Income Tax on PG Income in India: House Property or Business, Presumptive Tax and Which ITR to File (2026)

Short answer: if you run a PG with food, cleaning, Wi-Fi or other services, the income is usually business income, not rent. You can either keep accounts and pay tax on real profit, or use the presumptive scheme and declare 6% of digital receipts (8% of cash) as profit. If you only lease the building to a PG operator for a fixed rent and provide nothing else, that is house property income, taxed after a flat 30% deduction.

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. The section numbers changed, but these rules did not.

House property or business: which applies to you

Courts have long held that running a paying guest establishment is more than letting property. In Manohar Singh v CIT (Punjab & Haryana High Court, 1965) the court said such an owner "is not merely earning a rental from property. He is doing something more." Later rulings on guest houses followed the same idea: the more you serve, the more it looks like business.

If it is house property income

This applies when you lease the building out and someone else runs the PG.

1. Start with the rent received for the year (the annual value).
2. Subtract municipal property tax you actually paid.
3. Subtract a flat 30% standard deduction for repairs and upkeep. You get it whatever you really spend.
4. Subtract interest on a loan taken to buy or build the property. For a let-out property there is no ₹2 lakh cap on this interest, although set-off of a resulting loss against other income is limited.

You cannot also claim actual repairs, staff salaries or electricity: the 30% covers them. In the 2025 Act these rules sit in sections 20 to 22.

If it is business income: two ways to pay tax

Most small PG owners choose presumptive tax because it is simple. It works best when your real margin is above 6–8%. If your costs are high, for example a new PG paying a large lease, loan interest and setup costs, regular books may show a lower profit and save tax.

Collecting rent by UPI helps. Digital receipts are taxed at 6% instead of 8%, and keeping cash at 5% or less of receipts lifts the turnover limit to ₹3 crore. See how to collect PG rent online.

Expenses you can claim with regular books

• Rent or lease you pay for the building.
• Food, groceries, gas and kitchen supplies.
• Electricity, water, Wi-Fi and DTH.
• Staff salaries: cook, cleaner, warden, guard, manager.
• Repairs, maintenance, pest control, painting.
• Depreciation on furniture, beds, ACs, geysers, washing machines and the building if you own it.
• Trade licence, FSSAI, fire NOC, professional fees and software.
• Interest on loans taken for the PG.

Keep bills for every expense. A spreadsheet or expense tracker with photos of bills is enough for most owners. Personal spending cannot be claimed.

Worked example

A 30-bed PG in a rented building, rent ₹8,000 a bed, 90% average occupancy, all collected by UPI:

Here presumptive tax lets the owner declare ₹1.56 lakh instead of ₹6.12 lakh. That is legal: the scheme lets you declare 6% even if your real margin is higher. If your real profit is below 6%, you can declare it only with proper books, and you may then need a tax audit.

Under the new regime, income up to ₹12 lakh is tax-free after the rebate, and Budget 2026 kept these slabs. A PG owner with no other income in this example would pay no income tax. Add salary or other income and tax applies on the total.

Which ITR form to file

Forms are renamed and revised each year, so check the current list on the income tax portal before you file.

GST and TDS, briefly

• GST: residential stays of up to ₹20,000 per person per month for 90 days or more are exempt. Full rules are in GST on PG and hostel rent.
• TDS: individual tenants rarely deduct TDS on PG rent. A company paying for its employees' stay may deduct TDS on large payments; claim it from Form 26AS or your annual information statement.

Records to keep

1. A monthly rent register: who paid, how much, when and how (UPI, cash, bank).
2. Rent receipts issued to tenants. See our rent receipt format.
3. Bills for every expense, by month.
4. Your lease, loan statements and property tax receipts.
5. Bank statements, kept separate from your personal account if you can.

In My PG Manager every payment is recorded with its mode, so you can see digital and cash receipts for the year in a few taps. Expenses are logged by category, and the detailed Excel export gives your accountant rent and expenses in one file. It costs ₹159 a month after a 14-day free trial.

Frequently asked questions

Is PG income taxable as rent?

Only if you simply lease the property and provide no services. If you run the PG with food or other services, it is usually business income.

Can a PG owner use presumptive taxation?

Yes. A resident individual, HUF or partnership firm running a PG as a business can declare 6% of digital receipts and 8% of cash receipts as profit, within the turnover limit.

Can I claim the 30% deduction on PG income?

Only when the income is house property income. For business income you claim real expenses or use presumptive tax instead.

What changed with the Income-tax Act 2025?

From 1 April 2026 the new Act replaced the 1961 Act and uses a single "tax year" instead of previous year and assessment year. Section numbers changed, for example the presumptive scheme moved from 44AD to section 58, but the rates and limits above stayed the same.

Last reviewed: October 2026. This is general information, not tax advice. Rules depend on your facts; speak to a chartered accountant before you file.