Avoiding Common Mistakes in Income Tax Return Filing for Property Owners
Property owners often make mistakes when filing their income tax returns, especially when it comes to reporting real estate income. Here’s how to avoid them and ensure a smooth tax filing process.
Income TaxReal EstateProperty OwnersRental IncomeTax FilingReal EstateSep 16, 2025
Many taxpayers forget that all payments tied to a rented property, such as parking fees, maintenance charges, or furniture rentals, must be reported as part of rental income. These payments are not separate add-ons but must be included in the total rent received.
Owners of more than two properties often miss declaring notional rental income on the third (and additional) properties, as required under income tax rules. This can lead to underreporting of income and subsequent penalties.
Another frequent oversight is not claiming capital gains exemptions when selling property, often due to a lack of awareness about options like the Capital Gains Account Scheme (CGAS). Many assume that exemptions under Section 54 or 54F of the Income Tax Act are only available if the gains are immediately reinvested in another property. This misconception can lead to unnecessary tax liabilities.
The government extended the due date for filing income tax returns (ITRs) for Assessment Year 2025-26 by a day to September 16, as technical glitches disrupted filings on the last day. A record over 7.3 crore ITRs were filed till September 15, surpassing last year's 7.28 crore, according to the Central Board of Direct Taxes (CBDT).
Overlooked rental income components that can trigger errors include parking fees, furniture and fixture charges, and maintenance charges. These must be reported as part of the total rent received. “For instance, taxpayers often overlook that every payment connected to a rented property forms part of the rental income,” explains Amit Baid, Head of Tax at BTG Advaya, a law firm.
Undeclared notional rent can lead to penalties. Those who own more than two properties sometimes fail to report notional rental income on the third or additional properties, which is mandatory under income tax rules. “These errors can lead to underreporting of income, mismatch with department records, and result in notices, reassessment, or penalties,” says Alay Razvi, Managing Partner, Accord Juris, a law firm.
It is important to note that Budget 2025 has allowed homeowners to claim tax relief on two self-occupied properties instead of one, removing tax on deemed rental income for the second home.
Overlooking paperwork and deduction rules can also lead to errors. Common mistakes include claiming interest before property construction is completed (only post-completion interest is eligible under Section 24(b)), lacking crucial paperwork like interest certificates, and misunderstanding deduction limits. For example, exceeding the ₹2 lakh cap for self-occupied properties or missing Section 80EE/80EEA benefits for first-time buyers is a mistake.
Misclassifying a property can lead to tax compliance issues. A self-occupied property qualifies for lower interest deduction limits and is exempt from notional rent, while a rented or let-out property requires reporting actual or notional rental income but allows unlimited interest deduction on home loan interest. “Errors here can trigger underreporting of income, overclaiming of deductions, and mismatches with information in Form 26AS, often resulting in audit, penalty, and demand notices from the tax department, especially if more than two properties are declared self-occupied,” says Razvi.
Missing capital gains exemptions with CGAS is a frequent mistake. Many taxpayers are unaware of options like the Capital Gains Account Scheme (CGAS). “Many assume that exemptions under Section 54 or 54F of the Income Tax Act are only available if the gains are immediately reinvested in another property. This misconception can lead to unnecessary tax liabilities,” says Preeti Sharma, Partner, Global Employer Services, Tax and Regulatory Services, BDO India, a professional services organization.
If you have made a mistake, there are two options for correcting errors in your tax return. The first option is to file a revised return, but the timeline for this is limited. You have up to three months before the end of the relevant assessment year or before the assessment is completed, whichever comes earlier. If you miss this deadline, you can file an updated return, but it tends to be more costly as it involves additional taxes and interest. The amount of additional tax depends on how long after the original filing you make the correction; the later you file, the higher the extra tax liability.
Frequently Asked Questions
What are some common errors property owners make when filing income tax returns?
Common errors include forgetting to report all payments tied to a rented property, not declaring notional rental income for additional properties, and overlooking capital gains exemptions.
What is the Capital Gains Account Scheme (CGAS) and how can it help in tax savings?
The CGAS allows taxpayers to temporarily park their capital gains in a designated account, retaining eligibility for tax exemptions without immediate reinvestment in another property.
What happens if I miss the deadline to file a revised income tax return?
If you miss the deadline, you can file an updated return, but it may involve additional taxes and interest, making it more costly.
How does misclassifying a property affect tax compliance?
Misclassifying a property can lead to underreporting of income, overclaiming of deductions, and mismatches with tax department records, often resulting in penalties and reassessment notices.
What is the new tax relief for self-occupied properties introduced in Budget 2025?
Budget 2025 allows homeowners to claim tax relief on two self-occupied properties instead of one, removing tax on deemed rental income for the second home.
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