How to Save Tax on Rental Income in India?
One of India’s most popular investment choices is Real Estate. It is one of the reliable asset classes an investor can ask for, as it holds the capability to provide monthly income as well as price appreciation over the years.
Hence a lot of us look at it as a source of consistent passive income and, eventually, an asset that can be passed down to our legal heirs. Besides being a source of substantial income through rents, real estate offers many benefits such as easy financing (mortgage loan), steady capital appreciation and a number of tax benefits.
According to the Income Tax Act 1961, the earnings obtained by renting out a property is taxable as rental income. The following sections will cover how you can lower the burden of taxes on rental income.
How to save Tax on your Rental Income:
- Joint property
An effective way to save taxes on rental income is by purchasing a joint property. In other words, you can save tax if you buy a property with another member of your family whom you can trust, for example, your spouse, parents, etc.
If there are co-owners of the property, then rental income from such house property shall be divided into the ratio of the shares of their co-ownership, and each co-owner will pay tax on their share of income. This reduces the impact on their net taxable income. If one of the co-owners is unemployed, it further reduces the impact of rental income tax.
Now consider a different scenario. If both the husband and wife are employed, this arrangement will be helpful, provided both of them are involved in diverse tax slabs. Thus, one can get the benefit of a lower tax slab for his or her spouse and reduce the tax on rental income. Furthermore, you can stay away from the provisions of “Clubbing of Income” in case of joint property.
- Municipal taxes
You can deduct Municipal taxes like property taxes, sewerage taxes, etc. from your rental income tax. The owner can claim this deduction only if they pay municipal taxes.
For a few scenarios where tenants pay municipal taxes, the owner cannot claim deductions for the payment. Those who pay these taxes can claim a deduction from their house property income, thereby reducing the tax liability.
- Standard deduction
Any salaried person can claim this deduction by default without having to produce any proof of the expenditure or investment.
If you have purchased a property for investment and are using it for rent, then it is considered that you will spend some money on repair and maintenance. Thus, regardless of actual repair and maintenance expenses, you can claim 30% on the Gross Annual Value (GAV) as a standard deduction.
- Semi-furnished or fully furnished properties
In these types of properties, owners offer some specialised facilities such as newspaper, DTH/Cable, piped gas connection, Wi-Fi connection, etc. The owner collects all of these charges together with the rent amount and pays the bills to the respective service providers. Doing so increases your rental income, and you need to pay more taxes for this.
To avoid this, you have two options. First, you can request the tenant to pay these bills to service providers and deduct the same from the rent. Secondly, you may collect these charges separately from the tenant without adding them to the rent.
- Maintenance charges
Many landlords include maintenance charges within the rent, consequently increasing their rental income by a large margin and escalating tax on rental income. For instance, if you charge a rent of Rs. 20,000, and there is an inclusion of Rs. 5,000 as maintenance charges, you will have to pay tax on the entire Rs. 25,000. However, you can save taxes on rental income by following a simple solution.
All you need to do is to state a clause while making the rental agreement which will state that the tenant will directly pay such maintenance charges to the society association. Any payment going to the association will either be collected separately or paid by the tenant.
How Is Tax Computed on Rental Income in India?
It makes sense to take the help of a rental income tax calculator while filing the Income Tax Returns statement. By doing so, you can easily determine the estimated tax amount you need to pay on rental income in India. Mentioned below are the steps by which you can figure out the estimated tax amount on rental property:
Step 1: Determine the GAV or Gross Annual Value (Monthly Rent*12) of the property.
Step 2: Record the property taxes like the municipal taxes that you have paid. Remember that if you have paid Property Tax in advance, it is considered a deduction.
Step 3: Figure out the Net Annual Value (NAV) from the difference between GAV and the amount of property tax paid (NAV= GAV – Taxes).
Step 4: Deduct 30% as a standard deduction from the NAV as per Section 24(a) of the Income Tax Act.
Step 5: If the owner has availed a housing loan of a rented property, then the entire amount of interest paid on the housing loan during the financial year is allowed to be deducted from the rental income after allowing for the standard deduction. This rebate is permissible under Section 24B of the Income Tax Act.
Step 6: The result is the income from your rental property on which tax will be applicable according to the prevailing rates for rental properties in your locality.
Income from Rented Property = Gross Annual Value – Municipal Taxes – standard deduction – Home loan interest
Conditions When Property Is Not Taxable
Following are the scenarios when your property is not taxable:
- Any self-occupied property under Section 23(2)
- Income from property confined to local authorities as per Section 10(20).
- Earnings from an educational institute as per Section 10(23C) .
- Property rented for a charitable purpose as per Section 11.
- Income from property used for one’s own business or profession is also tax-exempted under Section 22.
- Property income of a political party under Section 13A
- Revenue earned from a property belonging to an approved scientific research association is exempted from tax under Section 10(21).
- Income from property subjected to charitable or religious purposes is tax-exempted as per Section 11.
- Property income of a Certified trade union is exempted from tax under Section 10(24).
- The annual value of one palace possessed by an ex-ruler of Indian states is free from tax as per Section 10(19A) where other palaces come under taxation.
- The revenue generated from the buildings in and around the agricultural land that forms a part of agricultural income is exempted from tax as per section 10(1). Examples of this kind of income include renting or leasing of a farmhouse, storehouse or godown.
We hope that we could help you understand how you can better save taxes from rental income earned in India. Make sure to follow the above pointers carefully while calculating taxes.
Furthermore, if you rent out your property to somebody, it is obligatory for you to pay the liable taxes. Having a thorough awareness of rental income tax laws will help you avoid penalties and fines for late payment of taxes.
Frequently Asked Questions
Is there any tax on rental income for NRIs?
Yes. Even though there is a tax on rental income for NRIs, the responsibility for that relies on the tenant instead of the owner. Here a tenant needs to pay a mandatory TDS amount by deducting 31.2% from the monthly rent.
Under which income tax head, does rental income fall?
Among the five heads of income, rental income falls under the “Income from House Property” head for taxation purposes. However, if you get rental income from any vacant land, it will be treated and taxed under “Income from Other Sources”.
Can Non-Resident Indians (NRIs) enjoy rental income?
Yes. Non-Resident Indians, or NRIs, get the opportunity to earn rental income from their let-out property. However, they need to make sure that the due tax on rental income has been paid by the tenant.
How to compute income from a property, when part of the property is self-occupied and part is let-out?
A house property may consist of two or more independent units, one of which is self-occupied and the remaining are/are used for any other purpose (i.e., let-out or used for own business). Income from such property will be computed in the following manner:
a) Part/unit which is occupied by the taxpayer for his residence throughout the year will be treated as an independent property and income from such a part/unit will be computed in the manner as discussed in case of a self-occupied property.
b) Part/unit which is let out will be treated as an independent property and income from such a part/unit will be computed in the manner as discussed in case of let out property.