Is Your Property Income a Business Income from Tax Perspective

The calculation of income from house property or property income is very simple and standard. I shared a dedicated post on this subject i.e. How to calculate income from House Property. While answering a query on the open forum, the readers share their queries in a summarized form. Therefore, all the details are not mentioned in a query. Please note that property income can be treated as a business income, depending on your main business.

Recently one of the regular readers of this blog Mr. Rajesh Sharma posted a similar query. He took retirement under VRS at the age of 48 from a PSU and bought 5 properties from the retirement proceeds and savings. Like large no of retirees his retirement planning is dependent on rental income though he has not attained the retirement age. He earns a rental income of around Rs 80,000 per month from 5 properties. He asked me how to declare this property income and what all deductions he can claim.

Now, in this case, the reader is in a business to let out property, therefore, rental income will be treated as business income. There are multiple court and income tax rulings in this regard. Though Mr. Sharma disagrees but the fact of the matter is if you are in the business of letting out a property then the rental income even from the residential property will be considered as a business income. On the contrary, he is not aware that it is beneficial to declare property income as business income. We will discuss later in the post.

Before I proceed, let me clarify that the classification of property income is a bit subjective. I don’t want to confuse readers but property income can be classified as an either or combination of following three

(a) Business Income

(b) Income from other sources

(c) Income from house property

The classification depends on the line of the business of the owner. It might sound bit strange but it is true.

Commercial Property Income is not necessarily the Business Income

This is very common myth that income from the commercial property will always be treated as a business income. It is not true. The logic shared by me holds true for the commercial property also. In other words, if the letting out property is not my main business then even the rent from the commercial property will be treated as income from house property or income from other sources.

Here I would like an share an example of Mr. Vivek who posted his query on my blog. He is a salaried individual. He bought a commercial property in Delhi and put it on rent. His query was whether the commercial property income will be treated as income from house property or business income. In my opinion, to rent out property is not his main business (He is salaried) therefore, commercial property income will be treated as income from house property.

This answer will vary in case of Mr. Suresh who owns a guest house in Delhi. In his case, income from the guest house is his core business, therefore, income from paying guest accommodation or guest house is business income. As per my understanding, the definition of main business means “source of living”. In the case of Mr. Suresh, he is earning his living from the guest house. Therefore, the guest house is main business thus income from the guest house is business income.

The reason for this confusion is whether the owner is using a property for own business or professional purpose. Just to clarify that own business does not necessarily mean that he has set up his office or conducting some professional activity from the premises. In literal terms, It means whether the owner is earning his/her living from the property or not. At the macro level, if the premise is not used for business or professional purpose then the property income is income from house property. In other cases, it will be business income or income from other sources. The same rule applies for stock in trade properties.

I shared some other interesting points related to property income in my post, House Property Income – 10 Facts you are not aware of. You may check the same.

Why is it beneficial to declare Property Income as Business Income?

Now you must be wondering why so much fuss about property income. The answer lies in the fact to claim tax deductions. In case you declare property income as income from house property then you can claim max tax deduction of 30% of Net Annual Value. This deduction is towards repair and maintenance of the property. Besides standard deduction, only municipal taxes and home loan interest is allowed as deduction subject to the max limit. This deduction is irrespective of actual expenditure incurred by the owner. It limits the overall tax benefits.

On the contrary, if the property income is declared as business income then the owner can claim a tax deduction on actual expenses. There is NO MAX limit in this regard. In this case, all the expenses are allowed as deduction.

For example, in the case of Mr. Vivek, the net annual value of his property 10 Lac. As he has to declare the property income as income from house property, therefore, he can claim max standard deduction of 3 Lac and a municipal tax of 30k. Therefore, total deduction of 3.3 Lac can be claimed. On the other hand, his actual expenses are around 4 Lac. Therefore, if property income is business income then he can claim 4.3 Lac deduction.

How you Receive Rental Income is also important?

I covered this topic in my post, Rental Income – How to save tax on it? This post was predominantly for the owners wherein property income is considered as income from house property. The taxation is a bit complex in the case of business income. The reason being, in 99% cases the property is let out with fittings and fixtures or with some other facilities. Like in the case of Mr. Suresh, he provides a fully furnished guest house to a corporate. The rent received by him also includes the charges towards caretaker, electricity, water, food etc. Should he consider the 100% rent received as business income? Let’s check out.

The answer, in this case, is very subjective and depends on case to case basis. The total rent in such cases consists of 2 parts i.e.

Component A = Rent for the property

Component B = Rent/payment towards fittings, furniture, and other facilities

The cumulative rent is called Composite rent in this case. The tax treatment will depend whether component A and Component B are separable or not.  In the case of Mr. Suresh, the two components are inseparable as he is providing guest house facility where furniture, TV, and other facilities are inseparable from rent for the room. As it is his main line of business, therefore, total rent received (Component A + B) will be considered as Business Income in the case of Mr. Suresh.

Assuming guest house is not the main business of Mr. Suresh. In this case, entire amount received will be treated as income from other sources i.e. rental income will also be treated as income from other sources. The standard deduction is not available in such cases. Similarly in the case of Mr. Vivek, if he starts charging for component B then his entire property income i.e. Component A + B will become income from other sources.

In case Component A and B are separable. The tax treatment of these components is different depending on the treatment of rental income. If rental income is income from house property then component B will be income from other sources. In such a scenario, It is advisable to sign separate rent agreement for component A and component B can be covered through a different agreement. Alternatively, if rental income is business income then component B will be by default business income.

In the case of sub-letting of a rented property, the entire property income will be treated as income from other sources. Though tax experts differ on this point but in my opinion, a tenant is not the owner of the property, therefore, any income from sub-letting is income from other sources. Though the answer may differ in some cases i.e. property income from sub-letting can also be considered as income from house property.

Words of Wisdom:

Contrary to common perception the residential and commercial properties are treated in the same way from a tax perspective. The core of this entire discussion is the main line of business of owner irrespective the property is residential or commercial.

At the macro level, property income is considered as income from house property if the property is not used by the owner for business or professional purpose. Secondly, the owner is not earning his living or main business is not to let out property and lastly, if the component A and Component B are separable.

If component A and B are inseparable then composite rent can either be business income or income from other sources. If it is the main line of business then composite rent will be business income otherwise, it will be income from other sources.

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