How to Save Tax on Rental Income in India

When you think about income, the idea of taxes simultaneously haunts all people. Well, this is true even in case of rental income. We have all wondered if there was a way to save some taxes. We have some ideas for those who have rental income. Read on, to find out!

Tax on rental income

For those who are confused about what this is – when a person rents their house or their building they receive an income, therefore they must pay a tax. This tax is called rental tax.

Under which section is rental income taxed

This comes under section 24 of the Income tax act, under “Income from housing property”. On the other hand, if you’ve rented land without any property on it, it would come under the “Income from other sources”. Even though an individual may have gifted the property to their spouse, they will still be regarded as the owner of the property and be taxed as such. The only exception to this is if there is an agreement in place between the couple that they will live apart. If the property has been gifted to a minor, the donor parent will still be responsible for paying taxes on the property.

How is rental income taxed

Rental income from any residential property – be it an apartment, house, or even a factory – is subject to taxation. The amount of tax you’ll pay is based on the property’s gross annual value (GAV). This takes certain things into account – municipal taxes, standard deductions, as well as any interest paid on a home loan (if applicable). You can claim a 30% standard deduction of the annual value to help cover expenses like renovation or repairs.

Wondering what GAV (gross annual value) is? The tax levied on the tenant is based on the annual value of the property. It could be calculated by the property owner based on the annual income or the amount that it could be rented for.

How is Gross Annual Value (GAV) determined

This could be determined by several factors. Firstly, it is important to understand that the expected rent of a place, a building or a house could be different from the actual rent that has been agreed upon. If this difference exists, and the actual rent is greater than the expected rent, then the actual rent is the GAV.

However, if the actual rent is lesser than the expected rent things would work differently. In this case, it is important to understand the cause of it. If it happened because there was no tenant for some time and there was a vacancy, then the actual rent is the GAV. However, if it happened because that property was self occupied, then the expected rent would be considered as GAV.

What are the deductions available under section 24

1. Standard deduction

You can deduct 30% of the gross value of the property for repairs and maintenance from your taxes. This amount is calculated after deducting municipal taxes. The deduction of 30% is allowed if your actual expenditure is higher or lower. However, you can reduce municipal taxes if you pay them in a financial year.

2. Deduction for actual interest paid on home loan

This deduction can be claimed for rented, deemed to be rented, or self-occupied property. The interest is 100% tax-deductible on an accrual basis for interest on money borrowed for construction/acquisition/ repair/ renovation. If the net income is higher than the net annual value (NAV), it can be adjusted to other income heads or carried forward for up to 8 years to set off against taxable income.

How much rent is tax free

You will not need to pay rental tax if your rental income is less than 2.5 lakhs. However, you would need to pay tax despite the amount, if rental income is your primary source of income.

How is taxable rental income calculated

The tax on rental income is calculated on the Gross Annual Value (GAV) of the property, after deducting municipal taxes, standard deductions, and home loan interest (if any).

To understand how taxable income is calculated, let’s use an example. Suppose an owner is receiving Rs 30,000 per month in rental income and paying municipal tax of Rs 30,000 (which is calculated using the Unit Area System of a property). Also, he has taken out a loan on the house, for which he is paying a home loan interest of Rs 80 000.

When property is not taxable

You will not have to pay tax on the following types of rental income:

  • Self-occupied property
  • Rent from a farmhouse
  • Income from a local authority
  • Income from an approved scientific research association
  • Income from a trade union
  • Income from an educational institute
  • Property income of a political party
  • Property rented for charitable purposes
  • If you use property for your own business

Rental income taxation for NRIs

Non-Resident Indians (NRIs) who earn rental income by renting out a property pay taxes under section 24. However, there are some key differences. In general, the limits and deductions for NRIs remain the same as they are for people residing in India, but in this case it is the tenant who is responsible for tax payment on the property. The tenant will have to deduct a 31.2% tax deduction at the source (TDS) and then make the payment to the NRI account. The TDS form has to be submitted to the tax authorities, along with a Form 15CA which must be filled out and submitted to the Income Tax department.

Tips to save tax on rental income

1. Maintenance charges

One of the simplest methods to reduce taxes is to deduct maintenance fees from rent. It is one of the easy pickings.Some renters raise the total rent by including maintenance fees, which essentially raises the tax rate on rental income. Your rental agreement could simply contain one line, which says that the tenant can pay maintenance directly to the society association.

2. Joint property

You could also save tax if you purchase property jointly, with a family member. In this case, the tax would be divided equally between the two of you.

3. Municipal taxes

Municipal taxes like sewage and property taxes can be deducted from rental income taxes. But there is a catch. The property owner, not the tenant, is responsible for paying all of these municipal taxes. These payments will lower your rental income, which will lower your tax obligation.

4. Semi-furnished or fully furnished property

You can ask the tenant to pay these fees individually and not include them in the rent if you are renting out a property with amenities like WiFi, DTH, Pipeline, etc. As a result, you will have to pay less tax on your rental revenue.

Latest updates on saving tax on rental income in 2022

The Income Tax Appellate Tribunal’s decision to make unrealised rental tax-free has relieved property owners of late. Unrealised rental is the portion of the rent that is due but has not yet been paid to the landlord. If this fee is not paid by tenants, it may be deemed irrecoverable in some circumstances. For example, when the tenant has left the rental property or was forced to leave due to unavoidable events and the landlord has pursued all legal remedies. According to the regulation, tax is only levied on rent payments made to property owners. Therefore, property owners are not responsible for paying tax on any unpaid rent.

Cooperative Housing Society

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