Expert verified Written By – PKC Desk, Edited By – Vijay, Reviewed By – Aakash
Are you an Indian landlord struggling to minimize tax liability on rental income? Let us help you with effective strategies and tips on how to save tax on rental income in India.
Discover with us the latest tax deductions, exemptions, and planning tips to optimize your returns from let out property.
Breaking Down Taxation of Rental Income in India
The income you earn through rent is subject to taxation whether it’s a residential or commercial property, including vacant land used for business purposes.
Types of Taxes to Be Paid on Rental Income in India
Taxation on rental income is governed by the Income Tax Act 1961, and other applicable regulations.
Here’s a quick look at the types of taxes a property owner may need to pay:
How to Save Tax on Rental Income in India: 19 Advanced Strategies
There are a number of ways to save tax on rental income in India. Let’s take a look at them briefly:
1.
Utilize Deductions for Municipal Taxes
Deduct municipal taxes (like property tax) paid during the financial year from the Gross Annual Value (GAV) to calculate the Net Annual Value (NAV).
This reduces the taxable rental income. However, make sure these taxes are paid within the same financial year to claim the deduction.
2.
Utilize Joint Ownership Benefits
If a property is jointly owned (e.g., with a spouse or family member), rental income can be divided between co-owners.
Each co-owner is taxed individually, which reduces the overall tax burden by leveraging lower tax slabs. This is particularly useful for high-value properties with significant rental income.
3.
Use Insurance Premium Deductions
Premiums for insuring the property against damages or liabilities may qualify as a deductible expense.
To make claims for this, ensure the insurance is directly linked to protecting rental property income.
4.
Professional Fees Deduction
Legal fees, property agent’s brokerage, and property management charges incurred by the owner to earn rental income can be deducted.
Retain proof of such expenses for claiming them as deductions.
5.
Use Tax-Free Components in Rent Agreement
Structure rent agreements to include separate charges for utilities or amenities (like maintenance fees).
These are paid directly by tenants and not included in the rent. This lowers your taxable rental income earnings.
Make sure your rent agreement clearly documents this bifurcation.
6.
Claim Depreciation For Commercial Properties
If the property is used for commercial purposes, you can claim depreciation on the building as an expense.
This can significantly reduce taxable rental income and applies only if rental income is classified under business income.
7.
Utilize Loss from House Property
If your expenses exceed your rental income, you can set off this loss against other sources of income under Section 71 of the Income Tax Act.
This loss can be offset against other income sources like salary or business income.
Note that the new tax regime does not allow this.
8.
Form a Hindu Undivided Family (HUF)
Rental properties owned by an HUF are taxed at HUF rates, which can be lower than individual slab rates.
A separate PAN and tax return are required for the HUF.
9.
Handle TDS Deductions Efficiently
Tenants deduct TDS if rent exceeds INR 50,000/month or rent exceeds INR 2.5 lakh annually
Submit Form 15G or 15H can help avoid TDS if total income is below taxable limits.
10.
Tax Planning with Professional Help
An experienced tax consultant or chartered accountant firm like PKC Management Consulting can help you reduce total rental income tax liability.
They are aware of the changing and evolving regulations. They can guide you when choosing between the tax regimes best suited for you.
11.
Claim for Unpaid Rents and Vacancies
If you experience unpaid rent, you can adjust this loss against your Gross Annual Value (GAV) when calculating your taxable income.
Similarly, if your property is vacant for a period, you may also account for this loss. This means that you won’t be taxed on the full potential rental income during these times.
Keep proper records of these instances to help reduce your overall tax liability.
12.
Utilize Exemptions & Deductions for NRIs
NRIs earning rental income in India can claim deductions like municipal taxes, standard deduction (30%), and home loan interest.
They can also benefit from exemptions and deductions available under Double Taxation Avoidance Agreements (DTAA) to avoid double taxation on rental income.
Here again, the exemptions and deductions available are subject to the tax regime chosen.
14.
Explore Tax Saving Instruments
If you are adopting the old tax regime, invest in tax-saving instruments like the Public Provident Fund (PPF) or Equity-Linked Savings Schemes (ELSS).
This can help you claim deductions under Section 80C and offset rental income tax liabilities. This option is available to you only if you opt for the old tax regime.
15.
Consider forming Private Limited Company/ Trust
Owning properties through a company or trust can reduce taxes for high-income landlords.
Companies pay a flat tax rate, which may be lower than individual slab rates for wealthy landlords.
This also allows for more strategic financial planning regarding rental properties.
16.
Make Use of Strategic Family Transfers
Transferring property ownership to family members in lower tax brackets can reduce overall tax liability.
You can use legal instruments like gifts or wills to transfer ownership efficiently.
17.
Account for the Standard Deduction
Under Section 24(a), a standard deduction of 30% of the net annual value (NAV) is allowed for all rental properties.
This deduction is available irrespective of the actual expenses incurred. It accounts for property upkeep and repairs.
18.
Home Loan Interest Deduction
This deduction is available in both the old and new tax regimes on interest paid on a home loan for let-out properties
You can deduct the entire interest paid on home loans taken for purchasing or constructing rental properties without any upper limit on deductions.
19.
Explore Benefits for First-Time Homeowners
First-time homeowners can claim additional deductions under Section 80EE or 80EEA on home loan interest.
This indirectly reduces the overall tax burden. These benefits, however, may only available in the old tax regime
Frequently Asked Questions
Rental income up to INR 10 lakh can be tax-free under the New Tax Regime, assuming there are no other sources of income.
The tax on rental income is calculated based on the individual’s applicable income tax slab rates. If the Gross Annual Value (GAV) is less than INR 2.5 lakh, no tax is payable.
You should compare potential tax liabilities under both regimes based on total income and available deductions to determine which is more advantageous for their specific situation.
To reduce income tax on rental income, property owners can utilize deductions such as municipal taxes paid, claim a 30% standard deduction on NAV, and deduct home loan interest payments. You can also adjust for unpaid rents and vacancies to further decrease taxable income.
To avoid TDS on rental income, landlords need to ensure that their total rental income does not exceed INR 2.5 lakh annually. Landlords may submit Form 15G or 15H if their total taxable income is below the taxable limit to avoid TDS deductions.
