How Is Rental Income Calculated In Fractional Ownership Of Real Estate Assets

Investing in real estate provides you with a steady rental income. And it would mean purchasing a property. But what if you do not have enough funds or are not ready yet to buy a whole property? Is that the end for you? What if I told you that you could invest in one or numerous properties with the minimum funds you have in your hand? All thanks to fractional ownership, your dreams can now be a reality. Fractional ownership gives you the advantage of earning a steady rental income. But the dire question we all have is how do we calculate the rental income earned from fractional ownership of these real estate properties?

The first question for everyone considering an investment is, “How can I obtain the best return on my money?” One way to do this is to look for an investment that will grow your money in more than one way. One of the most significant benefits of commercial property fractional ownership is it allows you to earn more and enhance your wealth through rental income, capital appreciation, and resale.

An investor can combine their cash with other prospective purchasers and share property ownership through fractional investing, splitting the cost and risk. It is a practical model for investing in premium commercial real estate, which might be too expensive for a single buyer to acquire. But it gives the highest returns — enough to be split among a group of investors for a tidy profit.

Fractional ownership is a fascinating new asset class. Assetmonk, for example, is a major Wealth-tech firm that facilitates fractional ownership of premium commercial and residential categories. It combines real estate, finance, and technology to offer a platform for retail investors to engage in a property with a predictable exit path. It allows smaller retail investors to engage in valuable commercial or residential assets in contrast to stock market instability and low-interest rates on FDs. Glitzy buildings, sumptuous office spaces, and enormous warehouses are no longer the exclusive realm of private equity titans and ultra-high-net-worth people. Those with a minimum of Rs 25 lakh may now own a piece of ‘Grade-A’ commercial real estate in metropolitan cities and industrial areas including IT parks, luxury office buildings, and warehouses leased to e-commerce firms. It all owes to the notion of fractional ownership.

But, firstly, what qualifies as rental income?

Rental income is money earned by renting out property that you own or have access to. You can own property on your own or in cooperation with another person. Rental income gets generated through renting a home, apartment, room, office space, or immovable property. The rent paid by tenants to their landlords gets referred to as rental income. It comprises the landlord’s costs for the rental space, furnishings, and other expenses. Cleaning shared rooms, hot water, heating, and property upkeep are examples of such services.

The rental income varies depending on the landlord and the rented property. The amenities supplied, the size of each property, and the fact that certain places are hotter than others all differ.

And how does fractional ownership help you earn rental income?

Fractional ownership generates two streams of income: monthly rental revenue and long-term capital appreciation. Both go hand in hand; as the property rises, so do the rental prices. Commercial real estate is particularly well-known for its use of fractional ownership. CRE property in India has been witnessing a boom in recent years — yes, even during the epidemic — as Grade A property such as luxury office buildings has been swiftly absorbed by the country’s expanding outsourcing sector. As a result, Grade A commercial real estate has a high rental return of 6-10%. It means that a Rs 10 lakh investment might earn you somewhere between Rs 60,000 and Rs 1 lakh in rent every year. These types of returns are unrivaled by most investment firms, except for mutual funds and equities, which are, regrettably, also riskier. Commercial property also delivers predictable rental returns due to the nature of the tenants, who are typically large MNCs, banks, IT offices, or firms with vast wallets. Such renters typically sign long-term contracts and pay their rent on time or in advance. Furthermore, the rental payments are sent directly into the investors’ bank accounts, eliminating the need to wait for a lock-in period.

Is rental income taxable in India?

If a commercial or residential property is leased or rented, the sum received in place of the property is referred to as “Rental Income” under India’s current tax laws. According to the IPC, the rental income is substantial.  And thus should fall under the tax bands specified in Section 24 of the Income Tax Act. The government doesn’t distinguish between residential and commercial properties. As a standard deduction, 30 percent of your rental income gets taxed under the income from residential or commercial property.

So, how do I calculate rental income from fractional ownership?

Calculating rental income from fractional ownership of real estate property has a process. But one should also account for the tax on rental income from house property levied by the Income Tax. They are as follows:

• Step 1: Determine the property’s Gross Annual Value (GAV): The gross yearly value of a self-occupied property is zero, but the gross annual value of a rented out property is the rent earned for the same dwelling property.
• Step 2: Municipal Tax Reduction (Property Tax): When the property tax gets paid, it can get subtracted from the gross yearly value of the property.
• Step 3: Calculating Net-Annual Value (NAV): After subtracting the property tax from the Gross Annual Value, the Net-Annual Value gets obtained.
• Step 4: Reduction of standard Deduction @30% of Net-Annual Value: Under the Income Tax Act, 30% of the Net-Annual Value can get deducted as a rebate from the NAV. Other expenditures, such as repair, rebuilding, or painting, cannot be claimed as a tax deduction over 30% under the Act.
• Step 5: Deduction of home loan interest: Section 24 of the Income Tax Act allows for the deduction of interest paid on a home loan throughout the fiscal year.
• Step 6: Final Determination of House Property Income: Your rental income from house property or commercial property is the final value that arrives. It gets taxed at the slab rate based on your income.