The rental income tax is the amount of tax one pays to the government for income that is derived from the use of residential property. This tax came about when the Finance Act 2015 introduced a new Section 6A in the Income Tax Act that provides for a simplified tax regime on rental income. However, if the rent collected exceeds ten million shillings during any year of income, one does not qualify to be in this tax bracket.
The tax is simplified in that one only pays 10% of the gross rental income unlike the past where the tax was a complicated affair to compute. However, landlords who wish to remain in the current/old tax regime can elect to do so in writing to the Commissioner, this will mean that they will continue being taxed under the normal tax rates that is a graduated scale (depending on income) with tax rates ranging from 10% to 30%. In the event that a landlord chooses to remain in the current rental tax regime, they shall pay installment taxes and file returns annually. The new tax rate was effective of 1st January 2016 and failure to file the monthly return and pay taxes due will attract punitive penalties and interest as specified in the Income Tax Act.
If you own the residential property via a partnership, this tax is not applicable to you as per the Income Tax Act. However, the individual partners will be taxed based on the individual share of income from the partnership. For the purposes of this tax, if the individual share of gross rental income from the property is less than Kshs 10 million, the partners will be eligible for the new tax at 10%.
Under this new tax regime, landlords are expected to remit the tax when they receive the rent from their tenants. This can be on a monthly, quarterly, semi-annually or annually. However, the tax returns have to be filed on a monthly basis, as such in the duration when one does not receive any rent one is expected to file a nil return as opposed to not filing any return. Eligible persons for this tax are expected to file their returns via the iTax System and pay the tax due on or before the 20th day of the month after receiving the rent from tenants. An important point to note is that under this new tax regime, one is not allowed to deduct expenses before calculating the tax unlike the old regime.
A landlord may be asking him/herself what are the benefits of the new tax regime as opposed to the old one. Well here are a few pointers;
- The new tax regime has a flat rate of 10% on the gross rent as opposed to the 10 – 30% rates on a graduated scale in the current regime.
- Due to the fact that one files returns on a monthly basis, the landlord will not be required to produce records to account for expenses on an annual basis. Most landlords don’t have accountants so you can imagine how much of a hassle this is.
- This is a final tax as such landlords will not be required to file annual returns if they do not have other incomes.
- Compliance has been made much easier and cost effective in that you do not have to hire accountants to do your returns
This tax regime will not apply to;
- Rental income from commercial property
- If a landlord eligible to pay tax under this regime opts not to be subjected to the Rental Income Tax by way of notice in writing to the Commissioner.
- Non – resident landlords (as per Income Tax Act definition)
- Landlords earning residential rental income of more than Kshs. 10 million per year.
In the event you need further clarification on the above, kindly contact the KRA on Tel: +254 (020)4999999/+254 (0711) 099 999/+254 (020) 2816095 or via email: callcentre@kra.go.ke, rentalincome@kra.go.ke . In case you are in town you can stop by Times Tower or any other KRA station for assistance.