How to save Tax on Rental Income in India?

Tell me, who does not like to own a property that generates a steady rental income? If you have the option, owning assets that produce income is a better financial strategy than owning assets that generate expenses.

Rental Income or income from property is one of the most common sources of income in India after salary. Personally, I know many households (especially, the retirees) which have rental income as the main source of their livelihood.

The income from Property, whether it is from a residential home or a commercial property, is chargeable to tax as per the individual’s income tax slab rate.

For the financial year 2019-2020 for individual tax payers of below 60 years of age, income up to Rs. 2, 50,000 is tax free.

Suppose an individual’s only ‘source of income’ is income from property (rent) and if the property is rented at say Rs 20,000 per month. The total rental income received for the year is 20,000 x 12 = Rs 2,40,000.

This Rs 2.4 lakh is below the Basic Exemption Limit and hence it is a tax-free income.

Now suppose the rent goes up next year to Rupees 25,000 per month. The total rental income for the year is 25,000 x 12 = Rs 300,000. This amount is Rs 50,000 over the allowed tax free slab. So, is the rental income taxable? Perhaps, not..

In this post, let’s discuss – What the legitimate ways of saving tax on Rental income? How to save tax on Rented Property? How to reduce tax liability on property rent amount? What are tax deductions that can be claimed against rental income? Can NRIs save tax on rental property? Is it possible to reduce tax liability on rental income by gifting an ownership share in the property?….

How to save Tax on Rental Income in India?

Let’s now first understand how ‘income from house property’ gets calculated;

Calculation of Income from House Property :

Kindly note that the gross annual value of a self-occupied house is zero. Whereas in case of Let out house, it is the rent collected.

Claim Municipal Taxes paid & Standard Deduction

Continuing with our example- If an individual earns Rs 3 lakh as rent from property (assuming home loan has not been taken), he/she can deduct property taxes (say Rs 10,000) and standard deduction @ 30% of Rs 2.9 lakh ie Rs 90,000 from Net annual value (Gross rental value minus Property Taxes). So, the net income from house property is Rs 2.03 lakh only, which is a tax-free income.

• The 30% Standard deduction (u/s 24a)is allowed for all types of properties (residential or commercial). Standard deduction is towards repairs & maintenance of the property.
• NRIs are also allowed to claim the standard deduction on rented properties.
• The municipal taxes paid can be deducted from the gross annual value. But, note that the taxes should have been paid the Owner of the property and not the tenant.

Income Tax Benefits on Home Loan

As shown in the above image, the owner of a Residential property can also claim tax deductions on interest repayments done on a home loan, thus reducing your tax liability on income from house property. Kindly note that these tax benefits are not available for commercial properties.

• Under Section 24(b), you can claim tax deduction of up to Rs 2 lakh on interest payments.
• The tax benefits u/s 24b can not be claimed until the completion of construction / you get the possession of the property. In case, you may EMIs for an under-construction property then you can claim the pre-construction period interest in 5 equal installments after the completion of construction. (Related article : ‘Under Construction House : How to claim tax deduction on Home Loan Interest payments?‘)
• As per the latest Budget 2019 proposal, under new Section 80EEA, you can claim an additional tax deduction of up to Rs 1.5 lakh on interest payments. (Related article : ‘Is it really possible to claim full Rs 3.5 lakh tax benefit on a home loan?‘)
• NRIs also can avail tax benefits on home loans.
• A word of advice : Do not acquire a home loan just for tax saving purpose!

Bifurcate Rent amount & Maintenance Charges

You can further reduce your rental income by asking your tenant to pay property maintenance charges (if any) to the Society directly and can advise your tenant to pay rent amount to you.

As per the latest news, the Flat owners will have to pay GST at 18% if their monthly contribution to resident welfare association (RWA) exceeds Rs 7,500 pm. 

Joint-ownership (or) Co-ownership of Property

Another effective way to reduce tax liability on rent generating property is by way of owning it jointly.

• If a house is co-owned and ownership share is ascertainable, then the income shall be taxable for both the partners in accordance with the ratio of their ownership as provided in the Property Title Deed.
• Ideally, the ownership share should be based on the ratio of contribution amount paid for owning the property. All the owners of the property can claim standard deduction individually.
• The tax benefits on home loan (if any) can be claimed based on the property ownership ratio.
• If you already own a property and paying a heavy tax on rental income, you can transfer/gift the property or a share in the property to your family member. After such transfer, the rental income is taxable in the gift receiver’s name only.
• However, if you gift the property without any consideration (without taking any amount) to your Wife then the rental income generated on such property is still clubbed to your taxable income only.
• Kindly note that rules of clubbing of income comes into picture if you gift the property to your spouse, or minor children or Son’s wife. Any income earned by the recipient on the gift shall be clubbed with the income of donor (you).
• One can avoid provisions of “Clubbing of Income” in case of jointly held property or if wife is a home-maker. A husband can transfer / purchase a share in the property in exchange for wife’s jewellery or Streedhan.

You can also transfer the rent generating properties or ancestral properties to HUFs (Hindu Undivided Family) or create Trusts to reduce your tax liability. But, get this done after consulting a tax expert.

Because, once the assets or money gets transferred to HUF, it becomes family property. All members will lose the direct control and assets will be managed by Karta only. Also the assets lying in HUF can’t be bequeathed through WILL. So, one need to be very cautious while creating an HUF.

Do note that ‘TDS on rent’ of up to certain threshold limit is applicable and tenants may quote landlord’s PAN while claiming HRA (House Rent Allowance) from their employers. So, as a property owner you need to be very careful/honest while declaring your rental income in ITR.

Based on the Budget 2019 proposals, we can also expect some major reforms w.r.t rental housing laws in the near future.

Continue reading :

• How to save Capital Gains Tax on Sale of Land / House Property?
• Self Occupied Property (SOP) & Tax implications
• 5 ways of transferring your Immovable (or) Real Estate Property
• 6 Steps for Renting Commercial Property in India

(Post first published on : 26-July-2019)