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