Income Tax return filing: Common mistakes property owners make and how to avoid them

A common income tax filing mistake is failing to claim capital gains exemptions on property sales due to a lack of awareness about Capital Gains Account Scheme

With the tax filing deadline here, it’s important to be aware of common mistakes, especially those related to reporting real estate income.

Many taxpayers forget that all payments tied to a rented property like parking fees, maintenance charges, or furniture rentals must be reported as part of rental income.

Owners of more than two properties often miss declaring notional rental income on the third (and additional) properties, as required under income tax rules.

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.

The government on September 16 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, the Central Board of Direct Taxes (CBDT) said in a post on X.

Overlooked rental income components that can trigger errors

There are several common errors taxpayers make when reporting rental income, sometimes without even realising it.

“For instance, taxpayers often overlook that every payment connected to a rented property such as parking fees or furniture and fixture charges, maintenance charges forms part of the rental income. These aren’t separate add-ons but must be reported as part of the total rent received,” 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 to be noted 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

Common errors in claiming deductions 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, says Razvi.

For example, exceeding the ₹2 lakh cap for self-occupied properties or missing Section 80EE/80EEA benefits for first-time buyers is a mistake. Many taxpayers also incorrectly claim principal repayment and interest under the wrong sections, leading to failed or reduced deductions.

“Additionally, people sometimes mix up principal and interest deductions, incorrectly claiming them under the wrong sections (e.g., claiming principal under 24(b) instead of 80C, which leads to reduced or rejected deductions and delays in refund processing.” says Razvi.

Tax errors from property status

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.

The result can be tax scrutiny, penalties, and reassessment notices, particularly in cases where taxpayers attempt to claim more than two properties as self-occupied, which is against the rules.

Missing capital gains exemptions with CGAS

A frequent mistake taxpayers make is failing to claim exemptions on capital gains from property sales because they 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 (India) are only available if the gains are immediately reinvested in another property. This misconception can lead to unnecessary tax liabilities, as taxpayers may not realize they can temporarily park their gains in a CGAS to retain exemption eligibility,” says Preeti Sharma, Partner, Global Employer Services, Tax and Regulatory Services, BDO India, a professional services organisation.

What you can do 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,” says Baid.

Source: Hindustan Times