Which is more attractive: Rental income from residential or commercial property?
If you are planning to invest in property to earn returns, which type of property should you choose – residential or commercial?
People often do not recognise the difference between residential and commercial properties, while making an investment and therefore, tend to focus on just one type.
The operating expenses of rental housing properties are minimal, as the tenant only requires basic, yet functional infrastructure.
Commercial property investments (i.e., offices and malls) typically entail high investment and come with leasing and vacancy risks. Moreover, there’s a direct impact of the economy and real estate market cycles on this segment. This is unlike housing, which is uncorrelated with markets, as it is end-user driven and there exists a huge shortage
While income tax laws prescribe certain taxes on a person, who receives any rent from a property which he has let out, the tax payer is also allowed to claim certain deductions out of such income. We examine the legal provisions
If you let out a property for a nominal amount, the amount to be considered for taxation of such property, would be the market rent and not the rent that you have received. Likewise, if the actual rent received by you for your property is higher than the market rent, the rent actually received/receivable by you, will be considered for taxation purpose. Please note that the rental income becomes taxable in your hand on accrual basis and not on receipt basis.
From the rent received/receivable for the property, you are allowed to deduct the municipal taxes payable for the property. As the rent is taxable on accrual basis, the law allows you to claim deduction for the rent which you have not been able to realise, subject to the fulfilment of certain conditions. After deducting the above two items, what you get is the annual value, from which you are allowed a standard deduction of 30% of the annual value, to cover the expense for repairs, etc.
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