Income tax on short-term rental income: house property or business?

Most owners will report their nightly rents as income from house property. A homestay run like a small hotel raises a harder question. We set out both readings without pretending the answer is always obvious.

From 1 April 2026 Indian income tax is governed by the Income-tax Act, 2025, which replaced the 1961 Act. It uses a single notion of tax year, the twelve months of the financial year starting on 1 April, and keeps five heads of income: salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. For a short-term rental owner, the whole debate sits between the second and the third head.

Reading one: income from house property

Under this head, tax is charged on the annual value of a building you own. The computation, in broad strokes, runs as follows:

• Start from the annual value, based on the rent received or receivable.
• Subtract municipal taxes actually paid during the year.
• Deduct a standard deduction of 30% of that net annual value, whatever your real expenses were.
• Deduct interest on money borrowed to buy, build or repair the property, within the limits of the law. For a self-occupied home the interest deduction is capped at ₹2,00,000 for loans taken on or after 1 April 1999.

The attraction is simplicity: no bookkeeping of each expense, a flat 30% allowance. The drawback for a busy rental is that real costs (cleaning, linen, commissions, utilities, repairs) may exceed 30% and cannot be claimed on top.

The 2024 clarification for residential lettings

The Finance (No. 2) Act, 2024 added Explanation 3 to section 28 of the 1961 Act, applicable from 1 April 2025: income from letting out a residential house or a part of the house by the owner is not chargeable as profits and gains of business or profession. The stated aim was to stop owners reporting ordinary rent as business income to claim larger deductions. For an owner who simply lets an apartment, this points firmly towards house property.

Reading two: business income

Before that amendment, courts had accepted that letting can be a business in some cases. The Supreme Court in Chennai Properties and Investments held that where letting properties is the main business of the taxpayer, the income is business income. Owners who run a homestay with meals, daily housekeeping, a reception and staff sometimes argue that they are not letting a house at all but supplying hospitality, the rent being only one part of a service. Under this head actual expenses and depreciation are deducted, but books must be kept and the rules are more demanding.

How far the 2024 explanation reaches into genuinely hotel-like operations is not something we can state with certainty: it depends on how the property is run, who runs it and in whose name. This is exactly the kind of question a chartered accountant should answer after looking at your facts.

Factors that usually weigh in the analysis

• Whether you let the premises alone or bundle substantial services with them.
• Whether the activity is organised and continuous, with staff and systems.
• Whether the owner is an individual or a company whose object is hospitality.
• How the income has been treated in earlier years.

Keeping records either way

Whichever head applies, keep platform payout statements, invoices, bank credits, municipal tax receipts and loan interest certificates for the full tax year. Platform statements show gross booking values, commissions and taxes separately; your accountant will need all three.

We explain; we do not advise. Before filing, discuss the choice of head, the deductions and any NRI-specific points with a chartered accountant.