 30% standard deduction towards repairs and maintenance.

2. Income from Business

2.1 Generally, the annual value of the property will be considered under the head 'profits and losses' from business / profession if

1. Portions of property occupied by the taxpayer for the purpose of any business carried on by him.
2. Properties of the taxpayer engaged in the business of letting out of properties.

2.2 If the rental income is considered as business, the taxpayer can claim the actual expenses with respect to repairs, maintenance, depreciation, interest etc

2.3 The taxpayer's intention to show as business and the documentation (eg., MOA, Firm's objective statement, Self declaration*) is mandatory to show as business.

ADVISORY NOTE:
If the taxpayer shows the rental income under the head business, there will be loss of revenue to Government as the taxpayers will claim more expenses. Hence the chances of scrutiny will be higher if the rental income is shown under business / profession.