Can travel expenses be deducted from rental income? Here’s everything you need to know

Renting a home can take many forms. A landlord may decide to rent out the house immediately after taking possession, doing minimal work on the property and letting the tenant pay for the basic infrastructure with a reasonable rent. On the other hand, homeowners who have spent some time in their new home and later decide to rent it out may want to add additional amenities. It is common practice these days for people who rent their homes to split the total rent they expect between the rent for using the property of the house in one part and the rent for using the furniture and other equipment (if any) in another part. of the tenant. In such cases, even if the rent is shared, the tax laws clearly indicate that both of these incomes would be taxable. Rental income for the use of the property should be offered for tax under ‘Home ownership’ while rent for amenities should be charged under ‘Other sources’.

Deductions that can be claimed

To understand the deductions that can be claimed from income under the heading “Property Property”, the tax laws provide that property taxes paid, standard deduction (calculated at 30% of rental income) and interest paid on property loans are deductions that can be deducted from rental income. On the other hand, for income offered under “Other Sources”, the Income Tax Law (hereinafter the “Law”) provides that any expense incurred wholly and exclusively to earn such income may be deducted when calculating taxable income. The tax laws are not more specific here and therefore what constitutes “entirely” and “exclusively” may be open to different interpretations.

To cite an example: a non-resident taxpayer who owned a property in India gave it up as rent. The rent was divided into two parts – one part for the property and the other for the amenities. On his tax return, he reported income from home ownership, short-term capital gains, and income from other sources. During the assessment, while checking the details filed by the taxpayer, the Inland Revenue observed that the taxpayer had claimed a deduction (under the relevant provisions of the law) in respect of his travel expenses of Rs 2 lakhs against compensation for the amenities indicated under the heading ‘Other resources’. The taxpayer argued that these expenses relate to the management of his property in India and therefore should be deductible. The tax officer, however, was unconvinced and dismissed the claim in his order.

Before the first appellate authority, the taxpayer argued that in order to manage the property the taxpayer had to travel to India and hence the same should be deducted from the amount received for the use of the amenities of the property . The taxpayer traveled to India on several occasions, he claimed, and the actual travel and accommodation expenses he incurred far exceeded the amount claimed as a deduction in the tax return.

Travel expenses claimed by a taxpayer are not considered expenses

The first appeal authority held that the expenses claimed by the taxpayer could not be characterized as expenses incurred entirely and exclusively to earn amenity income, as required by law. Considering the same, the authority agreed with the tax officer and rejected the request. When the case was taken to the second appellate authority (Mumbai Tax Court), the judge ruled that no travel expenses could be allowed for the taxpayer’s international travel for property-related income received of a house in India. Moreover, the taxpayer had claimed the amount in a lump sum without any support. The Tribunal therefore did not interfere with the orders made by the lower authorities and upheld the disallowance of the deduction.

The above ruling, although in the context of a non-resident taxpayer, the interpretation may be valid even in the case of resident taxpayers who may own properties in different parts of the country and incur travel expenses for maintain.

Points to remember

1. The standard deduction, the municipal taxes paid and the interest on the mortgage are allowed as a deduction from the income from home ownership.

2. Rent from the amenities of a rental home may be subject to tax as income from other sources.

3. Expenses incurred wholly and exclusively to earn income may be claimed as a deduction from income.

4. Expenses must be supported by documents in support of their claim.

(To receive our E-paper on WhatsApp daily, please click here. We allow the PDF of the paper to be shared on WhatsApp and other social media platforms.)

Posted: Sunday, April 17, 2022, 07:00 IST