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New Act Impact on Rental Income From Co-living Properties: Complete Guide for 2026

By Finin2min Research Desk Updated Jun 2026 Income-tax Act 2025 Property Owners

India's co-living sector — from managed PGs in Bengaluru to micro-apartments in Gurugram — now faces a sharper tax lens under the Income-tax Act 2025. The new Act, effective 1 April 2026, preserves the house property vs business income divide but changes the deduction mechanics and TDS section references. Owners who provide services alongside accommodation face the most scrutiny. This guide decodes the classification rules, deduction calculations, GST overlap, and TDS obligations for Tax Year 2026-27.

Use the Income Tax CalculatorModel the tax impact alongside this guide.

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How the New Act Classifies Co-living Rental Income

The Income-tax Act 2025 reorganises heads of income but does not fundamentally alter the core classification test for rental income. The two-head test remains:

Factor	Taxable as House Property Income	Taxable as Business Income
Nature of activity	Passive letting of property (land/building)	Active operation — meals, housekeeping, laundry, concierge
Occupancy structure	Fixed-term rental agreements for residence	Short-term licences, daily/weekly rates
Services bundled	None or minimal (electricity metering only)	Multiple services (hotel-like experience)
New Act provision	Schedule IV — Income from House Property	Chapter VII — Business/Profession Income
Key deduction	30% standard deduction on NAV (unchanged)	Actual expenses — depreciation, interest, wages

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Critical Threshold — Services = Business: Courts and ITAT have consistently held that once you provide services like housekeeping, meals, laundry or WiFi as an integral part of the rental, the character changes to business. The Income-tax Act 2025 does not change this jurisprudence. CBDT Circular No. 7 of 2017 on composite services remains valid under Section 536(2)(j) of the new Act.

Old Act vs New Act — Deduction Mechanics for House Property Income

Parameter	Old Act (up to AY 2026-27)	New Act (Tax Year 2026-27 onwards)
Gross Annual Value	Section 23	Section 193 — same concept retained
Standard Deduction	30% of NAV (Section 24(a))	30% of NAV — Section 194(b)(i)
Interest on home loan	Section 24(b) — up to ₹2L (self-occ)	Section 194(b)(ii) — ₹2L cap retained
Municipal taxes	Deductible — actual paid	Deductible — actual paid (Section 193)
Loss set-off limit	₹2L cap for set-off against other income	₹2L cap retained — Section 72(3)
Carry forward of HP loss	8 years (only against HP income)	8 years — retained

Worked Example — House Property Route

Nidhi owns a 4-BHK apartment in Noida converted into an 8-bed co-living space. She charges ₹12,000/month per bed. No food or housekeeping is provided. Municipal taxes paid: ₹24,000/year. Home loan interest: ₹1,80,000/year.

Item	Amount (₹)
Gross rent received (8 beds × ₹12,000 × 12)	11,52,000
Less: Municipal taxes	(24,000)
Net Annual Value (NAV)	11,28,000
Less: Standard deduction 30% of NAV	(3,38,400)
Less: Home loan interest	(1,80,000)
Taxable house property income	6,09,600

Nidhi does not need to maintain any books of accounts for this income. She reports it under Schedule HP in ITR-2. Her employer issues salary TDS — she pays advance tax on this ₹6.09L addition.

Case Study: Vijay's Co-living Startup — Business Income Reclassification Risk

Co-living Operator, Bengaluru — 3 Properties, 45 Beds

Vijay leased 3 apartments and sub-let them as co-living. He provided WiFi, housekeeping (weekly), and a welcome kit. He filed income under house property and claimed 30% standard deduction. During scrutiny for AY 2024-25, the Assessing Officer held that the service element converted the income into business income.

Standard deduction of ₹8.4L (30% on NAV) was disallowed
He was required to maintain books under Section 44AA
But actual expenses — lease rentals ₹15L, WiFi ₹72K, housekeeping ₹1.5L — when deducted from gross receipts, reduced taxable income significantly
Net result: similar tax but with penalty for non-maintenance of books (₹25,000)

Under House Property

Tax: ₹3,12,000

Under Business Income

Tax: ₹2,85,000 + ₹25K penalty

Lesson for Tax Year 2026-27: If you provide any services, proactively file as business income, maintain proper books, and ensure GST compliance. Reclassification risk under the new Act remains identical.

TDS on Co-living Rent — New Section References

Under the Income-tax Act 2025, TDS provisions for rent are consolidated under Section 393 (non-salary TDS). The old Section 194-I and 194-IB have been subsumed. Key rates for Tax Year 2026-27:

Payer Type	Threshold	TDS Rate	New Act Section
Individual/HUF tenant (not covered by tax audit)	Rent >₹50,000/month	2%	Section 393 (r/w Schedule XIV)
Company/firm/LLP tenant	Rent >₹2,40,000/year	2%	Section 393
NRI landlord — any tenant	Any amount	30% (+ surcharge)	Section 395

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Form Change: The TDS return for rent (old Form 26Q) continues but section references change to the new Act effective April 2026. CBDT will update challan codes and TDS return formats for Tax Year 2026-27. Check traces.gov.in for updated form instructions before the first quarter filing.

GST on Co-living — Not Covered by Income Tax Act 2025

GST treatment of co-living is a separate question governed by the GST Act 2017. Key rules remain:

Residential accommodation below ₹20,000/month per unit: Exempt from GST under Notification 12/2017-CT(R) Entry 12 — unchanged in 2026
Above ₹20,000/month or accommodation with services (hotel-like): GST at 12% or 18% depending on classification
Mandatory registration: Co-living operators with aggregate turnover above ₹20L must register under GST
If a co-living property is rented to a GST-registered business (office use), the reverse charge under Section 9(3) GST may apply on commercial property rent

Income tax and GST classification can differ — a property may be exempt from GST (below ₹20K threshold) but still be taxable as business income for income tax purposes because of the services offered. Both tax systems must be evaluated independently.

Depreciation on Furniture and Fittings in Co-living

If income is classified as business income, co-living operators can claim depreciation on furniture, fixtures, air conditioners, and electronic appliances provided to tenants. Under the Income-tax Act 2025:

Furniture and fittings: 10% WDV depreciation (Block 8, Appendix I of new Act)
Computers and peripherals: 40%
Air conditioners, electrical fittings: 15%
The building itself (if owned and not leased): 10% on written down value

If classified as house property income, no depreciation is available — only the flat 30% standard deduction applies. This is a significant structural difference that makes business income classification potentially more beneficial for asset-heavy co-living operators.

PG Accommodation — Specific Clarification

Paying Guest (PG) accommodation is specifically addressed in multiple ITAT rulings. The consensus position, which the Income-tax Act 2025 preserves:

PG with meals + housekeeping: Business income — closest to a lodging and boarding establishment
PG bare rooms only: House property income
Owners must document their service offering clearly in rental agreements to support their tax filing position

Co-living Landlord — Tax Year 2026-27 Action Checklist

Determine whether your co-living offering qualifies as house property or business income (services test)
If business income: register books of accounts, maintain separate P&L for each property
Check GST registration threshold — register if aggregate turnover exceeds ₹20L
Verify TDS compliance: corporate tenants must deduct TDS at 2% on monthly rent under new Section 393
File advance tax by June 15, Sep 15, Dec 15, Mar 15 if liability exceeds ₹10,000
For home loan interest: cap is ₹2L for let-out properties only in new regime (no cap for let-out properties under old regime)
Reconcile rental income in ITR against Form 26AS TDS entries and AIS rental income data
Maintain rental agreements reflecting duration (preferably 12+ months) and service scope

Related Calculators

🧮 Income Tax Calculator 🏠 Home Loan EMI 💼 TDS Calculator ⚖️ Old vs New Regime

Frequently Asked Questions

Under the Income-tax Act 2025, co-living rental income is taxed as house property income if you simply let out rooms without services. If you provide housekeeping, meals, WiFi, or laundry, it qualifies as business income. House property income allows a flat 30% standard deduction on NAV; business income requires maintaining books but allows deduction of actual expenses including depreciation.

Under the new Act, TDS on rent is governed by Section 393. Individual/HUF tenants paying rent above ₹50,000/month must deduct TDS at 2%. Company/firm tenants deduct at 2% where annual rent exceeds ₹2,40,000. For NRI landlords, TDS is 30% plus surcharge under Section 395. The old Sections 194-I and 194-IB are subsumed into Section 393.

Residential accommodation below ₹20,000/month per unit is exempt from GST. Above that, or if the operator provides hotel-like services, GST at 12–18% applies. Operators with aggregate turnover above ₹20L must register under GST. Income tax and GST classifications are evaluated independently — a property can be exempt from GST yet taxable as business income under income tax.