Rental income is an important source of income for many individuals in India. However, it is subject to taxation under the Income Tax Act, 1961. Proper tax planning can help homeowners legally reduce their tax burden. In this guide, we walk you through how to save tax on rental income in India. But we will find out different ways, or we will follow the tax rules. If you are looking for expert assistance, you can meet with Vineet Dwivedi, Chartered Accountant in Kanpur, India to provide customized tax saving advice.
how to save tax on rental income in India
Understanding Taxation of Rental Income
Rental income is classified under ‘Income from house property’ in India and is subject to tax as per the applicable slab rates. To understand how to save tax on rental income in India, the net taxable income is calculated as follows:
Gross Annual Value (GAV) – Deductions = Taxable Rental Income
Before delving into tax saving strategies, let’s understand the major deductions and exemptions available.
1. Standard deduction under section 24(A)
The Income Tax Act provides a standard deduction of 30% on the net annual value of the property to cover maintenance and repair expenses, regardless of the actual expenditure.
2. Deduction on home loan interest (Section 24(B)
If you have taken a home loan to buy or construct a rental property, the interest paid on the loan is eligible for deduction.
- For self-occupied property, the maximum deduction is ₹2 lakh per year.
- The entire interest amount on rented property is deductible (to the extent of total loss of ₹2 lakh under house property head).
3. Deduction for municipal taxes
Property owners can reduce their taxable rental income by deducting municipal taxes such as property tax paid during the financial year. This deduction is applicable only when the tax is paid by the owner and not by the tenant.
4. Benefits of Joint Property Ownership
If the rental property is co-owned with family members, the rental income is divided among the co-owners, reducing the overall tax liability. This is another effective way to save tax on rental income in India.
5. Claiming Depreciation for Tax Benefits
For assets classified under business assets, depreciation can be claimed under Section 32 of the Income Tax Act, which helps reduce taxable income.
6. Tax Optimization through HUF and Family Trusts
Forming a Hindu Undivided Family (HUF) or a private trust can help distribute rental income among multiple members, thereby reducing tax liability due to lower individual tax slabs. This is also a strategic way to save tax on rental income in India.
7. Invest rental income in tax-saving instruments
Instead of keeping the rental income idle, reinvest it in tax-saving instruments like:
- National Pension Scheme (NPS) under Section 80CCD(1B)
- Public Provident Fund (PPF)
- Equity-Linked Savings Schemes (ELSS) under Section 80C
8. Renting out a business unit
If you rent out your property to a business, you may receive the rental income as business income instead of house property income, which will enable you to claim additional business-related deductions.This is another way to save tax on rental income in India.
Conclusion
On how to save tax on rental income in India, proper tax planning can significantly reduce your tax liability. By taking advantage of deductions under Section 24, offsetting losses, investing in tax-saving tools, and structuring ownership wisely, landlords can optimize their rental income.Consulting CA in Kanpur, India. Vineet Dwivedi can further help in effective tax planning and compliance. Always seek professional guidance before implementing tax-saving strategies.
Always seek professional guidance before implementing tax-saving strategies to ensure compliance with Indian tax laws.
