Let-out Property Meaning

Letting out a property is an option many consider when it comes to real estate investments. Letting out property in simple terms is renting or leasing a property to a tenant in exchange for rental income. This approach allows property owners to generate a steady cash flow while retaining ownership of the asset. It can be particularly attractive for those looking to diversify their investment portfolio or for NRIs seeking a source of income from their property in India. Additionally, renting out a property can lead to potential long-term capital appreciation as real estate values typically increase over time.

What is let-out property meaning?

Let-out property refers to a property that is rented or leased to tenants in exchange for rental income. It can include residential, commercial, or industrial spaces provided by the owner to another party under a formal rental agreement.

This arrangement benefits both parties—the property owner earns passive income, while tenants gain access to a space without the need for ownership. Let-out properties are subject to specific tax rules, such as deductions for maintenance costs, municipal taxes, and depreciation, making it an attractive investment option for many.

Types of let-out property

Let-out properties refer to properties rented out to tenants for residential, commercial, or other uses. These properties generate rental income and serve as an investment. The types include:

1. Residential properties: Houses, apartments, or villas rented for living purposes.
2. Commercial properties: Offices, shops, or warehouses rented for business activities.
3. Vacation rentals: Short-term accommodations like holiday homes rented to travellers.
4. Industrial properties: Factories or manufacturing units leased for production activities.
5. Co-working spaces: Shared office spaces rented to professionals or businesses.
6. Mixed-use properties: Buildings combining residential and commercial use, like a shop with living quarters above.

What are the benefits of let-out property?

Income tax implications on let-out property

As a property owner, you have to include the rental income in your total income for the relevant financial year. This rental income is subject to taxation as per the applicable income tax slab rates. You can also claim deductions on expenses incurred for maintaining the property, such as property taxes, maintenance costs, and interest on home loans, under Section 24(b) of the Income Tax Act. It is essential to maintain proper documentation and receipts for these expenses to claim the deductions correctly.

What is deemed let-out property?

Deemed let-out property is where you own more than one residential property, but only one property is let out to tenants. According to the Income Tax Act, if you own more than one residential property and none of them are self-occupied used for residence), then only one property can be treated as self-occupied. The other properties are deemed to be let-out.

Under this provision, the law assumes that the owner is earning rental income from the properties they do not self-occupy. The notional rental income is calculated based on certain factors, such as the property's market value and the prevailing rental rates in the area. The owner is required to pay income tax on this notional rental income, even if they are not earning any actual rental income from those properties.

Deemed let-out property provisions aim to prevent individuals from avoiding taxes by claiming multiple properties as self-occupied and they earn rent from them.

What is self-occupied house property?

A self-occupied house property refers to a residential property that the owner personally resides in. Unlike rental properties, where the owner earns income by leasing out the space, a self-occupied property is used exclusively by the owner or their family. This type of property can be exempt from certain income tax liabilities, such as tax on rental income, because it is not generating income. However, there are specific tax rules and exemptions applicable to self-occupied properties, including deductions on home loan interest under Section 24(b) of the Income Tax Act and principal repayment benefits under Section 80C.

Difference between let-out vs. deemed let-out vs. self-occupied house property

Steps to calculate income from house property online

To calculate income from house property online, follow these steps:

1. Gather information: Collect details such as the annual rental income, municipal taxes paid, and interest on home loans.
2. Determine gross annual income: Enter the total rental income received from the property.
3. Subtract municipal taxes: Deduct the municipal taxes paid on the property.
4. Calculate net annual income: Subtract municipal taxes from gross annual income.
5. Deduct home loan interest: Subtract the interest on home loans (if applicable).
6. Apply standard deduction: Deduct 30% of the net annual income as a standard deduction.
7. Complete the calculation: The remaining amount is the taxable income from house property.

Use online tax calculators or government portals to simplify this process.

Is it worth letting property out?

The decision to let out a property depends on various factors, including your financial goals, the potential rent, and the current real estate market conditions. Letting out a property can be a wise investment if the rental income helps cover mortgage payments or generates a positive cash flow. However, do consider the responsibilities of being a landlord, such as property maintenance and handling tenant-related issues.

Let-out property offers a viable avenue for generating rental income and building a diversified investment portfolio. It is crucial to seek advice from a tax professional to ensure compliance with tax laws and maximise your returns.