The Finance Bill proposes an amendment to Section 28 of the Income-tax Act to address improper reporting of rental income. Some taxpayers have been categorizing income from renting out residential properties under the head “Profits and gains of business or profession,” which leads to reduced tax liabilities. To rectify this, the amendment clarifies that rental income from residential properties must be reported under the head “Income from house property” rather than as business income. This change aims to ensure proper tax reporting and compliance. The new provision will be effective from April 1, 2025, and will apply to the assessment year 2025-26 and subsequent years. Additionally, Clause 11 of the Bill inserts a new explanation in Section 28, specifying that rental income must be classified correctly to avoid tax evasion and ensure accurate income reporting.
Budget 2024: Reporting of income from letting out of house property under ‘Income from House Property’
Section 28 of the Act specifies kinds of income that shall be chargeable to income-tax under the head ‘Profits and gains of business or profession’.
2. It has been observed that some taxpayers are reporting their rental income generated by letting out of the house property, under the head ‘Profits and gains of business or profession’ in place of the head ‘Income from house property’. Accordingly, they are reducing their tax liability substantially by showing house property income under the wrong head of income.
3. In view of the same, it is proposed to amend the section 28 of the Act so as to clarify that any income from letting out of a residential house or a part of the house by the owner shall not be chargeable under the head “Profits and gains of business or profession” and shall be chargeable under the head “Income from house property”.
4. This amendment will take effect from the 1st day of April, 2025 and will, accordingly, apply in relation to assessment year 2025-26 and subsequent assessment years.
Proposed Amendment to section 28 of Income Tax Act, 1961 vide Finance Bill, 2024
In section 28 of the Income-tax Act, after Explanation 2, the following Explanation shall be inserted with effect from the 1st day of April, 2025, namely:––
‘Explanation 3.––It is hereby clarified that any income from letting out of a residential house or a part of the house by the owner shall not be chargeable under the head “Profits and gains of business or profession” and shall be chargeable under the head “Income from house property”.’.
Extract of Clause 11 of Finance Bill 2024
Clause 11 of the Bill seeks to amend section 28 of the Income-tax Act relating to profits and gains of business or profession.
The said section provides various types of income that shall be chargeable to income-tax under the head “Profits and gains of business or profession”.
It is proposed to amend the said section and insert a new Explanation so as to provide that any income from letting out of a residential house or a part of the house by the owner, shall not be chargeable under the head “Profits and gains of business or profession” and shall be chargeable to tax under the head “Income from house property”.
This amendment will take effect from 1st April, 2025 and will, accordingly, apply in relation to the assessment year 2025-2026 and subsequent years.
